“The first quarter of 2020 has truly been like no other in our history,” Delta CEO Ed Bastian said on yesterday’s Delta investor call.
Yeah. Pretty much everyone in the world had an historic first three months. And not in a good way.
The hour-long conference call featured discussions about money, passenger traffic, Delta Amex cards, employees, cost-cutting measures, and more. Also included were several fetes of CFO Paul Jacobson — who was set to retire a couple of months ago before Mr. Bastian talked him into staying.
All of this was before Delta announced last evening that “it intends to commence a private offering to eligible purchasers of $1.5 billion in aggregate principal amount of senior secured notes due 2025 and enter into a new $1.5 billion Term Loan B facility due 2023.”
Here are the points that stuck out to me. (Neither René nor I own any airline stock, for the record.)
How Bad Are Things?
Delta’s first-quarter pre-tax loss was $422 million. That’s $1.3 billion lower than last year. It was also the airline’s first quarterly loss in almost a decade.
And the hits keep a-comin’.
Traffic is down — get ready — 95%.
Mr. Bastian said most current passengers are “people who need to…see sick people, people who are first responders, people whose work goes on and it’s required for them to travel.”
Delta’s Overall Response to the COVID-19 Air Travel World
Mr. Bastian outlined three main priorities undertaken by the airline during the coronavirus crisis:
1. Protect the health and the safety of Delta’s employees and customers.
2: Preserve the airline’s liquidity while dealing with the current situation
3. Make sure Delta is “well positioned to recover once the virus is contained and building a plan to accelerate our progress through this period of recovery.”
How Long Until Everything is “Normal”?
So when does Mr. Bastian see Delta in good shape?
Settle in, folks. It’s gonna be a while.
He said it may take “up to three years before we see a sustainable recovery,” adding that Delta will likely need to “resize [its] business in the near term to protect it in the long term.”
“We all wish we could predict the pace of the recovery,” he said. “The truth is, our recovery will be dictated by our customers feeling safe both physically and financially to begin to travel at scale.”
What Customers Can Expect in the Future
Mr. Bastian predicts “the customer of tomorrow will place a higher premium on the quality of service than ever before.”
He insists Delta’s new cleaning practices “won’t end when the virus abates.”
So does that mean Delta will forever fog each plane every night and wipe down all the tray tables?
Even though passenger numbers are very bleak, there’s one planet in the Delta galaxy that apparently hasn’t suffered as much as one might assume: the co-branded Delta American Express cards.
Delta CFO Paul Jacobson said spend “has not fallen off nearly as dramatically but it’s down in numbers in the short term and it’s one of the things that’s enabling us to keep [up].”
Mr. Bastian also seemingly shot down recent reports that Delta was looking to sell SkyMiles to Amex at bargain-basement prices.
“If we come to the point where we feel that’s an important source of liquidity, we will have good, constructive conversations,” he said. “But we are not having conversations — unlike publicly reported.” He didn’t rule out using SkyMiles to pad the bank, if you will, but stated “there’s nothing imminent to announce now.”
It’s possible more of those dreaded CRJ-200s may finally leave the Delta fleet! “We will certainly be looking at the…smaller RJ’s that we operate.”
(If the airline must keep a few to serve really small markets, get it. But the fewer CRJ-200s, the better.)
Older 757 and 767s may also be on their ways out.
One thing not mentioned: the report Delta may replace 717s with 737 MAXes.
Mr. Bastian heaped tons of well-deserved praised on Delta employees.
“Our employees are on the frontlines in the fight against the virus keeping our nation’s airways open for essential travel even as they worry about their own health,” he said. “Our nation has a lot of heroes in this battle against the virus and I’m proud of the men and women of Delta serving our nation in this time of need.”
He said 37,000 employees — more than a third of the airline’s staff of 90,000 — voluntarily accepted unpaid leaves, ranging in duration from 30 days to one year.
How Delta is Saving Money?
Mr. Jacobson said Delta’s cash burn was $100 million per day in March. Starting next month, that’ll be pared down to $50 million a day.
What’s the airline doing to cut its cash outflow?
In addition to the 37,000 employees who volunteered to take unpaid leaves, Delta has cut some staff work hours. It also instituted a hiring freeze.
Delta has “strategically” parked more than 650 jets “to get optimal maintenance savings.”
“Combined with $2 billion in lower fuel expense from reduced flying and lower fuel prices,” he said, “we expect a $5 billion reduction in total operating expense for the June quarter.”
That’s some nice savings at the pump.
The airline consolidated operations in a number of concourses at its airports. It also temporarily closed a number of Sky Clubs.
Delta killed most of its discretionary spending on items such as advertising and contractors.
Don’t Expect Airlines to Have “Emergency Funds”
You know how, ideally, three to six months of living expenses is ideal for a personal emergency fund? Will airlines follow suit and keep some cash reserves for situations like coronavirus?
“That would be a difficult financial burden to carry,” said Mr. Bastian. “I don’t think we can build our business models to sustain once-in-a-century pandemics…This will take us a bit of time as an industry to dig out. They have got plenty of time to ask those questions in the future but for now we’re very focused on weathering this storm and getting through over the next several years and then we’ll have time to think about that.”
An $18 billion emergency fund certainly would take a while to amass. Though Bill Gates (so take that for its worth), says we’ll see pandemics every 20 years.
So start saving up, airlines?
Mr. Bastian anticipated “(advancing) the timelines as some of our critical airport infrastructure projects as we don’t have the same constraints that limited progress and drove higher cost to construct.“
So, for instance, maybe the Delta SkyWay at LAX might be finished sooner than later.
I found it interesting to learn how Delta is slashing so much of its cash burn. It’s pretty amazing how the coronavirus did so much damage in so little time — and will require years for companies to recover. (And those are the lucky ones that actually survive.) Obviously, COVID-19’s human toll is far worse than air travel disruptions and credit card spending goals.
I do appreciate that they’re making the best of a bad situation: speeding up airport projects and hopefully kicking CRJ-200s out the door.
I, for one, welcome planes’ “deep cleanings” at night. I’m curious how that will affect ticket prices.
If you’re curious and want to hear the call or read its transcript, visit Seeking Alpha.
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