Disclosure : DEAR is the acronym for Digital Earnings Analysis & Review. Comments, opinions & recommendations are personal and based on analysis of SEC filings , press releases & earnings call transcripts. While writing this article, I do not have any investments or business relationship with Delta Airlines. Image is copyright of Delta Airlines & sourced from here
On April 22nd Delta Airlines (DAL) announced their March quarter 2020 pre-tax loss of $422 Million, Delta’s first quarterly loss in close to a decade. In these troubled times where travelling is scary and lockdown restrictions by governments globally, airlines are chalking out a new strategic playbook to weather this crisis. Setting the template for the playbook are the leadership team at Delta with a key focus on people, costs , maintaining liquidity & operations.
Delta CEO Ed Bastian believes that it could take at least three years before they see a sustainable recovery and they are resizing the business for the near term to stay in business for the long term
We are going to deep dive with the assumption that all sales in the previous & future quarters are digital driven.
People – Delta has always been one of the leading people-focused business I have known. Maintaining health & safety for guests & crew across all touchpoints of their journey would be a key challenge.
Delta leadership explained $200 Million in unplanned investments in developing wide range cleaning procedures and cleanliness across all the network. Deriving on their flying expertise they are working with the medical experts to ensure physical safety. Bastian also explained a future where immunity passport could be norm to understand health risks from individuals both passengers & crew.
Costs – Delta expects revenues to be down by at least 90% in the upcoming quarters. To mitigate Delta CEO Ed Bastian talked about reducing operating costs by 50% roughly $5 Bn in savings in the upcoming quarters.
With no planned flights, Delta’s 37,000 crew have volunteered to take an unpaid leave of absence ranging from 30 days to full year. Also leading to $2 Billion savings in fuel and lower than ever fuel prices.
More than 650 aircraft are strategically parked to ensure optimal maintenance savings. Consolidating concourses, temporary closures of Sky Clubs, advertising & spend on contractors are key measures taken to reduce expenses. Delta CFO Paul Jacobson says these measures together lead to $550 Mn savings in June quarter.
Delta is expecting to reduce daily cash burn by 50% to $50 Mn per day starting May despite $20 Mn in net sales caused by refund backlog which should take time to clear in a couple of months.
Lastly and most importantly more than $3 Billion planned CapEx is eliminated by suspending all shareholder returns and deferred voluntary pension funding.
Maintaining Liquidity – When the planes don’t fly they incur a cost to maintain starting from regular maintenance checks to parking fees. Delta closed the quarter with $6 Billion in cash but keeping in mind 90% drop in near-future revenue, they plan to look for avenues to maintain liquidity.
Delta ended the quarter with $20 Bn in assets and $6 Bn in cash. In addition to the $4.6 Bn loan from the federal government they have a full year plan to look at avenues to generate funds based on available assets .
Fleet – Delta fleet is among the last airlines to still operate MD-90s and one of the first to adopt Airbus 350, A330 & A320 variants. Accepting any new aircrafts from previous orders would not be favourable to the flight business right now.
Delta are in discussion with Airbus for deferred payments and delivery of 184 aircraft already ordered. Decommissioning and retiring of old fleet would continue as planned creating even more opportunities to optimize operational revenue.
Cargo and mercy flights are silver lining in the pandemic cloud for Delta as they remove seats to make room for cargo. It would be interesting to note in the next quarter earnings around revenue from passenger vs cargo flights. I am expecting a tip to the later.
In conclusion, Delta has the manpower & liquidity to brave through this storm. I have always known Delta as a travel innovation leader & given these times I am sure the leadership is going back to the drawing board every day to look at the most secured & optimized way to run this business. Most importantly Bastian strongly believes premium flying to be back quickly as people enjoy experiences and business is done face-to-face.