Delta’s loss in 2020 was huge, as expected, but weak demand calls recent optimism into question

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Delta airline
DAL
s, considered by analysts to be the best performing of the world’s major conventional airlines, lost $ 12.3 billion in a disastrous 2020 – and $ 755 million in a slightly less disastrous fourth quarter .

Senior executives at the carrier, which today became the first airline to report fourth quarter and year-end results, continue to say that Delta expects to return to balance based on the flow of cash this spring. But that achievement, assuming it does happen, will be almost entirely the result of further cost cutting, not an improvement in passenger travel demand in the first half of this year.

Indeed, Delta officials today reacted subtly to recent public comments that strongly suggested the carrier was anticipating a pickup in demand and revenue generation to begin in the second half of the year. As late as Jan. 1, in a note to airline employees, CEO Ed Bastian said the company expected to see positive cash flow by late spring and a demand environment. markedly improved – although still very poor – from the second half of the year. of the year.

But growth in travel demand practically came to a halt in November, remained weak even through the holiday-influenced December, and fell in January, prompting a negative review of Delta’s view on how this year will run.

“The start of the year will be characterized by an unstable recovery in demand and a reservation curve that remains compressed,” said Delta President Glen Hauenstein, acknowledging that the reality so far this year is not up to the very recent and somewhat positive expectations of the company. .

At some point, likely this spring or summer, Hauenstein said, he expects to see an “inflection point” where travel demand will start to increase. But his suggestion that this ‘inflection point’ covers a certain period of time rather than a clear demarcation of the demand environment implies a new degree of uncertainty about when this recovery in demand will occur and how long it will take to fully settle. Thereafter, he said, Delta expects there to be, “at last, a sustained recovery in demand as customer confidence grows, vaccinations become widespread and offices reopen “.

But this optimism, which has never been widely shared in the industry, is tested by:

  • Current high number of new Covid-19 cases and high number of daily Covid-19 deaths are reported
  • The surprisingly slow rate at which people are vaccinated against the Covid-19 virus, especially in the United States and Europe
  • The surprisingly high rate at which people refuse to be vaccinated
  • Recently reported mutations in the virus itself threaten to make it spread faster and easier
  • New and increased travel restrictions imposed by governments that are sure to depress demand even more and for a longer period
  • Extremely weak demand in the major Delta markets of New York and Boston, where demand is down 75% to 80% from a year ago

Therefore, Delta’s return to breakeven or even a slightly positive cash flow performance – which is not the same as a return to profitability – will be achieved entirely, or almost entirely, based on cost reduction, not growth in travel demand.

Gary Chase, the carrier’s acting co-CFO, said today in Delta’s earnings announcement that the airline has reduced its daily cash consumption to $ 12 million, down 90% from its rate of cash consumption at the start of the pandemic last March. But further reductions in daily cash consumption to break even cash flow will depend on whether the airline “remains nimble and disciplined with our cost structure,” he said.

Yet instead of seeing its daily cash consumption decline further in the first quarter of this year, extending the downward trend from December and the fourth quarter, Delta now plans to burn cash at a 10-15 pace. billion dollars per day current quarter.

Hauenstein pointed out that Delta “has the levers to pull to successfully respond to the emerging demand environment, including closely matching our salable capacity to expected demand,” strongly suggesting that if demand does not grow as much or as soon as the airline anticipated it recently like two weeks ago, it is ready to further reduce the number of seats and / or flights it will offer. This could force Delta to reverse, to one degree or another, its plans to increase capacity in the first quarter by adding several hundred flights per day.

Delta’s cost reduction continued in the fourth quarter, with total operating expenses falling 52% from the fourth quarter of 2019, compared to a full-year reduction in those costs of just 27%.

Revenue generation, however, is the real issue for Delta and all other airlines in this time of pandemic. And in Delta’s case, it’s been generating at least a little more revenue each month since the end of June. Total fourth-quarter operating revenue fell 65% in the fourth quarter to $ 3.97 billion, from $ 11.4 billion in the fourth quarter of 2019. But that’s a slightly larger drop in revenue – 1 percentage point worse – than the airline’s decline in annual revenues to $ 17.1 billion from $ 47 billion in 2019.

And the picture of declining income is actually worse than these numbers show. Like almost every other carrier, Delta generated new revenue by carrying more cargo during the pandemic. Weak passenger demand continues to more than offset rising freight transportation and revenues. In the fourth quarter, Delta’s revenue from passengers traveling in the main cabins of its aircraft fell 72% in the fourth quarter to just $ 1.45 billion, from $ 5.2 billion in the fourth quarter of 2019, while that for the full year, main cabin passenger revenues fell by “only” 70%. Worse yet, revenues from passengers traveling in business class or purchasing other types of premium tickets fell 78% to just $ 810 million in the fourth quarter, from $ 3.7 billion in the fourth quarter of 2019. For the Overall, the decline in passenger revenues from premium services was significantly “better”, down only 71% year over year.

This drop in passenger revenues from these high-end services clearly illustrates the huge drop in demand among business travelers in response to the pandemic. Business travelers tend to pay significantly more for their tickets than leisure travelers or business travelers representing small and medium-sized businesses. With significantly higher health and liability risks, and a very low chance that their salespeople and collaborators could meet companies or customers if they were traveling, companies have cut their travel expenses by 90% or more in many places. many cases.

As a result, instead of earning 15.65 cents per passenger-mile flown in revenue, as Delta did in the fourth quarter of 2019, this only brought in 7.38 cents in revenue per passenger-mile flown during of the quarter which has just ended. That’s a 53% drop despite only a 44% drop in fourth quarter capacity as measured by available seat miles.

Delta shares jumped more than 4% early in today, but quickly gave back all that gain before climbing slightly to around $ 41.80 per share, up around 1.5% from noon, eastern time.

We are in the fourth quarter and the full year losses, as expected, were company records. They were also close to analysts’ expectations ahead of today’s report.

United Airlines will release its fourth quarter and full year 2020 results on January 21, while airlines in the Southwest, the United States and Alaska will do so on January 28.

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