Delta Air Strains Earnings: Restoration on the Horizon
Thursday morning Delta Airlines (NYSE: DAL) resulted from the profitable season for the US aviation industry. As expected, the airline giant posted a sizeable loss and continued to burn cash in the final quarter. More of this is expected in the first quarter of 2021.
However, Delta’s earnings report and management commentary provided compelling evidence that a strong recovery in demand is imminent – and that Delta is in a great position to benefit from this future recovery in demand.
Cash burn is under control
Delta recorded an adjusted loss of $ 1.6 billion ($ 2.53 per share) on adjusted sales of $ 3.53 billion for the fourth quarter. These results were roughly in line with analysts’ consensus, which called for an adjusted loss of $ 2.51 per share on revenue of $ 3.6 billion. In addition, Delta’s results improved one by one. In the third quarter – usually a seasonally stronger period – the company reported adjusted sales of $ 2.65 billion and an adjusted loss of $ 3.30 per share.
However, since the pandemic that squeezed demand for air travel last March, cash burn has been a more important metric. After all, airlines that burn more cash in the short term will either emerge from the pandemic with weaker balance sheets (all others equal) or be forced to dilute shareholder interests by selling stocks.
Delta reported that the average daily cash burn fell to $ 12 million last quarter, a 50% decrease from the third quarter. That number came on the auspicious end of the company’s latest forecast for the fourth quarter average daily cash burn of $ 12 million to $ 14 million.
Looking ahead, Delta expects a similar cash burn for the first quarter: an average of $ 10 to 15 million per day. However, the company also expects it will receive roughly $ 3 billion in salary support money from the recently passed federal stimulus bill. With most of its wage support in the form of grants, Delta expects net debt to decline this quarter.
Solid signs of a recovery in demand
Delta executives expect demand to remain restless and extremely weak by historical standards over the next several months. However, as the introduction of the vaccine begins to tame the pandemic, demand should improve significantly. Management currently expects the recovery to begin in earnest in spring and accelerate in the second half of 2021. This would allow Delta to generate positive cash flow in the second quarter and return to profitability in the third quarter.
Management supported this bullish outlook and noted that “shopping visits” to the Delta website and mobile app have increased dramatically. Most consumers continue to hesitate to book, but are actively looking for destinations and travel options. This suggests that there is a huge pent-up demand that will likely be sparked as more people get their COVID-19 vaccinations.
While many experts have speculated on the decline in business travel due to the rise in video conferencing, Delta’s latest customer survey suggests a much better result. Just over half of Delta’s top business travel customers expect to return to 2019 travel levels by 2023. In fact, most of the companies in this group expect to hit 2019 travel levels by next year. Of the remainder, 42% said they weren’t sure about their future plans, and only 7% said they’d never return to their 2019 travel levels.
Obviously, many companies are still unsure of their long-term business travel plans. Still, these statistics support Delta’s view that business travel will recover to at least 80% to 90% of 2019 levels once the economy recovers. Delta management also found that small and medium-sized businesses recover business travel faster than large corporate customers.
Cost reductions pave the way for impressive profit recovery
Even if business travel recovers to 90% of pre-pandemic levels within a few years, investors might wonder if that would allow for a full rebound in Delta’s earnings and share price. Fortunately, Delta’s cost reductions during the pandemic should more than offset long-term weak demand.
Delta significantly reduced its workforce and fleet count in 2020. Delta is also simplifying its fleet and replacing the aircraft it is withdrawing from service with larger models with significantly lower unit costs. As a result, the company expects unit cost excluding fuel to be below 2019 levels by the fourth quarter of 2021, even if capacity is around 25% lower. As Delta will reset capacity to 2019 levels over the next two to three years, unit costs will continue to decrease.
Even if sales don’t fully recover by 2023, Delta’s earnings should recover to 2019 levels or higher. This would allow the company to quickly pay off the debt it had accumulated in 2020 – and it could allow Delta stock to soar to a new all-time high.