This article was originally written by Adam Levine-Weinberg of The Motley Fool With the COVID-19 pandemic escalating in the United States, U
This article was originally written by Adam Levine-Weinberg of The Motley Fool
With the COVID-19 pandemic escalating in the United States, U.S. airlines are confronting an unprecedented drop in demand. Numerous companies have canceled all business travel, public health authorities are urging people (especially older Americans and those with underlying medical conditions) to avoid nonessential travel, and the U.S. has imposed travel restrictions barring many foreign nationals from entering the country.
Earlier this week, United Airlines (NASDAQ:UAL) President Scott Kirby told investors that in recent days, net bookings had plunged 100% for travel to Europe and Asia and fallen 70% in the domestic market. As a result, he said United would slash domestic capacity by 10% and international capacity by 20% in April, with an overall 20% reduction likely in May.
That sounded like a shockingly severe drop in demand. However, on Friday, Delta Air Lines(NYSE:DAL) CEO Ed Bastian announced that Delta was experiencing negative net bookings (i.e., more cancellations than new reservations) for travel over the next four weeks. With demand evaporating, Delta is moving aggressively to limit the losses from this health crisis and ensure that the company doesn’t suffer permanent damage.
A rapidly developing situation
At the beginning of March, there were significant COVID-19 outbreaks in Europe and Asia, but fewer than 70 confirmed cases in the United States. Over the past two weeks, the situation has changed rapidly. Hundreds of new U.S. cases have been reported every day recently, bringing the nationwide total to more than 2,000 by Friday, despite very limited testing so far. The scale of the outbreak in Europe has increased significantly since the beginning of March, too.
Airlines have also had to cope with rapidly changing rules on who is allowed to travel where. Travel to and from China has been severely restricted since the beginning of February. Last Wednesday, President Trump announced new restrictions barring most travel from continental Europe to the U.S. except for American citizens and permanent residents. Several other countries, like Argentina and India, are severely restricting or banning travel from the U.S.
With new developments every day, it has been virtually impossible for airlines to make accurate demand projections. However, it’s clear that demand for air travel within the U.S. and to Latin America has plunged dramatically, while demand for flights to and from Asia and Europe has almost disappeared entirely. As a result, airline stocks have plunged. Even after a double-digit gain on Friday, Delta Air Lines shares have fallen 35% this year.
This swift collapse in demand is unprecedented, far outpacing what airlines experienced in the aftermath of 9/11 and during the Great Recession. Delta is acting decisively to limit the damage.
Here’s how Delta is responding
As the COVID-19 pandemic has spread, Delta has instituted enhanced aircraft cleaning procedures. In keeping with its reputation as a customer-friendly airline, Delta has also waived change fees for all flights in March and April and for bookings made in March for future travel.
But in the short run, there’s really not much airlines can do to stimulate demand. At an investor conference earlier this week, Delta said it would reduce system capacity by at least 15% in the spring. However, it quickly became clear that far more aggressive action was needed.
In a memo to employees on Friday, Delta Air Lines’ CEO said that because of plunging demand, the airline will slash capacity by 40% for the next few months. That includes eliminating all flights to continental Europe — a significant market for Delta — for at least 30 days. In light of this sharp capacity reduction, Delta will park up to 300 aircraft, a third of its mainline fleet.
Delta also plans to reduce 2020 capex by at least $2 billion compared with its original plan to spend $4.5 billion. It will do so by deferring aircraft deliveries and delaying non-essential projects. Meanwhile, it is cutting discretionary spending, instituting a hiring freeze, and urging employees to consider taking voluntary short-term unpaid leaves. The airline is also asking employees to chip in by identifying ways to reduce spending in their departments.
Finally, Delta Air Lines is working to boost its liquidity. As of earlier this week, it expected to end the first quarter with at least $5 billion of liquidity. On Thursday, it finalized the issuance of $1 billion of secured debt (at a weighted average interest rate just above 2%), backed by 33 of its aircraft. And Delta still has close to $20 billion of unencumbered collateral — mainly aircraft — that it could use to issue additional secured debt as needed.
The financial impact will still be enormous
Even after taking all of these actions, Delta is still in for a lot of pain. At the investor conference last week, United’s Scott Kirby said his company was planning for a worst-case scenario where revenue could decline by 70% in April and May and by 60% in June, with gradual improvement thereafter. With near-term net bookings having turned negative for Delta, that type of doomsday scenario is starting to look frighteningly realistic.
Last year, Delta Air Lines generated $12.5 billion of revenue in the second quarter. A 60% drop in revenue to $5 billion (consistent with a 65%-70% decline for the core airline business) would thus cost the airline $7.5 billion of revenue.
On the flip side, jet fuel prices have plunged by nearly $1 per gallon since the beginning of 2020. If fuel prices hold near current levels, Delta would save about $1 billion next quarter, holding capacity constant. The 40% capacity reduction could drive another $500 million of fuel cost savings, roughly speaking.
The financial impact will still be enormous
Even after taking all of these actions, Delta is still in for a lot of pain. At the investor conference last week, United’s Scott Kirby said his company was planning for a worst-case scenario where revenue could decline by 70% in April and May and by 60% in June, with gradual improvement thereafter. With near-term net bookings having turned negative for Delta, that type of doomsday scenario is starting to look frighteningly realistic.
Last year, Delta Air Lines generated $12.5 billion of revenue in the second quarter. A 60% drop in revenue to $5 billion (consistent with a 65%-70% decline for the core airline business) would thus cost the airline $7.5 billion of revenue.
On the flip side, jet fuel prices have plunged by nearly $1 per gallon since the beginning of 2020. If fuel prices hold near current levels, Delta would save about $1 billion next quarter, holding capacity constant. The 40% capacity reduction could drive another $500 million of fuel cost savings, roughly speaking.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold no positions in companies mentioned above. Read our full disclosure policy here.
Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.