Delta Air Favors New Debt Over Equity After United’s Fire Sale

(Bloomberg) -- Delta Air Lines Inc. is looking to extend a borrowing binge to survive the collapse in travel demand from the coronavirus pandemic, favoring new debt over an equity offering after rival United Airlines Holdings Inc. sold shares at a historically low price.

Options for Delta include borrowing against $13.5 billion in unencumbered assets, or selling planes and leasing them back from the buyers, said Chief Financial Officer Paul Jacobson. Delta has also applied for $4.6 billion in U.S. government loans. If tapped, that would complement the $5.4 billion in emergency U.S. payroll support that Delta has already lined up.

“While the uncertainty means that we can’t rule anything out, we’re certainly prioritizing use of our unencumbered assets,” Jacobson said Wednesday on a call to discuss financial results. “We still feel pretty good about what’s available to us in the market.”

Delta signaled it may increase borrowing a day after United sold more than $1 billion in stock at $26.50 a share -- 70% less than the closing price at the end of 2019, before the virus outbreak plunged airlines into their worst-ever crisis. Delta Chief Executive Officer Ed Bastian said the industry faces a long, uncertain recovery that will take as long as three years, dashing any lingering investor hopes for a speedy rebound.

“This is a case of expectations meeting reality,” said Christopher Stathoulopoulos, an analyst at Susquehanna Financial Group. “This was the first up-close and personal look at operating results for an industry that has been front and center with Covid. It was the first real look at results in a near zero demand world and saying it would be a few years until things get back to normal.”

Read more: United, Delta in Talks on New Debt to Outlast Pandemic

Delta fell 2.5% to $22.52 at 3:08 p.m. in New York amid a broad industry decline after the company’s cautious outlook and United’s share offering.

United sank 6.9% to $25.96, the third-worst drop on the S&P 500 Index. United is selling stock at well below what it paid to repurchase its own shares over the last decade. Not since early 2013 had the company bought back shares at an average cost below this week’s offering price, according to data compiled by Bloomberg.

Cash Burn

Delta said it’s not considering a share sale or trying to monetize stakes in its global network of partner airlines. While weighing additional borrowing, it’s also stepping up efforts to cut costs, although Bastian said it’s too soon to say if Delta will resort to layoffs. The government aid carries restrictions on job cuts that run out at the end of September.

“We do know that Delta will be a smaller airline for some time, and we should be prepared for a choppy, sluggish recovery even after the virus is contained,” Bastian said in a letter to employees. “I estimate the recovery period could take two to three years.”

The company will slice its daily cash burn in half, to $50 million, as soon as next month, said Jacobson, the finance chief. The cash usage figure was $100 million at the end of March.

The Atlanta-based airline has parked 650 aircraft, cut flying capacity 85% this quarter, frozen hiring and lowered executive pay. More than a third of Delta’s workforce has agreed to take short-term leave without pay.

“The decline in expenses will help mitigate some of the revenue head wind,” Helane Becker, an analyst at Cowen & Co., said in a note to clients. Delta also benefits from a “solid liquidity position relative to other airlines,” she said.

Tumbling Sales

Delta swung to an adjusted loss of 51 cents a share in the first quarter, compared with earnings of 96 cents a share a year earlier. This year’s figure was the first loss on an adjusted basis since 2012. On a net basis, it was the first in more than five years.

First-quarter sales tumbled 18% to $8.59 billion. Delta suspended 2020 financial guidance earlier this year.

Bastian reiterated the airline’s expectation that second-quarter revenue will tumble by 90%, or $11 billion, from a year earlier. The CEO warned that Delta doesn’t expect a profit-sharing payout in 2020, the first miss in eight years. The company paid out $1.6 billion in employee profit-sharing in February, and the figure has surpassed $1 billion six years in a row.

Delta raised $5.4 billion in capital since early March, including a $3 billion secured term loan and $1.2 billion in aircraft sale leaseback agreements.

The additional $5.4 billion in payroll support from the U.S. Treasury Department includes a $1.6 billion unsecured loan for which the government will receive warrants for 6.5 million shares of company stock. Delta said it would end the second quarter with about $10 billion in liquidity.

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