Delta Air Lines Is Executing The Strongest Recovery Plan

Summary

• 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 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 leisure markets while others have focused on higher value business travel and still others on the international marketplace.

Despite the distinct market segmentation, industry profitability and valuation has not been consistent across business types, indicating that carriers using all business models could be profitable. Delta, a legacy/global carrier and Southwest (LUV), the nation's largest low-cost carrier, led the industry in net income margins for 2019 and also were numbers 1 and 2 in market cap. Still, airline stocks as a group often move in the same direction and at very similar percentages on a short-term basis even though news might be released for a specific airline.

As the airline industry recovers from the coronavirus crisis, I believe that there will be greater differentiation of the financial results and valuations in the airline industry than was seen during the last ten years. A number of analysts believed that it would take a macroeconomic crisis in order to determine which carriers were capable of long-term survival. The coronavirus has become the catalyst that will determine whether U.S. airlines were prepared for a downturn and will also distinguish those that can deliver consistently solid financial results and valuations from those that cannot.

Delta was well-prepared for the coronavirus crisis

Delta spent the last ten years distinguishing itself from its legacy carrier peers. Up until the Great Recession, airlines had not ever covered their cost of capital and had accrued few if any cumulative profits. Most legacy airlines did not have investment-grade credit ratings due to their highly leveraged balance sheets.

Delta, and then-future merger partner, Northwest Airlines, entered chapter 11 bankruptcy on the same day in the same New York U.S. bankruptcy court in 2005. While their bankruptcy cases were separate and they emerged at different times, their merger announcement came a year after both emerged from chapter 11 - and just as the U.S. was heading into the Great Recession. While Delta laid the framework for transforming itself from the traditional legacy carrier business model before and during its bankruptcy, the Great Recession provided the opportunity for Delta to benefit from it and Northwest's trips through bankruptcy to not only quickly cut its losses in the post-Great Recession period but also to use the next decade to transform itself into the world's largest airline by revenue, market capitalization, and net profits, titles Delta held on December 31, 2019. For 2019, Delta's net income margin was virtually identical to Southwest, long considered the best-run airline business in the history of commercial aviation; Delta and Southwest sat financially at the top of the U.S. and global airline industry.

As the first quarter of 2020 unfolded, Delta relied on the strengths it built and reacted quickly and decisively to not only limit the financial damage to Delta from the virus crisis but also to strengthen Delta's position in the industry as the recovery phase begins. Now that all of the big four U.S. airlines (American (AAL), Delta, Southwest and United (UAL)) have reported their first quarter earnings and provide insight into their recovery plans and as the U.S. economy begins to reopen, it is clear that Delta's recovery plan is superior to its peers in building on the strengths that put Delta at the top of the industry.

Delta executives indicated that they understood early in the virus crisis that the keys to survival included being able to

1. gain sufficient liquidity to endure the reduced revenue that came from managing spread of the virus

2. adapt the business plan to the realities of the likely enduring unseen threat of the virus

3. match costs with the new level of revenues during the disease and economic recovery phases and

4. retiring the debt that Delta and other airlines would accumulate and return to the balance sheet strength to an investment-grade rating, which allowed the stock to compete with other high-quality companies.

Delta's strengths going into the crisis were substantial and will fuel its turnaround.

Source: Delta investor presentation, p. 5

Revenue Generation

While no one can accurately forecast airline industry revenue for the foreseeable future, there are encouraging signs that Delta and the industry might see demand recovery within the next few months. While TSA security checkpoint volume dropped to less than 5% of year over year levels, there have been recent, daily increases in the number of passengers traveling. Delta, like most airlines, has cut capacity through the month of May and for parts of June, but they are slowly restarting routes.

Delta's current network is operating at minimum levels of service in accordance with requirements under CARES funding assistance from the federal government. Unlike some of its competitors, on a pre-virus basis, Delta did not talk about or have strategies to deal with underperforming parts of its network. Domestically, Delta has hubs in every region of the United States except for Texas and over the past month has operated its network by serving smaller cities from the hubs closest to those cities. Delta's international network was uniquely and consistently profitable in every one of the three global regions (transatlantic, transpacific and Latin America). While government travel restrictions have necessitated suspending service to some markets, Delta has served key markets and partner hubs in Europe and Asia throughout the virus crisis. Unlike its legacy carrier peers, over the past decade, Delta supplemented its well-defined hub and spoke route system with focus cities throughout the U.S. where it generally relies on point to point (non-connecting) flights in cities with strong economic growth. I discussed Delta's focus city strategy in this Seeking Alpha article. Much of its focus city network has been temporarily dismantled based on low demand; the hub and spoke system is the most efficient means to serve a broad number of cities, esp. in a low demand environment. Delta was the largest airline in the U.S.'s top markets according to the latest DOT data for 2019 and also connects more passengers from small and medium markets to its global network; both of those characteristics of Delta's network will be key to its revenue recovery.

