Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The interim financial statements were reviewed by Ernst & Young, not audited; the reviewer reported no material modifications needed for GAAP conformity.
Business context and reporting period
Delta’s results were severely affected by the COVID-19 pandemic, travel restrictions and sharply lower demand. Compared with the prior-year quarter, September-quarter system capacity fell about 60% (domestic 50%; international 80%); load factor was 41%, down 47 percentage points. Delta had removed about 500 aircraft from active service and parked approximately 40% of its fleet.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $3.062 billion | $12.560 billion | $13.122 billion | $35.568 billion |
| Operating (loss)/income | $(6.386) billion | $2.071 billion | $(11.611) billion | $5.219 billion |
| Net (loss)/income | $(5.379) billion | $1.495 billion | $(11.630) billion | $3.669 billion |
| Diluted (loss)/earnings per share | $(8.47) | $2.31 | $(18.30) | $5.59 |
| Operating cash flow | $(2.575) billion | $2.245 billion | $(2.507) billion | $7.455 billion |
Q3 operating revenue fell 76% year over year; passenger revenue fell 83%. Q3 GAAP operating expenses were $9.448 billion, including $5.345 billion of restructuring charges and $1.315 billion of CARES Act grant recognition as a contra-expense. Management reported adjusted Q3 pre-tax loss of $2.589 billion and adjusted operating expenses of $5.004 billion; these are non-GAAP measures. Q3 free cash flow, also non-GAAP, was negative $2.531 billion.
At September 30, cash and cash equivalents were $16.477 billion and short-term investments were $5.048 billion. Reported liquidity, including available revolving-credit commitments, was $21.6 billion. Total debt was $33.648 billion net of discounts and issuance costs; principal debt and finance leases were reported as $35.1 billion. Stockholders’ equity fell to $3.357 billion from $15.358 billion at year-end 2019. Q3 dividends were zero; year-to-date dividends declared were $0.40 per share.
Material changes versus prior comparable periods
- Q3 revenue declined $9.498 billion and Delta moved from Q3 2019 operating income of $2.071 billion to an operating loss of $6.386 billion.
- Nine-month revenue fell 63%, while operating cash flow shifted from $7.455 billion provided in 2019 to $2.507 billion used in 2020.
- Debt increased substantially amid approximately $27 billion of financing transactions during the first nine months. Q3 included $9 billion of SkyMiles-backed financing and $1.5 billion of LaGuardia-related bonds.
- Restructuring charges included aircraft impairments and related costs, voluntary separation and early-retirement programs, and receivable reserves. Aircraft purchase commitments were reduced by more than $2 billion for 2020 and more than $5 billion through 2022.
Outlook, commentary, risks and unusual items
- Management expected December-quarter system capacity to be down approximately 40%–45% year over year. It anticipated modest demand improvement, led by leisure travel, while international recovery was expected to lag domestic recovery. The timing and pace of recovery remained uncertain.
- Delta expected negative operating cash flows through the rest of 2020 and possibly beyond, but said it expected liquidity to meet needs for the next 12 months. It expected interest expense to rise versus prior-year periods as debt increased.
- The $5.6 billion CARES Act payroll support package included a $4.0 billion grant and a $1.6 billion loan, plus warrants for more than 6.7 million shares. The grant was being recognized as an expense offset; Delta expected to recognize the remainder by year-end. The support carried restrictions including a ban on dividends and share repurchases through September 30, 2021. Delta declined a separate proposed $4.6 billion CARES Act secured loan.
- Delta recorded $1.1 billion and $770 million of investment-related charges for LATAM and Grupo Aeroméxico, respectively, after their Chapter 11 filings; both investment balances were zero at quarter-end. Virgin Atlantic’s investment basis had also been reduced to zero, and Delta recorded $511 million of year-to-date impairment and equity-method losses related to it.
- Other notable exposures include a $235 million outstanding secured loan to GOL, aircraft purchase commitments of approximately $14.2 billion, and substantial airport construction obligations. Delta reported compliance with debt covenants at September 30, 2020. In October, it repaid the $3.0 billion secured term loan and $2.6 billion of revolving-credit borrowings.
- Management cited potential lasting changes in travel behavior, continuing restrictions and renewed outbreaks as major risks. Delta also warned that reduced capacity, customer refunds and credits, partner-airline distress, and fixed obligations could further pressure operations and liquidity. It had notified pilots of potential furloughs affecting approximately 1,700 pilots after October 31, 2020, while seeking alternatives.
Important facts for investors to verify
- Whether demand, capacity, load factors and operating cash flow recover as management expected, and whether the liquidity forecast remains adequate.
- Debt maturities, interest costs, covenant headroom and the availability of additional financing, particularly after significant borrowing and collateral pledges.
- The scale and cash timing of restructuring and voluntary-separation payments, and any further aircraft impairments or retirements.
- Whether customer ticket credits and loyalty-program obligations are redeemed, refunded or recognized as revenue in line with Delta’s estimates.
- Potential further losses, recoveries or strategic consequences from distressed airline partners and investments, including LATAM, Grupo Aeroméxico and Virgin Atlantic.
- Execution costs and potential overruns for LaGuardia and LAX projects, alongside remaining aircraft purchase commitments.