Delta Air Lines – Not Going Bankrupt
Summary
- We expect $5 billion of losses in the second half of the year.
- Net debt expected to grow to $19 billion at year end.
- Should have more than $10 billion of liquidity left when breaking even.
Cash Burn
Delta’s cash burn declined by more than 70% to $27 million per day, from March to June. Assuming current cash burn rates, the company would lose approximately $5 billion over the second half of the year. Delta expects to be at break even at year end.
The additional $5 billion of losses would mean the company’s current net debt of $14 billion would grow to $19 billion at year end. This would be a $10 billion increase from the pre-Covid debt levels, or more than 2 years’ worth of average annual profits of $4 billion, before the shutdown.
Liquidity
At the end of the quarter the company had $15.7 billion of liquidity. With the option to apply for an additional $4.6 billion of liquidity under the CARES Act Secured loan program. Delta’s had not yet decided if they will be accessing that liquidity.
Assuming another $5 billion of cash burn over the second half of the year, Delta will have more than $10 billion of liquidity left when they expect to break even. It does therefore not appear that they will be going bankrupt and might not even need to access the CARES loan.
Results
Total adjusted revenue for the second quarter was $1.2 billion, declining 91% from the prior year, driven by a 85% fall in capacity .
Delta’s operating expenses decreased 53%, which is impressive. The company expects to have the same level of expenses in the third quarter.
The large decrease in operating expenses was driven by an 84% reduction in fuel expense and a 90% reduction in maintenance expense from parking 700 aircraft, and significantly lower volume and revenue related expenses. Salaries and benefits expense was down by 24% as 45,000 employees took voluntary unpaid leave.
As part of the cost saving initiatives Delta is retiring several old aircraft, accelerating terminal construction to shorten timeline and launching a new early retirement program.
Analyst's Disclosure: I am/we are long DAL.
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