Delta Air Lines, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim statements were reviewed, not audited; the independent accountant reported no material modifications were required.
Business context and reporting period
COVID-19, travel restrictions and related customer caution caused an unprecedented collapse in air-travel demand. Delta reduced Q2 system capacity 85% year over year (international 94%, domestic 80%) and had about 600 aircraft parked at quarter-end. Demand improved during the quarter but remained substantially below 2019 levels. Results for the period are not indicative of full-year results, the company cautioned.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $1.468 billion | $12.536 billion | $10.060 billion | $23.008 billion |
| Operating loss | $4.815 billion | Operating income $2.128 billion | $5.225 billion | Operating income $3.148 billion |
| Net loss | $5.717 billion | Net income $1.443 billion | $6.251 billion | Net income $2.173 billion |
| Diluted loss/earnings per share | $(9.01) | $2.21 | $(9.83) | $3.29 |
| Operating cash flow | $(290) million | $3.268 billion | $68 million | $5.211 billion |
Q2 operating revenue fell 88% year over year, including a 94% decline in passenger revenue. Q2 passenger load factor was 34%, down 54 percentage points; PRASM fell 60%. Reported operating margin was approximately negative 328% (operating loss divided by revenue). Adjusted pre-tax loss, a non-GAAP measure, was $3.864 billion versus adjusted pre-tax income of $1.998 billion in Q2 2019. Adjusted operating expense was $4.803 billion, down 53%; reported operating expense was $6.283 billion, down 40%. These reported figures include major restructuring charges and CARES Act grant recognition.
For the first six months, revenue fell 56% and passenger revenue fell 60%. Passenger load factor was 67%, down 18 percentage points, and PRASM declined 23%. Six-month adjusted TRASM was down 17% year over year. Fuel expense declined with lower flying and lower market fuel prices, while Q2 operating expenses also reflected reduced activity and lower volume-related costs.
Cash, cash equivalents and short-term investments totaled $15.668 billion at June 30 ($11.366 billion and $4.302 billion, respectively). Delta reported $15.7 billion of liquidity including committed, available revolving-credit capacity; only about $39 million remained undrawn under revolvers. Six-month free cash flow was not clearly provided as a comparable six-month figure; management reported Q2 free cash flow of negative $21 million, a non-GAAP measure, versus positive $1.849 billion in Q2 2019.
Total debt was $23.493 billion on the balance sheet, versus $10.106 billion at December 31, 2019; reported principal debt and finance leases were $24.7 billion. Current debt maturities were $4.954 billion and long-term debt was $18.539 billion. Stockholders’ equity declined to $8.690 billion from $15.358 billion at year-end 2019. Delta was in compliance with debt covenants at quarter-end and stated that it expected to remain compliant.
Material changes versus the prior comparable period
- Q2 operating revenue dropped $11.068 billion, primarily due to the pandemic-driven collapse in passenger demand; Q2 passenger revenue fell $10.690 billion.
- Delta moved from Q2 2019 operating and net income to substantial Q2 2020 losses. Q2 reported operating expenses included $2.454 billion of restructuring charges and a $1.280 billion CARES Act grant contra-expense.
- Non-operating expense rose to $2.199 billion in Q2, chiefly reflecting investment impairments and equity-method losses. Delta recorded $2.058 billion of Q2 charges related primarily to LATAM, Grupo Aeroméxico and Virgin Atlantic.
- Debt rose materially following emergency borrowing and financing transactions. Interest expense increased to $194 million in Q2 from $75 million a year earlier.
- Six-month operating cash flow fell to $68 million from $5.211 billion. Delta also issued approximately $2.1 billion in customer refunds during the first half, excluding taxes and related fees.
Outlook, management commentary, risks and unusual items
- Capacity outlook: Delta planned September-quarter system capacity about 60% below the prior year, with domestic capacity down about 50% and international capacity down about 80%. Management anticipated modest demand recovery beginning in that quarter, but said international recovery would likely lag domestic recovery. No full-year earnings or revenue guidance was provided.
- Liquidity actions and government support: Delta received $4.9 billion under the CARES Act payroll support program by June 30, comprising $3.5 billion in grants and $1.4 billion in unsecured loans; the remaining payment was expected in July. The full agreement provides $5.4 billion, including a $3.8 billion grant and $1.6 billion 10-year loan, and carries conditions including no involuntary layoffs or furloughs through September 30, 2020, and no dividends or share repurchases through September 30, 2021. Delta had a non-binding letter of intent for up to $4.6 billion in separate Treasury loans but had not decided whether to participate.
- Financing and capital structure: Major actions included a $3.0 billion secured term loan, $3.5 billion of senior secured notes, a $1.5 billion term loan, $1.3 billion of unsecured notes, aircraft-backed financing and $2.8 billion of aircraft sale-leaseback transactions. Most sale-leasebacks did not qualify as sales and were treated as financing. Credit ratings were downgraded to BB by S&P and BB+ by Fitch; Moody’s remained Baa3.
- Restructuring and fleet: Q2 aircraft impairment charges included $1.4 billion for the 777 fleet, $330 million for MD-90s, $220 million for 737-700s, $180 million for seven 767-300ERs and $60 million for ten A320s. Delta planned to retire its 777 and 737-700 fleets by October 2020 and said additional retirements remained possible. It expected a separate $2.7–$3.3 billion charge in Q3 for voluntary early-retirement and separation programs, with approximately $500–$600 million of related cash payments expected in that quarter.
- Partners and contingencies: LATAM and Grupo Aeroméxico filed for Chapter 11 in 2020; Delta wrote down its investments and no longer applied equity-method accounting to them. Virgin Atlantic’s investment basis was reduced to zero. Delta also disclosed a $300 million guarantee of GOL debt maturing in August 2020; the company had recorded only an immaterial reserve and noted increased repayment risk. Receivable reserves for airline partners and others totaled $98 million.
- Other exposures: Delta’s aircraft purchase commitments totaled approximately $14.24 billion. The company warned that demand recovery, further government restrictions, customer willingness to travel, partner restructurings, liquidity and covenant headroom, and potential lasting changes in business-travel behavior remained uncertain. It expected negative operating cash flows through the rest of 2020 and possibly beyond.
Most important facts for investors to verify
- Whether travel demand and passenger bookings recover as assumed, and whether the September-quarter capacity plan changes.
- Cash burn, usable liquidity, availability of further financing, and compliance with liquidity and collateral covenants as debt and interest costs rise.
- How CARES Act grants are recognized and the impact of program conditions, Treasury warrants and any decision on the separate loan program.
- The final cost, timing and cash requirements of employee separation programs, aircraft retirements and aircraft purchase commitments.
- Recoverability of airline-partner investments and receivables, the GOL guarantee exposure, and the continued valuation of goodwill and indefinite-lived intangibles.
- Progress on ticket refunds and credits, deferred revenue and loyalty-program obligations, and whether future cash flows differ materially from management’s estimates.