At a time when the demand for near-term air travel had dropped to almost zero, Delta Air Lines (NYSE: DAL) reported its first-quarter 2020 results on Wednesday. Aviation was the most affected sector, which got shattered by the COVID-19 pandemic related travel restrictions. While Delta’s EPS dropped 47% on a non-GAAP basis for the first quarter, it swung to a loss of $0.86 per share on a GAAP basis compared to the GAAP EPS of $1.09 posted in the prior-year quarter.
When addressing the investors and analysts, Delta Air Lines management said, “Given the combined effects of the pandemic and associated financial impact on the global economy, we believe that it could be up to three years before we see a sustainable recovery.”
Liquidity
U?nder the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides $61 billion in grants and loans as well as excise tax relief for the aviation industry, Delta received $2.7 billion of the $5.4 billion ($3.8 billion as direct aid and $1.6 billion in a low interest unsecured 10-year loan) allotted to it. Delta expects to have at least $10 billion in liquidity at the end of the June quarter. Since early March, the Atlanta-based airline had raised $5.4 billion in new financing and expects to raise several more billions in the current quarter.
Containing costs
Delta plans to reduce its total cost base by over 50% in the June quarter, which amounts to a $5 billion reduction over the prior year. The company’s 37,000 employees, more than one-third of its workforce have elected to take voluntary unpaid leaves ranging from 30 days to one year. Daily cash burn, which started at $100 million per day in March, down to $50 million a day, starting next month in May.
More than 650 aircraft have been parked to get optimal maintenance savings and reduce the facilities’ expense by consolidating concourses and temporarily closing Sky Clubs. The company had eliminated the majority of its discretionary spend for things like contractors and advertising. Delta instituted a hiring freeze and reduced work hours across the business.
In order to reduce capital outflows, Delta has cut more than $3 billion of its planned 2020 capex, suspending all shareholder returns and deferring elective voluntary pension funding. These cost containing efforts are expected to result in savings of approximately $550 million in the June quarter. Combined with $2 billion in lower fuel expense from reduced flying and lower fuel prices, Delta expects a $5 billion reduction in total operating expense for the June quarter.
Outlook
For the second quarter of 2020, Delta expects revenue to be down more than 90% compared to the prior-year quarter. To a question on the recovery, CEO Ed Bastian said that it will take some time and domestic to come back faster than international. He added that this recovery is going to be a multi-phased.
“We expect cash burn should come down to $50 million per day, beginning in May, a 50% reduction from where we were just a few short weeks ago. That moderation should continue in the back half of the year as revenue recovers modestly, but we are prepared for cash flow to remain negative through the end of the year.”
When the travel restrictions are relaxed, it’s obvious that all the carriers have planned to block their middle seats to maintain social distancing. With the lower load factor, there will be fewer airplanes flying in the skies for an extended period of time, and it’s going to be costlier for the air travelers.
I don’t know that you’ll see that on an international scale, I think it will be lot of loans. You might see some international airlines nationalized. I think there is going to be an array of — array of alternatives that you may, you will see some international airlines go away. You will see some international airlines, not on ours specifically, this would broadly go through administrative and bankruptcy processes. So I think as we — as we look at it to trajectory of the recovery, it’s going to be slower internationally than domestically.
The International Air Transport Association (IATA) had projected that airline passenger revenues to drop by $314 million in 2020. Also, IATA-commissioned survey of recent travelers found that 60% anticipate a return to travel within one to two months of containment of the COVID-19 pandemic but 40% indicate that they could wait six months or more 69% indicated that they could delay a return to travel until their personal financial situation stabilizes.
Meanwhile, peers Southwest Airlines (LUV) and United Airlines (UAL) are scheduled to report their quarterly results on April 28 and April 30, respectively. For carriers, the impact of the COVID-19 pandemic is worse than the 9/11 terrorist attacks and the 2008 financial crisis because of the worldwide travel restrictions and a drastic reduction in demand for air travel and the unknown time of the recovery.
Read Delta Air Lines (DAL) Q1 2020 full earnings call transcript