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Don’t worry about Delta’s $7 billion in pre-tax losses



On tuesday morning Delta Airlines (New York Stock Exchange: DAL) Becoming the first airline to report second-quarter results covers the period when the COVID-19 pandemic had the greatest impact on US air travel. In the first half of the quarter, TSA’s passenger inspections declined by more than 90% year-on-year every day.

Not surprisingly, Delta Air Lines suffered huge losses during this period. In accordance with generally accepted accounting principles (GAAP), its pre-tax loss reached US$7 billion. The adjusted pre-tax loss is better, although still daunting, at $3.9 billion. However, investors need not worry about these short-term losses because Delta Air Lines has taken active measures in the past few months to reduce cash consumption, enhance liquidity and lock in permanent cost reduction measures.

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Excluding the sales of petroleum products from its own refineries, Delta Air Lines̵

7; revenue in the last quarter was only $1.2 billion: a 91% year-on-year decrease. Delta’s industry-leading membership program and American Express Helps mitigate the impact of demand evaporation. Loyalty revenue “only” fell 44% year-on-year, while passenger revenue fell 94%.

Although Delta Air Lines was able to reduce adjusted operating expenses by US$5.5 billion (a 53% year-on-year decrease), the sharp decline in revenue resulted in its adjusted pre-tax loss of US$3.9 billion. In comparison, adjusted pre-tax profit for the second quarter of 2019 was $2 billion.

Delta Aircraft parked on the tarmac

Image source: Delta Air Lines.

Delta Air Lines also generated an impairment reserve of US$2.5 billion last quarter (mainly related to the decision to retire more than 100 aircraft earlier than previously planned), and reduced its Latin American Airlines, Aeromexico, And Virgin Atlantic’s combined $2.1 billion. Both Latin American Airlines and Aeromexico recently filed for bankruptcy protection, and Virgin Atlantic announced an out-of-court reorganization this week. These special expenses-offset by one-off gains from wage support grants provided under the CARES Act-brought Delta’s total pre-tax losses to $7 billion.

Sufficient cash, slow cash consumption

Although the second quarter was a difficult period for Delta Air Lines, the company’s condition was better than it seemed. On the one hand, Delta consumed only $801 million in cash in June: about $27 million per day. This is much better than the April forecast, which predicted that it would burn $50 million a day in June. In late March, when the refund request peaked and Delta Air Lines had not yet had the opportunity to cut costs, the maximum cash consumption reached about $100 million per day.

In addition, Delta Airlines had $15.7 billion in cash and short-term investments at the end of the quarter. Even if the cash consumption remains near the near-term level for the remainder of 2020, Delta Air Lines will still withdraw at the end of the year, with more than $10 billion in cash on hand and sufficient additional capital.

Importantly, despite the year-to-date, Delta’s adjusted net debt at the end of the second quarter was only $13.9 billion: higher than the $10.5 billion at the beginning of 2020, but less than the $17 billion adjusted net debt it carried At the end of 2009.

Cut costs to grasp the future

In addition to reducing cash consumption and increasing liquidity to mitigate short-term risks, Delta Air Lines also quickly took action to achieve permanent cost reductions. On Tuesday, Delta announced that it will retire its 10-person small fleet Boeing In addition to the previously announced retirement of the MD-88 and MD-90 fleets in June and the 777 fleet later this year, this year’s 737-700 is no different. Delta Air Lines also plans to eliminate some of the A320 and 767 ahead of schedule to further reduce the fleet size.

The retirement of these aircraft is part of a broader fleet simplification plan that will drive hundreds of millions of dollars in annual savings. With the reduction in aircraft types in the active fleet, Delta Air Lines will benefit from higher pilot productivity, lower maintenance costs, and better ability to recover from severe weather events and other disturbances.

In addition, more than 17,000 Delta employees (almost 20% of the 91,000 full-time employees in early 2020) have signed early retirement or other buyout plans. In addition to reducing the need to implement involuntary layoffs or vacations, these acquisitions and early retirement will help reduce future costs by eliminating many of Delta’s most senior and highest-paid employees.

Delta’s management is sober-minded about the challenges ahead: more so than some leaders in its aviation industry. CEO Ed Bastian (Ed Bastian) does not expect demand to recover for at least two years, and believes that business travel may never return to 2019 levels. Since March, Delta’s success in reducing cash consumption and its aggressive cost-cutting plan should give investors confidence that despite these disadvantages, it will still be able to recover its profits in the coming years ability.




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