Get Ready For The New, Slimmer Delta

In a post-pandemic world, Delta Air Lines, Inc. DAL will be significantly smaller, expand its definition of safety to include protecting customer and employee health, and take until mid-2023 to get to real growth again.

"A recovery will be dictated by our customers feeling safe, both physically and financially, to begin to travel at scale," CEO Ed Bastian said on an analyst call Wednesday to discuss the company's first-quarter pretax loss of $422 million. "Given the combined effects of the pandemic and associated financial impact on the global economy, we believe that it could be up to three years before we see a sustainable recovery. And to succeed through that environment, we will likely need to resize our business in the near term to protect it in the long term."

Bastian's transformation message is one that will likely be repeated throughout the airline industry in the coming weeks as fallout from the coronavirus quarantines and social distancing lasts into the summer and beyond.

United Airlines said it lost $2.1 billion in the first quarter.

Analysts say the industry's path to recovery will be uneven and L-shaped — the hope for a U-shaped recovery has been discarded — as the U.S. and other nations open up their economies in a phased approach. In some parts of the country, stay-at-home orders could extend through June — or longer. 

When consumers will feel confident enough to fly again is anyone's guess. Many will be cautious for fear of getting infected or spreading the disease to a loved one. The destruction of economic activity and resulting widespread unemployment means many people and businesses won't have the resources to travel, and large numbers will have used up vacation time adhering to stay-at-home orders.

A new poll shows about 60% of adults and a subset of those with investable assets of at least $100,000 fear contracting COVID-19 more than facing an economic recession. The Harris Poll for Nationwide Financial conducted the survey of more than 2,000 people.

Robert Redfield, the director of the Centers for Disease Control and Prevention, told The Washington Post on Tuesday that a second wave of the coronavirus this winter could be even worse because it will overlap with the seasonal flu.

Delta is developing a comprehensive safety approach with the help of medical advisers in response to the new normal, Bastian said.

"Safety will no longer be limited to flight safety but personal safety as well," he declared.

The Atlanta-based company has already adopted new cleaning and social distancing procedures on all flights, such as wiping down all high-touch areas like tray tables with sanitizer, spraying a disinfectant through the cabin and blocking all middle seats.

"Keeping middle seats empty is not a sustainable solution as airlines couldn't be profitable at a 67% load factor without raising fares to equally unsustainable levels," Cowen equity analyst Helane Becker said in a recent client note. 

Bastian's immediate goal is liquidity. 

On Monday, Delta received $2.7 billion of the $5.4 billion approved by the U.S. Treasury Department as part of the government's emergency economic aid for businesses. The money to maintain its existing workforce through Sept. 30 is divided between a $3.8 billion grant and a $1.6 billion unsecured, 10-year loan.

Recently, the company also secured $1 billion through the sale and leaseback of some aircraft, and a $2.6 billion, one-year term-loan secured by aircraft. It also drew down $3 billion on a revolving credit line.

Delta has $6 billion in liquid assets at its disposal and will raise more money this quarter to build its available cash to $10 billion, officials said.

That cushion is necessary, Bastian said, to weather a financial crisis that will see Delta's revenue plummet by 90% in the second quarter compared to last year.

Delta's cost base will be more than 50% lower in the second quarter because of aggressive steps to reduce operating and capital expenditures, the CEO said.

The $5 billion in savings "is impressive given the very short time frame in which we had to get this done," Bastian said.

He credited the voluntary, unpaid leave that 37,000 employees, more than one-third of its workforce, have taken with dropping Delta's daily cash burn from $100 million in March to a projected $50 million next month.

The airline has also grounded 650 aircraft and will reduce network capacity to 15% of its precrisis level starting in May.

The pandemic has also created an "opportunity to accelerate strategies to streamline our company, simplify our fleet and reduce our fixed cost base in ways not possible in the past. It will allow us to move up the timeline on critical airport infrastructure projects as we don't have the same constraints that limited progress and drove higher costs to construct."

Cowen's Becker has identified 313 aircraft, or 34% of Delta's fleet, over 20 years of age that could be good candidates for retirement.

Analysts say Delta is better positioned than most competitors to ride out the storm because of its quick response to the downturn, its access to funds, reputation for customer care and reliability, and strong balance sheet.

"I believe that the customer of tomorrow will place a higher premium on the quality of service than ever before. And that is our calling card," Bastian said.

Delta shares fell 2.73% to close at $22.47. The stock has lost 60% of its value in the past three months.