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Delta Air Lines Is Executing The Strongest Recovery Plan

May 05, 2020 1:00 PM ETDelta Air Lines, Inc. (DAL)AAL, LUV, UAL177 Comments
Tim Dunn profile picture
Tim Dunn


  • The airline industry has been hard hit by the COVID-19 virus crisis with passenger revenue decimated for weeks.
  • Delta spent more than a decade pursuing its goal of being viewed as a high-quality industrial company and will benefit from its transformation during its recovery.
  • Delta's recovery plan compares very favorably to its largest competitors in multiple areas.

It is a surprise to no one that the airline industry became an early casualty of the COVID-19 virus crisis. The U.S. has become the world's most impacted country by COVID-19 as the virus was carried to the U.S. from China and western Europe. While transpacific traffic began to weaken as virus news in China grew more dire, the bottom fell out for U.S. airlines in March as the number of cases exploded in the United States and as travel restrictions from Europe and stay at home orders accelerated across the United States.

As some states begin the process of reopening their economies, a comprehensive fact-based and comparative analysis of the airline industry will help investors try to navigate the airline industry and the strength of Delta's recovery plan. Airline stocks are still highly volatile as investors have seen some days with strong gains punctuated by equally negative swings. Longer term, there are solid indications that the airline industry still has value; investors can register solid gains in certain airlines and especially Delta Air Lines (NYSE:DAL).

Parked Delta aircraft

Parked Delta aircraft at Kansas City Source: JL Johnson

Corollaries, assumptions, and expectations

The U.S. airline industry today is largely the result of 40 years of domestic deregulation of the legacy segment (pre-1978 interstate carriers) that has been marked by consolidation over the past 10 years and chapter 11 reorganization post 9/11, the steady growth of a low cost segment, and the more recent rapid growth of ultra-low cost carriers. There are generally three carriers in each of the three categories with Frontier, an ultra-low-cost carrier, the only large U.S. airline that is not publicly traded.

During the past ten years, the U.S. airline industry benefited from the strong U.S. economy as well as industry capacity discipline and growing market segmentation, with certain carriers focusing on lower priced

This article was written by

Tim Dunn profile picture
Focus on multinational transportation companies. Mercosur economies.

Analyst’s Disclosure: I am/we are long DAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (177)

Tim Dunn profile picture
Based on postings on airline-related social media, Delta apparently held an employee briefing today and said that it expects to be about 25% smaller in 2022 than it was in 2019. DL will apparently offer an early retirement and voluntary separation package that should eliminate much of the need for furloughs.
Delta also said that it will add Cape Town to its route system so that its current Atlanta-Johannesburg flight can stop in Cape Town,which is at sea level, on the return to Atlanta when the flight switches to the A350; the B777LR which Delta is retiring is the only aircraft type that can make the 8400 mile flight, Delta's longest, nonstop from Johannesburg, which is at 6000 feet of elevation.
Tim Dunn profile picture
Delta will retire its fleet of 18 777s by the end of the year which represents half of its very long haul international fleet.

In the process, Delta will eliminate up to half of its highest paid pilot positions - with the rest on the A350.

The newer generation and larger A350 will remain as Delta's sole very long haul aircraft.

Sadly, these are the types of decisions that airlines will have to make; AAL operates more than twice as many 777s as Delta while UAL operates more than 4X.

In a reduced demand environment, the 777-200 is hard to justify esp. given that newer technology aircraft have far better operating economics.
Retired Investor profile picture
Add to that, they will retire their MD-88 and MD-90s too.
Tim Dunn profile picture
The MD80s/90s were on their way out in the next couple years; the MD80 retirement was accelerated by months.

The 777s just were retrofitted all-new cabins; DAL had every intention of keeping them around for another 7-10 years. With demand potentially down by 5 years and with A350s already on order, Delta undoubtedly took the necessary step of getting rid of the 777s and costs now rather than carry unnecessary weight for years of recovery.