Delta's international partners were a strength going into the crisis but have been a point of criticism from some. Delta developed a series of partnership anchored by its equity investments in a half dozen partner airlines around the world; most of the equity is currently worth far less than DAL paid. Where permitted by law, all of Delta's equity investment airlines are also joint venture partners. Those partnerships will be increasingly important as Delta rebuilds its international route system. Unlike other airlines that also have antitrust immunized joint ventures, Delta's equity investments include a presence in the boardrooms of each of its equity partners, an advantage that will help Delta rebuild its network by strengthening not just its partner but also Delta's presence in the region which the partner serves.

Source for both: Delta 10-Q 1Q2020, p 14-15

Although passenger revenue has fallen to near zero, airlines including Delta are taking advantage of their widebody aircraft to operate cargo-only flights. Normally, about half of the world's air cargo moves in the bellies of passenger aircraft. Even with production facilities around the world slowed or stopped, air cargo rates have soared which, combined with low fuel prices, favors the operation of cargo-only flights. Delta has removed passenger seats from some aircraft in order to maximize cargo capacity and has also won FAA approval to use the overhead bin space of some of its aircraft for cargo. Cargo rates will likely remain high for the foreseeable future which will provide financial support for the re-initiation of passenger flights.

Delta's Technical Operations division will continue to be a source of revenue. Delta provides aircraft maintenance services to airlines around the world and is the largest contract maintenance provider in the Americas with margins that are believed to exceed that of air transportation services. While fleet strategies and the temporary grounding of significant portions of the global fleet will push back airline maintenance expenses, Delta has won contracts from two of the three global manufacturers to repair new generation aircraft engines.

Delta's biggest source of non-transportation revenue is from American Express; Delta is also Amex's largest partner. While credit card billings will be influenced by the return of business travel, Delta's partnership was on track to add up to $7 billion in revenue to Delta within the next couple of years, a distinctly higher amount of revenue than any other U.S. airline.

Of course, the biggest factor that will influence the return of revenue will be Delta's ability to convince passengers of the safety of air travel. 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. In the meantime, Delta and other airlines have implemented enhanced aircraft cleaning processes and procedures to provide social distancing on its aircraft. Enhanced sanitation and virus safety procedures mirror the anti-terrorism procedures that have become commonplace over the past fifty years. The origin of airport security checkpoints can be traced in part to frequent hijackings of commercial aircraft to Cuba; those same security checkpoints and procedures were enhanced in the wake of 9/11 as airlines attempted to convince passengers that air travel was again safe. Of course, there is a great deal of collaboration with governments behind the scenes and that will be true regarding transmission of the virus. While Delta says it is not certain how far air travel safety in a post-virus world will go, efforts at cleaning and social distancing will likely be far more important until medical advances limit the presence and impact of the virus.

Delta disinfectant fogging

Finally, demand return will be closely tied to a new sense of the necessity of air travel in a world where telecommunications have advanced far beyond what existed in any previous external shock to the air transportation system. While Delta and other airline executives accurately note that humans have deep social needs to be present with each other in order to transact some of the most significant parts of life and business, technology and the ability to work remotely has allowed business to continue during the lockdown in a potential reshaping of business travel that will negatively impact the return of airline revenues. Given that Delta's business model pre-virus was built around successfully providing high-quality air service and attracting premium revenues, adapting to the new realities of commercial aviation, whatever that might be, will require Delta to match revenues with costs.

Cost Control and Cash Management

Cost control and cash management have long been key to Delta's strengths in the global airline industry. In the absence of certainty about the timing and degree of revenue recovery, cost control plays an even larger role than ever. Delta's cost control in this crisis focuses on several areas and each is unique among the U.S. airline industry; its CEO said they intend to use this crisis to reimagine every aspect of the business and engineer costs out of their system as they rebuild the airline.

Notably, Delta said that it is working to make 60% of its costs as variable costs, an unusually high number for an airline. No other airline has indicated that it can convert as many of its costs to variable costs. Delta also said that it will be able to cut 50% of its costs for the 2nd quarter.

