Tuesday morning, Delta airlines (NYSE: DAL) became the first airline to report its second-quarter results, covering the period when the COVID-19 pandemic had its greatest impact on US air travel. During the first half of the quarter, passenger evaluations of the TSAs decreased more than 90% year-over-year every day.
Not surprisingly, Delta posted a massive loss for the period. On a GAAP basis, her pre-tax loss amounted to $ 7 billion. Her adjusted pre-tax loss was a little better, though still pretty daunting at $ 3.9 billion. However, investors should not be overly concerned with these short-term losses, as Delta has taken aggressive steps in recent months to reduce its cash consumption, increase its liquidity and block permanent cost cuts.
The headline numbers
Excluding sales of petroleum products from the refinery it owns, Delta Air Lines generated just $ 1.2 billion in revenue last quarter – 91% less year-over-year. Delta’s industry-leading loyalty program and credit card partnership with American express helped cushion the impact of evaporating demand. Loyalty revenue decreased “only” 44% year-over-year, compared to a 94% drop in passenger revenue.
While Delta Air Lines was able to reduce adjusted operating expenses by $ 5.5 billion, 53% year-over-year, the even sharper erosion in revenue led to its adjusted pretax loss of $ 3.9 billion. That compares to an adjusted pre-tax profit of $ 2 billion in the second quarter of 2019.
Image source: Delta Air Lines.
Delta also incurred an impairment charge of $ 2.5 billion last quarter (primarily related to its decision to retire more than 100 aircraft earlier than previously planned) and noted the value of its investments in LATAM Airlines, Aeromexicoand Virgin Atlantic for a combined total of $ 2.1 billion. LATAM and Aeroméxico recently filed for bankruptcy, while Virgin Atlantic announced an out-of-court restructuring this week. These special charges, offset by one-time gains from the payroll support grants provided under the CARES Act, brought Delta’s total pretax loss to $ 7 billion.
Abundant cash and reduced cash burn
While the second quarter was a difficult period for Delta Air Lines, the company is in better shape than it appears. For one, Delta burned just $ 801 million in cash in June – about $ 27 million per day. This was significantly better than her April projection that she would burn $ 50 million a day in June. In late March, when reimbursement requests were nearing their peak and Delta had not yet had a chance to cut costs, the cash burn reached around $ 100 million per day.
Additionally, Delta ended the quarter with $ 15.7 billion in cash and short-term investments. Even if the cash burn remained close to recent levels for the rest of 2020, Delta would still exit the year with more than $ 10 billion of cash on hand and broad access to additional capital.
Importantly, despite its cash burn to date, Delta Air Lines ended the second quarter with just $ 13.9 billion of adjusted net debt: above $ 10.5 billion in early 2020, but lower than $ 17 billion of adjusted net debt that came with the end of 2009.
Cost reduction to take advantage of the future
In addition to reducing cash consumption and increasing liquidity to alleviate short-term risk, Delta Air Lines has also moved quickly to implement permanent cost reductions. On Tuesday, Delta announced that it will withdraw its small subfleet of 10. Boeing 737-700 this year, in addition to its previously announced moves to withdraw the MD-88 and MD-90 fleets in June and its 777 fleet later this year. Delta also plans to retire some of its A320s and 767s ahead of schedule to further reduce its fleet.
These aircraft withdrawals are part of a broader fleet simplification program that will generate hundreds of millions of dollars in annual savings. With fewer aircraft models in the active fleet, Delta will benefit from increased pilot productivity, lower maintenance costs, and better ability to recover from severe weather events and other disruptions.
Additionally, more than 17,000 Delta employees, nearly 20% of the 91,000 full-time equivalents in their workforce in early 2020, have signed up for early retirement or other purchase packages. In addition to reducing the need to implement involuntary layoffs or licenses, these early purchases and retirements will help reduce future costs by eliminating many of Delta’s highest and highest-paid employees.
Delta’s management is very clear about the challenges ahead: more so than the leaders of some of its peers in the airline industry. CEO Ed Bastian does not expect demand to pick up for at least two years and believes business travel will never return to 2019 levels. Delta’s success in reducing cash burn since March and its aggressive plans to Cost cutting should give investors confidence that they will be able to rebuild their profitability for years to come despite these headwinds.