It is these types of hard steps that other airlines will have to do; DAL has long led the industry in being willing to take the tough steps when the bottom falls out - which provides a stronger platform from which they can rebuild.
@Tim Dunn
... and they will outgrow everybody! NOT!

Right when they needed them(NOT), Delta was obligated in April to take the contract for 10 A350s as a result of the LATAM investment last fall. Sounds like a great time to dump the older 777s (NOT) that had less depreciation.
Tim Dunn profile picture
Pilot social media sources state that Delta has told its employees that they expect to make a fleet-related announcement in the next few days and have informed Boeing of their intentions.
@Tim Dunn
Retiring their 777s.
They are screwed. Cutting the short haul flights from small cities in the short term makes financial sense, but not long term customer sense. They won't return for a while.

The government knows we need an airline industry, but airlines aren't gonna make it. Time to do a Freddie/Fannie when they go Chapter 11.
The airline stocks are very fragile. If you have a flight on any airline and there is a Coronavirus outbreak, the airlines will tank for an indefinite period. Is that fair no, is the Coronavirus being hyped each day by a negative media obsessed by the Coronavirus, yes?
But it is the nature of the current environment. Where fear overrides rationality. A situation in which politics is overriding logic.
Never mind that five studies have shown the Coronavirus has a mortality rate in or around the Flu, which benefits from a vaccine. The article is quite good. But how do you overcome the constant barrage of media obsessed absurdity?
I’d much rather be in oil. Because people have to use oil. Be it at a lesser amount. Most, people don’t have to fly.
5 studies? this is significant. Please post links.
I hope this link gets you started. I was not able to find the other article.
Tim, thorough analysis, thanks for posting. What do you think of DAL’s debt as an investment? Carries nice yields, even the shorter maturity bonds, and I don’t see a whole lot of risk in bankruptcy.
Tim Dunn profile picture
great question @gotribe
I think the market answered that question.
DAL originally was planning to offer $1.5 billion in 7% secured notes but they instead raised $3.5 B.
in contrast, UAL wanted to raise $2.25 B at 9% but only got $1.5 B with indications that they would have to increase the interest rate to 11%.

thanks for reading and commenting.
EliasMouawad profile picture
@Tim Dunn "Delta's CEO stated early during the crisis that a full return of travel would not be likely until a vaccine against the virus is in use."
An intravenous drug (Remdesivir) can help patients recover in 5 days. Can travel demand recover 50% because of the drug ?
Tim Dunn profile picture
Thanks for reading and for your question.
I personally think there is a need for much more data about the effectiveness of any treatment for people in general to accept that there is adequate treatment available should one become infected. I don't think we are there yet.

I would also say that we need a lot more information about the populations in which covid deaths are occurring. Nearly every infectious disease is managed that way; not every person is equally susceptible to every infectious disease and that is true with this virus.
For example, we know that there are very defined guidelines about who should be vaccinated about the flu. The entire population is not vaccinated because most people can survive the flu; the same is true for covid 19 but people aren't getting that information.

People cannot make informed choices about whether it is safe for them to travel because they do not have information to know where their risk is relative to the rest of the population.

I believe the US needs to start providing that information so that doctors can have that conversation with their patients on an individual basis. We are still treating this disease on a one size fits all basis despite the fact that we know there are many "sizes" involved.
Really enjoyed reading the article. thanks Tin
Tim Dunn profile picture
glad you enjoyed it...thanks for reading @gregmcn
Sorry Tim for mispelling. The comments section is quality too.
The whole premise behind this article presumes that there is some kind of a plan for COVID-19.

Without knowing when and if demand will return and whether the government will continue to provide a back-stop, this is all just a guess, not a plan.