Delta was criticized over the past several years for its older fleet, although, in reality, United had the oldest fleet among the big 4 as of December 2019. Delta's fleet strategy has been built around the cyclical nature of the industry and ensures that it has adequate unencumbered aircraft it can retire in downturns with minimal costs and write-downs. The following chart shows Delta's fleet as of March 31, 2020, showing the average age of each fleet type as well as its ownership or lease status.

Delta fleet as of 3/31/2020 Source: DAL 10-Q, 1Q2020, p. 33

Delta has older as well as newer aircraft of various sizes across its domestic and international fleets so that it has multiple options to retire aircraft as it becomes necessary to do so. Delta said it would be closely looking at every fleet type that it had previously considered for retirement in the next five years; it has already announced its intention to ground the remainder of its MD80 and MD90s by this summer.

One of the challenges of fleet management with large, complex fleets is that pilot staffing is impacted by the removal or addition of fleet types as pilots are forced to change the aircraft and position they fly, potentially costing hundreds of millions of dollars in retraining expenses.

Delta's labor cost reduction efforts appear to be the most significant of the big 4. Early in the crisis, Delta offered unpaid leaves to its ground employees and flight attendants, all of which are non-union. Delta has stated that more than 35,000 employees, nearly 40% of its workforce, have agreed to take unpaid leaves of absence of one month or longer. Other airlines initially offered partially paid leaves of absence to their unionized ground staff and flight attendants with some unpaid leaves offered later - but many of the other airlines will not be able to get their employee costs down as much or for as long given that many of their employees are on partially paid leaves of absence. Some airlines have already offered early retirement programs but Delta so far has not.

Prior to accepting federal grant money, Delta also reduced the hours of most of its remaining ground employees in order to more closely match the number of working employees with travel demand. Several smaller airlines have also used this practice while United did the same thing after accepted federal grant money, invoking complaints from some legislators even though the CARES act does permit the reduction of hours but not base pay.

Reducing pilot compensation at each airline is more complicated than for most ground employees. While Delta encouraged many of its non-union employees to take leaves of absence and apply for state and later federal unemployment before the CARES act was passed, that strategy does not work for pilots since they cannot replace much of their income via unemployment. Pilots including at Delta, are discussing strategies to reduce pilot costs commensurate with reductions for non-pilot personnel with Delta and many other airline pilot unions agreeing to reduce the number of flight hours used to calculate minimum monthly pay.

Delta is also reducing its labor costs through elimination of profit sharing. Its employees just received checks representing, on average, 16% of their salaries, making Delta's profit-sharing program in 2019 the richest not just in Delta's history but also, in total, for all of corporate America. It is not likely that Delta or any airline will accrue profit sharing in 2020.

CARES Act

The Coronavirus Aid, Relief, and Economic Security (Cares) Act included $25 billion for U.S. passenger airlines with the first part of the act providing immediate cash to protect airline employee salaries, partially via direct grants and partially via loans to each airline. Delta received $3.8 billion in grants and $1.6 billion in an unsecured 10-year low interest loan. For the loan portion, Delta issued to the U.S. Treasury 6.5 million warrants to acquire Delta common stock with an exercise price of $24.39 per share over the next five years, representing an approximately 1% dilution of DAL stock. Delta is eligible for $4.6 billion in loans via the second part of the CARES act; Delta has said it will apply for the loan but will not have to decide whether to take the funds until September 30, 2020. Most other U.S. airlines have accepted federal assistance under part 1 and plan to apply for loans under part 2, but like Delta might not accept the loans. The CARES Act also allows airlines to defer employer social security contributions to increase cash flow; Delta values this benefit at $200 million for 2020.

The CARES Act was intended to prevent widescale bankruptcies in the airline industry and to provide short-term liquidity to cover employee costs. The roughly six months between the approval of the CARES Act and the expiration of its employee protection and minimum service requirements allows airlines, including Delta, to develop viable business plans for the virus recovery period. The viability of those business plans will certainly be scrutinized when and if airlines choose to accept loans from the federal government, if they are approved. The necessity to be able to match costs to revenues and service the debt - much of which will be due in the next five years - will be the tipping point between success and failure for some airlines, and the answer will not be the same for each airline. Delta will be on the side of a successful restructuring.

