Delta Sees Travel Rebound Stalling on Surge in U.S. Virus

Delta Air Lines Inc. slashed plans to restore some service after a resurgence in U.S. coronavirus cases squelched a fledgling recovery in travel demand.

The airline will add back no more than 500 flights in August instead of the 1,000 it had planned. It doesn’t see adding much more through year-end.

“Demand growth has largely stalled,” Chief Executive Officer Ed Bastian said in an interview. “The pace of improvement from this point is going to depend on consumers’ confidence in flying.”

The CEO’s caution underscored the risk for airlines that surging Covid-19 cases will upend their efforts to coax customers back onto planes after an unprecedented collapse in demand earlier this year. United Airlines Holdings Inc. warned last week that it was seeing a sharp drop in bookings.

Delta’s earnings report led the way for major carriers for the first full quarter affected by the pandemic. The carrier posted a record quarterly adjusted loss of $2.8 billion after revenue collapsed by 91% in the three months through June.

No further reductions to its daily cash burn are expected in July, which would mark the end of a string of monthly improvements that brought the rate to $27 million a day last month from $100 million in March. The second-quarter average was $43 million.

Retirements, Furloughs

Operating expenses were reduced 53% by parking some planes, retiring others and reducing labor expenses, thanks in part to 45,000 workers taking voluntary unpaid leave, the Atlanta-based airline said in a statement.

At least 17,000 workers have signed up for early retirement or voluntary separation packages. The figure doesn’t include pilots, who have another week to decide. The results could help reduce or eliminate the need for furloughs later this year.

Delta’s adjusted results exclude write-downs totaling $2.5 billion in restructuring charges, mostly for aircraft retirements, and nearly $2.1 billion on Delta’s investments in Latam Airlines, bankrupt Grupo Aeromexico and Virgin Atlantic Airways.

Delta dropped 2.6% to $26.12 at 1:23 p.m. in New York. The stock had tumbled 54% this year through Monday, in line with other big U.S. carriers, but much worse than the 2.3% drop registered by the S&P 500.

The quarterly results “illustrate the truly staggering impact of this pandemic on our business,” Chief Financial Officer Paul Jacobson said on a conference call. Delta expects it will take more than two years to reach a sustainable recovery, with leisure travel rebuilding ahead of lucrative business traffic, which normally accounts for 50% of revenue.

Cash Burn

Despite the setback, Delta still expects to reduce cash burn to zero by year-end and to return to “profitability, marginally,” by spring, Bastian said. “Not a lot, but that’s the hope.” The cash burn target largely will depend on a rebound in business demand, he said.

Credit Suisse analyst Joe Caiado was skeptical. “The June exit rate also suggests that our projected $29 million average daily cash burn for Q3 is too pessimistic, though break-even by year-end still seems optimistic without material increases in flying,” he said in a note to investors.

Third-Quarter Outlook

Third-quarter revenue will be 20% to 25% of year-ago levels, Delta said. Seats available for sale, which accounts for the carrier’s decision to block middle seats, also will be 20% to 25% of what it was in the same period of 2019.

“I don’t want anyone to get the sense that we’ve got a gloomy forecast on demand growth or revenue; not at all,” Bastian said on the call. “We said at the start of this pandemic that this is going to be choppy; it’s going to be unpredictable. It’s going to be driven by factors outside of our control.”

The executive said he was optimistic going through late summer and into fall, when he expects to see significant improvement. However, “I don’t think we’ll ever get back entirely to where we were in 2019 on the volume of business traffic,” Bastian said, in part as businesses pull back on inefficient trips better conducted by videoconferencing.

The airline is in talks with Airbus SE about minimizing deliveries of ordered aircraft over the next 18 to 24 months, although no agreement has been reached. The carrier parked 700 planes when demand collapsed in March and April and has permanently retired more than 100.

Delta ended the second quarter with $15.7 billion in liquidity through a combination of government and other financing, and is considering whether to take an additional $4.7 billion federal loan.

The carrier reported an adjusted per-share loss of $4.43, while analysts expected $4.22, based on the average of estimates compiled by Bloomberg. Operating revenue tumbled to $1.18 billion, while analysts projected $1.43 billion.

Delta’s net loss was $5.7 billion, or $9.01 a share.

The carrier’s air-traffic liability, representing tickets sold for future travel and estimated credits to be used, totaled $5 billion.

©2020 Bloomberg L.P.

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