Delta Air Lines: A path of progressive improvement in revenues

Delta Air Lines today reported financial results for the September quarter 2020. Detailed results, including both GAAP and adjusted metrics, are on page four and are incorporated here.

“While our September quarter results demonstrate the magnitude
of the pandemic on our business, we have been  encouraged as more
customers travel and we are seeing a path of progressive improvement in our
revenues, financial results and daily cash burn,” said Ed Bastian, Delta’s
Chief Executive Officer. “The actions we are taking now to take care of our
people, simplify our fleet, improve the customer experience, and strengthen our
brand will allow Delta to accelerate into a post-COVID recovery.”

September Quarter Financial Results 

  • Adjusted pre-tax loss of $2.6
    billion excludes $4.0 billion of items directly related to the impact of
    COVID-19 and the company’s response, including fleet-related restructuring
    charges and charges for voluntary separation and early retirement programs
    for Delta employees, which were partially offset by the benefit of the
    CARES Act grant recognized in the quarter
  • Total adjusted revenue of $2.6
    billion declined 79 percent on 63 percent lower capacity versus prior year
  • Total operating expense, which
    includes the $4.0 billion of COVID-related items described above,
    decreased $1.0 billion over prior year. Adjusted for those items and
    third-party refinery sales, total operating expense decreased $5.5 billion
    or 52 percent in the September quarter compared to the prior year, driven
    by lower capacity- and revenue-related expenses and strong cost management
    in the business
  • At the end of the September
    quarter, the company had $21.6 billion in liquidity
  • During the September quarter
    cash burn (see Note A) averaged $24 million per day, and $18 million per
    day for the month of September

Revenue Environment

Delta’s adjusted operating revenue of $2.6 billion for the
September quarter was down 79 percent versus the September 2019 quarter, as
demand for air travel remains under significant pressure. Passenger revenues
declined 83 percent on 63 percent lower capacity. Non-ticket revenue streams
have performed relatively better than passenger revenues, with total loyalty
revenues declining 60 percent and cargo declining 25 percent.

“With a slow and steady build in demand, we are restoring flying
to meet our customers’ needs, while staying nimble with our capacity in light
of COVID-19,” said Glen Hauenstein, Delta’s President.  “While it may be
two years or more until we see a normalized revenue environment, by restoring
customer confidence in travel and building customer loyalty now, we are
creating the foundation for sustainable future revenue growth.”

Setting the Foundation for Recovery

Delta has taken a number of actions to position the company to
accelerate into a post-COVID recovery:

Taking great care of Delta people

  • Through the voluntary
    separation and early retirement programs, voluntary unpaid leaves, job
    sharing and other initiatives, the company has been able to avoid
    involuntary furloughs for ground and flight attendant employees
  • Launching a “Stop the Spread.
    Save Lives.” campaign to emphasize the six core health actions that
    protect Delta employees against COVID-19, including wearing masks, social
    distancing, testing and getting a flu shot. Delta is providing no-cost
    COVID-19 testing and flu shots for its U.S. employees 

Improving the customer experience

  • Emphasizing health and safety
    with the Delta CareStandard, a multi-layered approach that includes
    intense cleaning protocols, blocking middle seats and requiring masks
    onboard all aircraft
  • Reducing complexity for
    customers by eliminating change fees for nearly all domestic fares and
    redeposit/reissuance fees on domestic reward tickets for SkyMiles Members
  • Taking a customer-centric
    approach to refunds, with approximately $2.8 billion returned to customers
    year-to-date

Simplifying the fleet

  • Restructuring its Airbus and CRJ aircraft order books to better match the timing of aircraft deliveries with network and financial needs over the next several years. The restructuring reduces aircraft purchase commitments by more than $2 billion in 2020 and by more than $5 billion through 2022
  • Accelerating its fleet simplification strategy, which is intended to modernize and streamline the company’s fleet, enhance the customer experience and generate cost savings. The company has announced plans to accelerate retirements of nearly 400 aircraft by 2025, including more than 200 in 2020.