The CARES Act has actually resulted in a willingness by private lenders to make collateralized loans to airlines. Delta started the coronavirus with an investment-grade credit rating; it believed it did not need to maintain cash balances as large as its peers because it could access capital markets if necessary. Delta has accessed more than $7 billion in debt, larger than any other US airline. DAL began the virus crisis with $20 billion in unencumbered assets excluding its loyalty program and appears to still have half of that amount available to it. Several U.S. airlines have issued equity in the past month but DAL has not.

Liquidity

Cash burn has been a heavily focused statistic for airlines but several words of caution are in order. First, cash burn includes cash refunds and, despite DOT reminders that U.S. airlines must provide cash for cancelled flights if asked, there are a number of customers that are accepting - perhaps with incentives from the airlines - to accept credit vouchers over cash. In March, refund activity constituted up to 20% of its cash burn. Delta, like United, has large international route systems that generally book much further in advance than domestic flights, meaning that the cash refund rate for those two airlines will be higher than largely domestic airlines. Cash burn also includes revenue projections and those numbers are changing constantly; because DAL reported its financial results and provided guidance a week or more before its competitor airlines, Delta's numbers might not be directly comparable given the rapidly changing financial situation for airlines. Delta's most recent estimates are for cash burn of up to $50 million/day in the 2nd quarter which will include very low demand for the months of April and May.

During the past three years, Delta committed to massive fleet and airport spending using its then-industry leading levels of cash flow. Delta committed to replacement of over 200 aircraft over three years; Delta completed a large order for 737s from Boeing so all of its current order book is for Airbus aircraft including the A220 which Delta ordered as the Bombardier C Series. Delta has not reached an agreement with Airbus on restructuring its order book but did say that it will not take delivery of any further new aircraft in 2020 unless they are already financed.

Delta also is self-financing a number of airport improvement projects including a multi-billion rebuild of its terminals at NYC LaGuardia and Los Angeles International Airport. Interestingly, Delta said it may accelerate some of its airport projects to take advantage of lower flight levels to minimize the cost of rebuilding around flight operations.

As of March 31, 2020, Delta had an unfunded pension liability of $8.5 billion which reflects most of the former Delta and Northwest pension plans; Delta had accelerated voluntary funding of its pension plans over the past three years and now does not expect to have to make any contributions to its pension plans in 2020.

Delta had also been reducing its NOLs over the past five years and expected to become a cash taxpayer later in 2020. DAL and the entire U.S. airline industry will accumulate NOLs that will eliminate cash payment of income taxes for years, further reducing DAL's cash requirements

From a financial strength standpoint, Delta entered the virus crisis stronger than its most direct peers American and United and DAL has demonstrated that its incoming financial strength has paid dividends in the earliest days of the virus crisis. Even though all airlines have taken on additional debt in order to fund operations, DAL's leverage ratio remains about one-half of UAL's which itself is about one-half of AAL's.

DAL 10-year chart Source: Seeking Alpha May 4, 2020

Competitive Implications

One of the most significant factors that favors a stronger recovery for Delta than its peers is the competitive environment in the airline industry, not just in the U.S but also globally.

First, some are quick to point out that the big 3 - American, Delta and United - are currently saddled by their international route networks which will take longer to recover than the domestic market, in part since the peak international travel should be starting right now but will be missed. However, American, Delta and United compete in the U.S. domestic market alongside the international market. During the next few months as the industry works its way through recovery, every U.S. airline will be aggressively competing for every passenger that they can carry in the domestic market using every pricing and product strategy that they use. As a full service, global carrier that competes against low-cost and ultra-low-cost carrier prices and products, Delta is as well-positioned as American and United. However, Delta also has the highest market share in its hub markets and had a revenue premium across its network prior to the virus crisis that will certainly allow it regain pricing strength in its markets before its peers.

Secondly, it is a given that there will be airlines that will not survive this crisis. While the U.S. government has committed to providing more than half of the aid and liquidity to its airlines compared to airlines around the world so far, U.S. airlines ended 2019 as the most profitable in the world and Delta was the most profitable airline in the world. Other airlines, especially in the international market, will not survive. Others are or will enter whatever form of restructuring is available in their home countries, some of which will succeed while others will fail.

I wrote years ago on Seeking Alpha Identifying The Winners In The Low Fare Transatlantic Air Fare Battle that a growing long-haul low-cost airline movement was beginning across the Atlantic; even before the virus crisis, a number of European low-cost carriers failed and even more are fighting for their survival including Norwegian, which became the largest transatlantic low-cost carrier. Delta, as the largest carrier across the Atlantic in 2019, will certainly benefit from the reduction in capacity from low cost carriers and from stronger pricing as the market recovers.