The industry is uninvestable for the long term investor.
Tim Dunn profile picture
Thanks for reading and commenting, @markcc
First, obviously there are long-term investors which are still in airlines and will remain that way - esp. since most of the industry is held by institutional investors.
Second, even on a short-term basis, there have been multiple days where airlines have been up, some on a sequential day basis.
Third, you might have sold out of airlines but others have remained and are coming back in. There have been major inflows into the airline industry.
Fourth, the plan which I clearly noted in the article is to survive the very low revenue environment with liquidity and then live with the debt airlines have and will accumulate while rebuilding their business plans to match costs with revenue.
Demand will return and is.
DAL is executing the strongest recovery plan due in part to its superior cost control basis.
You are free to come to a different conclusion and invest elsewhere.

thanks again for your comments and reading.
I think your confusion might stem from the fact you seem to be missing the premise of the article.
@Tim Dunn Let me remind you the comment you made to me on March 10 when Delta closed at $45.47 , "you sure did miss out on the rally today! Looks like alot of people that saw the industry as a solid investment. So sorry you weren't one of them."
How wrong can your forecasts be? That was at $45.47, now Delta is at $22.72, half of that last forecast! What burns you is that I bought my position in Delta on 9/12/12 for $9.13 and sold for $54.15 on February 24, 2020. I have not ridden it down like you have!

First, Long term investors like you, have sustained a MASSIVE decline in the value of the stock. Staunch support for stocks in any industry is insane.
Second, Gaming "short term" moves is equally insane as there are no fundamentals to gauge stock movement.
Third, Your comment about me being out of airlines is patently incorrect. You need to ask before posting on things you cannot know about.
Fourth, You need provide statistics about when Delta will get back to profitability. A few years from now is not an acceptable answer. Merely forecasting a return of demand does nothing as all the airlines may be owned by the government, and not the shareholders, by then.
Please get your facts straight. Delta never had "superior cost control" even in good times it was among the most expensive airlines by CASM. There is no information supporting your repeated claim.
Excellent and nuanced understanding and analysis of the players, their KEY differences, and the industry. Appreciate the time and effort in putting it together for public consumption. I think you are correct that Delta will outperform her peers in the recovery, which I think is your central assertion. That is an entirely different question than whether or not the investment is attractive on a relative basis over myriad timelines, which depends entirely on the speed and size of an economic recovery and any lasting change to human behavior and also seems to be the argument that many in the comments section want to have instead. To borrow a sports analogy, all the airlines are playing defense in a big way right now, but Delta is trying to be in a position to quickly get the ball down the court in transition from defense to offense once the ball turns over.
Tim Dunn profile picture
thanks for your comments and I agree with your assessment @tscreasman
The key goal right now is to preserve the business and to stay out of bankruptcy. Valuations will return which is why I gave an 18 month price target that is nearly double its current price.
rockwelljim profile picture
All the major carriers have bankrupted before. This has bankruptcy written all over it too. I agree that DAL will come back but scared shareholders will suffer badly in court. Your thoughts.
Tim Dunn profile picture
to be accurate, all of the current legacy/global carriers and their post 9/11 merger partners have been through chapter 11 reorganization. American merged with USAirways (which had previously been through chapter 11 twice) as American came out of C11, Delta and Northwest both filed for c11 on the same day and emerged separately but merged just about a year after NW emerged from C11 (DL came out first), and then United merged with Continental which had been through C11 twice. Alaska has never filed for C11 but Hawaiian has.

Legacy airlines were all interstate, regulated carriers before 1978 and came with legacy costs including defined benefit (DB) pension plans and, all except for Delta, were and still are heavily unionized - which slows the responsiveness to crisis in times like the current.

DB pension plans for the airline industry are/were insured by the Pension Benefit Guarantee Corp, a government backed fund which has still managed to not tap government funds because it is funded by premiums from companies. As you undoubtedly know, the steel industry's collapse nearly brought down the PBGC which was afraid the airlines could finish off the PBGC; Congress acted after United and USAirways' termination of their PB plans in C11 (about the only way to end a DB plan) to help airlines make it through the market crash after 9/11 by extending the repayment terms for airlines. DAL, NW, and later AAL all frozen their DB plans (except the pre-merger Delta pilot plan which had a unique lump sum distribution feature) and those plans are still frozen but not terminated. DAL made sufficient payments over the last five years that it did not need to make any payments to its plans until the mid 2020s.