Cost Performance

Total adjusted operating expense for the September quarter
decreased $5.5 billion or 52 percent versus the prior year quarter excluding
$3.1 billion in charges related to the voluntary separation and early
retirement programs for employees, $2.2 billion in restructuring charges from
fleet-related decisions, and a $1.3 billion CARES Act benefit.  This
performance was driven by a $1.8 billion or 78 percent reduction in fuel
expense, a 75 percent reduction in maintenance expense from parking or retiring
nearly 40 percent of mainline aircraft and lower volume- and revenue-related
expenses. Salaries and benefits expense was down 32 percent as a result of
approximately 18,000 employees electing to depart the company in addition to
benefits from voluntary unpaid leaves, work hour reductions and other
initiatives.

Non-operating expense for the quarter was $349 million higher
versus the prior year quarter, driven primarily by $221 million in higher
interest expense from increased debt levels the company has incurred during the
COVID-19 pandemic.

“Our results this quarter were underpinned by a strong focus on
costs, as we reduced adjusted operating expenses by more than 50 percent,
similar to the June quarter, despite flying 23 points more capacity,” said Paul
Jacobson, Delta’s Chief Financial Officer. “That cost focus allowed the
increase we’ve seen in net sales to flow directly into an improvement in our
daily cash burn, which improved from $27 million per day in June to $18 million
per day in September.”

Balance Sheet, Cash and Liquidity

Delta ended the September quarter with $21.6 billion in
liquidity. Cash used in operations during the quarter was $2.6 billion. Daily
cash burn averaged $24 million for the quarter, with an average of $18 million
for the month of September.

At the end of the September quarter, the company had total debt
and finance lease obligations of $34.9 billion with adjusted net debt of $17.0
billion, $6.5 billion higher than Dec. 31, 2019. In September, Delta
completed the largest debt offering in aviation history, raising $9.0 billion
at a blended average rate of 4.75 percent secured by its SkyMiles loyalty
program. In addition, the company borrowed $1.5 billion at a blended yield of
4.4 percent in connection with the issuance of tax-exempt bonds, that will be
used to finance the LaGuardia airport project. The company’s total debt had a
weighted average interest rate of 4.3 percent at Sept. 30, 2020.

Subsequent to the end of the quarter, the company repaid the $3
billion, 364-day term loan that it entered into in March, increasing its
unencumbered asset base to $9 to $10 billion of aircraft, engines and spare
parts and reducing remaining debt amortization and maturities to $2.3 billion
through the end of 2021. The company also repaid $2.6 billion under its
revolving credit facilities drawn down in March 2020.

At the end of the September quarter, the company’s Air Traffic
Liability stood at $4.6 billion, including a current liability of $4.4 billion
and a non-current liability of $0.2 billion. The non-current liability
represents the current estimate of tickets to be flown, as well as credits to
be used, beyond one year. Travel credits represent approximately 60 percent of
the Air Traffic Liability at the end of the September quarter.

CARES Act Accounting, Fleet Restructuring and Voluntary
Separation and Early Retirement Program Charges

In the September quarter, the company received $701 million
under the payroll support program (PSP) of the CARES Act, consisting of $491
million in additional grant funds and a $210 million increase in the
low-interest, unsecured 10-year loan. The September quarter amount includes an
incremental $157 million beyond the initial $5.4 billion Delta was allocated in
April 2020. In the September quarter, approximately $1.3 billion of the grant
was recognized as a contra-expense, which is reflected as “CARES Act grant
recognition” on the Consolidated Statements of Operations. The company expects
to use the remaining proceeds from the PSP by the end of 2020.

During the September quarter, the company made the decision to
retire its 717-200 fleet and the remainder of its 767-300ER fleet by 2025 and
its CRJ-200 fleet by 2023. As a result of these decisions, the company recorded
$2.2 billion in fleet-related charges, which are reflected in “Restructuring
charges” on the Consolidated Statement of Operations.

The company offered voluntary separation and early retirement
programs to employees during the September quarter. Approximately 18,000
employees participated in the programs, with most leaving the company Aug. 1,
resulting in a $3.1 billion restructuring charge in the September quarter,
which is reflected in “Restructuring charges” on the Consolidated Statement of
Operations. Cash payments in connection with these programs totaled $813
million in the September quarter, and these payments are excluded from daily
cash burn figures. The company anticipates an additional $150 to $250
million in cash payments in the December quarter, $600 million in 2021 and the
remaining payments in 2022 and beyond.

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