Finally, Delta's history shows that it has grown more in competitive markets than any of the big four U.S. airlines over the past 40 years and that will likely be the case with this recovery. Delta entered domestic deregulation over 40 years ago as the sixth-largest U.S. airline but became the largest U.S. airline by revenue in 2019 in part as a result of growth in the largest U.S. markets including New York, Boston, Seattle and Los Angeles. While it is not clear how Delta will reduce its domestic capacity, both American and United had implemented strategies to improve their performance in a number of their key hubs which they will have to pull back, likely resulting in opportunities for Delta to grow.

Delta is now the second-largest U.S. international airline behind United; however, United's international margins have been lower than Delta's, making it likely that United will reduce a greater proportion of its international network than Delta. United just recently notified its pilots that it will displace up to 5000 of them from higher to lower paying categories, likely a result of a significantly smaller international network. Delta's joint venture plans with Latam are certain to move forward, increasing Delta's size in Latin America, the only region where American is the largest U.S. carrier.

Finally, Delta has overcome industry adversity before, not only increasing margins at a faster pace than any other airline but also reducing debt; all airlines will spend years retiring debt they are taking on to survive this year and yet DAL has the best track record for retiring debt. As of March 31, 2020, Delta still has the highest stockholders' equity in the industry, more than 50% higher than LUV and UAL.

These charts illustrate the progress Delta made towards its goal of being viewed as a high quality industrial company in the most recent 5 years compared to the 5 years after it merged with Northwest Airlines.

Source for both: DAL 10-K 2019, p. 27

Source for both: DAL 10-K 2013, p 25,26

Investor Implications

I have long stated on Seeking Alpha that airlines should be held long-term rather than used as trading stocks but that there is a distinct difference in financial and valuation performance between U.S. airlines. DAL's track record of success during and after major industry crises will guide its recovery from this latest crisis. On multiple levels, Delta has the strongest airline recovery plan from the COVID-19 crisis.

I believe DAL has an 18-month price target of $40.

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.

Comments

[Tim Dunn]

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]

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]

Add to that, they will retire their MD-88 and MD-90s too.

[Tim Dunn]

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.

[markcc]

@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]

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.

[markcc]

@Tim Dunn
Retiring their 777s.

[Joe China Puppet]

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.

[RomeVVV]

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.

[markcc]

@RomeVVV
5 studies? this is significant. Please post links.

[RomeVVV]

www.pharmalive.com/...

[RomeVVV]

I hope this link gets you started. I was not able to find the other article.

[User 450587]

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]

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%.
seekingalpha.com/...

thanks for reading and commenting.

[EliasMouawad]

@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]

@EliasMouawad
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.

[gregmcn]

Really enjoyed reading the article. thanks Tin

[Tim Dunn]

glad you enjoyed it...thanks for reading @gregmcn

[gregmcn]

Sorry Tim for mispelling. The comments section is quality too.

[markcc]

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]

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.

[a cord of 3 strands]

I think your confusion might stem from the fact you seem to be missing the premise of the article.

[markcc]

@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.

[a cord of 3 strands]

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]

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]

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]

@rockwelljim
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

[markcc]

@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]

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]

If you want to gamble then American or Delta are your craps game. Tempting, but too many other better plays.

[Tim Dunn]

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]

@bluedriver
@markcc
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]

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]

thanks for reading and for your comments

[bluedriver]

What a puff piece for, and by, Delta Air Lines.

[Tim Dunn]

@bluedriver
thanks for reading....and feel free to become an SA contributor.

[Tim Dunn]

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.

[markcc]

@Tim Dunn
Actually, JetBlue's percent gain is ahead of Delta's gain today.
Please correct your comment.

[Tim Dunn]

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]

"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.

[gmb727]

Tim, you keep trying to rearrange the deck chairs on the titanic

[Tim Dunn]

@gmb727

You are in the wrong era

There are no more 3 holers left.

Airlines can survive crises now.

[Alexinvest]

Tim, thank you very much for your article.

[Tim Dunn]

thank YOU for the kind words - and the investment of your time.

[jebstuart]

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]

@jebstuart
smart man.
thanks for reading.

[Joe China Puppet]

@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]

@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]

Airlines, a bad bet