Delta’s 2020 Loss Was Huge, As Expected, But Soft Demand Is Calling Recent Optimism Into Question

Delta Air Lines

, regarded by analysts as the best-performing of the world’s major airlines, lost $12.3 billion in a disastrous 2020 – and $755 million in a slightly less disastrous fourth quarter.

Top executives continue to say that Delta expects to return to break even on a cash flow basis this spring. Assuming it happens, that will be almost entirely the result of further cost cutting, not improvement in passenger travel demand during the first half of this year.

Indeed, during a conference call to discuss its earnings Thursday, Delta officials subtly ratcheted back on recent public comments that strongly implied the carrier foresees the beginning of a recovery in demand and revenue generation in the second half of the year. As recently as Jan. 1, in a note to airline employees, CEO Ed Bastian had said the company expected to achieve positive cash flow performance by late spring and a much improved – though still very sub-par – demand environment beginning in the second half of the year.

But travel demand growth came pretty much to a halt in November, remained soft even during holiday-travel boosted December, and has plummeted in January, causing some negative revisions in Delta’s view about how this year will go.

“The early part of the year will be characterized by choppy demand recovery and a booking curve that remains compressed,” Delta President Glen Hauenstein said, acknowledging that the reality so far this year is not living up to the company’s very recent, somewhat positive expectations.

At some point, presumably this spring or summer, Hauenstein said, he expects to see an “inflection point” where travel demand begins to pick up. But his suggestion that this “inflection point” would cover some period of time rather a clear demarcation in the demand environment, implies a new degree of uncertainty about when that pick-up in demand will occur and how long it will take to fully take hold. Thereafter, he said Delta expect there to be, “finally, a sustained demand recovery as customer confidence gains momentum, vaccinations become widespread and offices re-open.”

But that optimism, which never was widely shared around the industry, is being tested by:

  • The high numbers of new cases of Covid-19 and deaths being reported
  • The surprisingly slow rate at which people are being vaccinated against the Covid-19 virus, especially in the U.S. and Europe
  • The surprisingly high rate at which people actually are declining to be vaccinated
  • Recently reported mutations of the virus that threaten to make it spread faster and more easily
  • New and increased travel restrictions being imposed by governments that are certain to depress demand even more and for a longer period of time
  • Extremely weak demand in Delta’s big New York and Boston hub markets, where demand is off 75% to 80% from a year ago

Therefore, Delta’s return to breakeven or even slightly positive cash flow performance – which is not the same as a return to profitability – will be achieved entirely, or almost entirely on the basis of cost cutting, not travel demand growth.

Gary Chase, the carrier’s interim co-chief financial officer, said today in Delta’s results announcement that the airline reduced its daily cash burn to $12 million, down 90% from its cash burn rate in early days of the pandemic last March. But further reductions in the daily cash burn toward breakeven cash flow performance will depend on the airline “remaining agile and disciplined with our cost structure,” he said.

Still, instead of seeing its daily cash burn fall further in the first quarter of this year, thereby extending the downward trend from December and the fourth quarter, Delta now expects to burn cash at a rate of $10 million to $15 million a day in the current quarter.

Hauenstein emphasized that Delta “has the levers to pull to successfully react to the emerging demand environment, including tightly matching our sellable capacity to expected demand,” strongly suggesting that if demand does not grow as much or as soon as the airline was anticipating as recently as two weeks ago, it is prepared to reduce further the number seats and/or flights that will offer. Doing that could force Delta to reverse, to some degree or another, its plans to increase capacity in the first quarter through the addition of several hundred flights a day.

Delta’s cost cutting continued in the fourth quarter, with total operating expenses falling 52% from the fourth quarter of 2019, vs. a full year reduction in such costs of only 27%.

Revenue generation, however, is the real problem for Delta and all other airlines in the pandemic era. And in Delta’s case its progress in generating at least a little more revenue in each month since June stopped. Total operating revenue in the fourth quarter fell 65% in the fourth quarter to $3.97 billion from $11.4 billion in the fourth quarter of 2019. But that’s a slightly bigger percentage drop in revenues – 1 percentage point worse – than the airline’s full-year revenue decline to $17.1 billion from $47 billion in all of 2019.

And the revenue decline picture is actually worse than those numbers depict. Like nearly all other carriers, Delta has picked up new revenue by carrying more cargo during the pandemic. Weak passenger demand continues to more than offset the uptick in cargo carriage and revenue. Delta’s fourth-quarter revenue from passengers flying in the main cabins of its planes fell 72% in the fourth quarter to just $1.45 billion from $5.2 billion in 2019’s fourth quarter, while for the full year main cabin passenger revenue was down “only” 70%. Worse, revenue from passengers flying in business class or purchasing other types of premium tickets dropped 78% to just $810 million in the fourth quarter from $3.7 billion in 2019’s fourth quarter. For the full year, the drop in premium service passenger revenue was significantly “better,” down just 71% year over year.

That drop in such premium service passenger revenue clearly illustrates the huge decline in demand among corporate travelers in response to the pandemic.  Corporate travelers tend to pay significantly more for their tickets than either leisure travelers or business travelers representing small or mid-size companies. With significantly higher health and liability risks, and very poor chances of their sales and support people being able to meet with corporate clients or customers if they were to travel, corporations have reduced their travel spending by 90% or more in many cases.

As a result, instead of earning 15.65 cents per passenger mile flown in revenue, as Delta did in the fourth quarter of 2019, it brought in just 7.38 cents of revenue per passenger mile flown in the quarter just ended. That’s a drop of 53% despite only a 44% drop in fourth quarter capacity measured by available seat miles.

Delta shares jumped more than 4% in early trading today, but quickly gave back all of that gain before rising slightly to around $41.80 a share – up about 1.5% -at noon Eastern time.

Its fourth quarter and full year losses, as expected, were company records. They also were close to analysts’ expectations prior to today’s report.

United Airlines will report its fourth quarter and full year 2020 results on Jan. 21, while Southwest, American and Alaska airlines are to report on Jan. 28.