So, there were very specific reasons why the legacy airlines filed for chapter 11 which low cost carriers such as LUV did not have and also why C11 is not going to necessarily be the solution now.

AAL and UAL have very low levels of unsecured debt. You can't necessarily get rid of secured debt in C11 unless you get rid of the asset; most airline debt is secured by aircraft which can eventually be placed with other airlines.

AAL does have some large DB funding requirements in the near future because they did not make near as many extra payments to their plans as DAL did.

C11 does provide a venue for altering union contracts in court and that has happened before. C11 would allow airline labor costs to be quickly cut w/o union concurrence.

The goal for airlines over the next few years will be to match costs to the new revenue normal. They are borrowing money and the government is helping to reach that goal.

As I noted, DAL has a very good track record of cost control including because they are the least unionized US airline. DAL is still working w/ its pilots regarding cost cuts but those conversations are not public and the main thing that other airlines have done which DAL has not with its pilots is to offer expensive early retirement and paid leave programs.

UAL imposed cost cuts on its unionized workforce after accepting federal aid and has had to roll back parts of those cuts because of pressure from some legislators.

AAL offered paid early retirement and paid time off plans and has said they don't plan to (but don't guarantee) that there will be no furloughs - in contrast to what UAL is saying.

Other airlines including LUV, ALK JBLU and SAVE are somewhere in between in terms of cutting labor costs.

IN terms of debt levels, AAL is by far the outlier on the most indebted end of the industry while LUV is the outlier on the least indebted end of the industry; much of the rest of the industry including DAL and UAL are in the middle.

If any airline files for C11, it will be AAL and they are most likely to have to go first, esp. since they have very little left in unencumbered assets while also saying they "have a right" to loans from the federal government. There is no assurance the feds will make loans to any airline but esp. to a company that has little left to pledge as collateral, except as some have noted, its loyalty program which is heavily tied to the airline itself. While loyalty programs are valuable, their value is heavily tied to the airline itself; if the airline itself does not survive, the loyalty program itself is not very valuable.

And if AAL is forced into C11, there might not be the revenue necessary to successfully restructure given that AAL is already heavily indebted.

And, finally, an AAL trip through C11 and even possible liquidation would help other airlines recover because AAL was still the 2nd largest airline based on revenue.

So, the notion that all of the industry might end up going through bankruptcy is not likely. It could take just one large airline to go through to strengthen the recovery of the entire industry. and there are specific reasons why the legacy airlines had to go through C11 which do not exist now.

thanks for reading and for your comment
@Tim Dunn
Delta's pension liability at 12/31/19, $8.4 billion, is larger than American's at $6.0 billion Delta's pension plan also contains $737 million valued in Delta stock that is down 60-70% and now has to be made up by Delta. American did not put its stock into the pension plan.

American is in far better shape with respect to its total pension obligations.
Tim Dunn profile picture
except pension funding requirements are not tied directly to pension liability but by actual data on when cash will be needed for disbursements and how well the plan is funded relative to today.
Unlike AAL, DAL has paid billions into its pension plans, in part because doing so has helped reduce DAL's taxes. As of its latest financial documents, DAL does not have to contribute to its plans for several years while AAL has significant funding requirements based on its latest financial statements.

The truth is not what we want it to be but what it is.
cwrasmith profile picture
If you want to gamble then American or Delta are your craps game. Tempting, but too many other better plays.
Tim Dunn profile picture
As I noted, Delta and Latam would move forward with their joint venture plans - faster than I expected, though.

Delta and LATAM sign trans-American Joint Venture Agreement

Once regulatory approvals are granted, the partnership will provide customers with a seamless travel experience and industry-leading connectivity.
Delta Air Lines and LATAM Airlines Group and its affiliates have signed a trans-American Joint Venture Agreement that, once regulatory approvals where required are granted, will combine the carriers’ highly complementary route networks between North and South America, providing customers with a seamless travel experience and industry-leading connectivity.
Tim Dunn profile picture
Looks like DAL ended up as the best gaining airline today after all as airlines beat market averages.
Despite what you might believe, there are more than adequate facts available to show how well companies do without at article being written by an insider. My disclosure is below.
And, more importantly, the notion that you two both seem to espouse that someone has to lose in order for someone else to lose is not borne out in most of life.
There will be some airlines that may do better than DAL in the end and others that won't do as well. My focus for this article is about the recovery plan laid out for this crisis and which is publicly available and the track record of recovering from other crises that DAL has demonstrated over more than 40 years of deregulation of the domestic US airline industry.
As hard as it is for some to accept, in 2019, DAL and LUV had nearly identical profit margins at the top of the US and global airline industries - and also had the two highest market caps.
cwrasmith profile picture
Delta does have the most advanced jet engine testing and repair facility of all the airlines. One of the airlines I look to fly first.
Tim Dunn profile picture
thanks for reading and for your comments
What a puff piece for, and by, Delta Air Lines.
Tim Dunn profile picture
thanks for reading....and feel free to become an SA contributor.
Tim Dunn profile picture
DAL is at the top end of an industry airline rally today; airlines are trying to regain their positions from last week.
Mixed financial results from the sector - which has all reported now - confirms that DAL's report was stronger than its most direct peers and its recovery plan includes elements that other carriers are not able to match.
@Tim Dunn
Actually, JetBlue's percent gain is ahead of Delta's gain today.
Please correct your comment.
Tim Dunn profile picture
There is nothing incorrect about my statement since I said "top end."

and the gap between JBLU and the rest of the industry is growing at this hour.

SAVE is negative. by alot. The ULCC segment, as I noted in the article, might not recover as well as some think.

anything positive you want to contribute to the conversation?
Andreas Hopf profile picture
"DAL is at the top end of an industry airline rally today"

What a joy of us pension investors, hallelujah, who thought they were lucky to "buy the dip" in the summer of 2016, added around $30, and are down 30% after four wasted years. $DAL now has to rise 43% from here only for one to break even.

At least there's the soothing $1.6 annual dividend, lol.
Tim, you keep trying to rearrange the deck chairs on the titanic
Tim Dunn profile picture

You are in the wrong era

There are no more 3 holers left.

Airlines can survive crises now.
Tim, thank you very much for your article.
Tim Dunn profile picture
thank YOU for the kind words - and the investment of your time.
Got a lot of LaGuardia Delta munibond debt for 4-6% NYS tax free last month, laddered maturities for the next decade of coupon clipping. I doubled my $ when I did the same with AAL last decade in it's bankruptcy merger w/USAir, and collected coupons till bankruptcy. When it exited the bankruptcy I got AAL new equity at 15/16 for the gate secured munibonds, then within 2 months it was at 35 and I sold it all.
Tim Dunn profile picture
smart man.
thanks for reading.
@Tim Dunn

The cash burn is too high, the airlines equity holders lose that cash burn value everyday. It's too large. The fact UAL did a $2.25 billion senior secured notes private offering clarifies we got a problem Houston! A lot of equity value has been diminished, far beyond what can be made up when this is over. Even the unsecured debt of these companies is dangerous at this point.
Tim Dunn profile picture
@Who cares about your portfolio?
remember that DAL retired about $10 billion in debt over the past decade which included its merger and the tail end of the Great Recession.
Debt is nobody's friend but it can be paid down w/ a solid business plan. I believe DAL has the best possibility of dealing w/ its debt.

And cash burn numbers make great sound bites but it is continually changing. It is also based on revenue projections which are not publicly known and are unique to each airline.
luizinga profile picture
Airlines, a bad bet
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