DELTA AIR LINES, INC. quarterly report, Q1 FY2020

Delta Air Lines, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. The interim financial statements were reviewed, not audited. Delta’s results began to reflect the COVID-19 demand shock, which accelerated sharply in March.

Financial results and liquidity

Metric	Q1 2020	Q1 2019
Operating revenue	$8.592 billion	$10.472 billion
Operating income (loss)	$(410) million	$1.020 billion
Net income (loss)	$(534) million	$730 million
Diluted earnings (loss) per share	$(0.84)	$1.09
Operating cash flow	$358 million	$1.942 billion
Free cash flow (non-GAAP)	$(161) million	$751 million

Operating revenue fell 18.0%, led by an 18.2% decline in passenger revenue. Passenger load factor decreased 9.6 percentage points to 73.1%; available seat miles fell 5.7%.
Operating expenses declined 4.8% to $9.002 billion, mainly from lower fuel, volume-related costs and no profit-sharing accrual. Operating loss was about 4.8% of revenue, versus operating margin of about 9.7% a year earlier.
Adjusted pre-tax loss, a non-GAAP measure, was $422 million, compared with adjusted pre-tax income of $831 million. Adjusted TRASM declined 12.3%; CASM-Ex rose 9.5% to 12.58 cents.
Cash and cash equivalents were $5.967 billion at quarter-end; Delta reported $6.0 billion of unrestricted liquidity, including only $21 million of undrawn revolving credit. Total cash, cash equivalents and restricted cash were $6.461 billion.
Total debt on the balance sheet was $15.840 billion, up from $10.106 billion at December 31, 2019. Principal debt and finance leases were reported as $16.8 billion. Stockholders’ equity was $14.309 billion.
Q1 financing cash flow included $3.962 billion of long-term borrowing and $2.882 billion of short-term borrowing. Investing outflows included $2.099 billion for strategic investments, principally LATAM, and $937 million in capital expenditures.

Material changes and unusual items

The pandemic caused severe deterioration in travel demand, cancellations and advance bookings. Delta issued approximately $850 million of customer refunds in Q1, excluding taxes and fees.
Delta drew $3.0 billion from revolving credit facilities and entered a $2.7 billion secured term loan facility in March, increased to $3.0 billion in April. It also raised $1.0 billion through aircraft-backed pass-through certificates and obtained $150 million of loans secured by widebody aircraft.
Non-operating results included a $112 million net loss on investments, compared with a $100 million gain a year earlier. Delta recorded a $240 million gain from combining Delta Private Jets with Wheels Up; the transaction also produced a 27% Wheels Up stake.
Delta acquired 20% of LATAM for $1.9 billion in January. The total $2.3 billion consideration, including transition payments, was allocated between the equity investment and a $1.2 billion alliance-related intangible asset.
Delta recorded a $22 million impairment charge related to the accelerated retirement of its MD-88 fleet. Its interim assessment found no impairment of goodwill or other indefinite-lived intangible assets, but estimates remain sensitive to the pandemic’s effects.
Delta repurchased $344 million of stock and paid $260 million of dividends in Q1, then suspended future repurchases and dividends in March. It also delayed $500 million of planned voluntary pension funding.

Outlook, management commentary and risks

Management expected the adverse effects to worsen in the June 2020 quarter and planned for a modest demand recovery beginning in September, while emphasizing that timing and pace were uncertain. Expected June-quarter capacity reductions versus the prior year were approximately 85% systemwide, 90% international and 80% domestic.
Delta expected negative operating cash flows through the June quarter and possibly beyond. It planned to defer substantially all previously planned 2020 capital expenditures; expected 2020 investment was $1.2 billion, of which $937 million had been spent in Q1.
Cost and capacity actions included parking about 400 aircraft by March 31, with more than 650 expected parked by the end of June; accelerating MD-88 retirement; voluntary unpaid leaves accepted by about 35,000 employees; reduced work hours and management pay; and a hiring freeze.
Delta reported $5.4 billion of CARES Act payroll support granted in April: $3.8 billion in grants and a $1.6 billion 10-year loan. It received the first $2.7 billion installment on April 20. Conditions include restrictions on involuntary layoffs or furloughs through September 30, 2020, and on dividends and repurchases through September 30, 2021. Delta also expected about $200 million of liquidity from deferred employer Social Security taxes.
Management said available liquidity, financing, CARES Act support and operating cash flows were expected to meet cash needs for the next 12 months. Delta cited at least $15 billion of unencumbered assets, but credit ratings were downgraded to BB by S&P and BB+ by Fitch. The company warned of possible covenant pressure and said it might seek waivers or amendments; there was no assurance these would be obtained.
Risks include prolonged travel restrictions and weak demand, customer refunds and limited bookings, fixed obligations and aircraft purchase commitments of approximately $14.7 billion, potential covenant or liquidity pressure, and possible lasting changes in business and leisure travel. Delta guaranteed a $300 million GOL loan maturing in August 2020; pandemic-related repayment risk had increased.

Important facts for investors to verify

Subsequent-quarter cash burn, liquidity and the timing and terms of additional financing or government support.
Actual capacity, demand recovery, load factors and ticket refunds or credits compared with management’s expectations.
Compliance with debt and credit-card processing covenants, including whether waivers or amendments are needed.
Execution of aircraft delivery deferrals, fleet retirements and capital expenditure reductions, and any further impairment charges.
Exposure to investee and guarantee risks, particularly LATAM, other airline investments and the GOL loan guarantee.
Effects of CARES Act conditions, warrants and grant accounting on future expenses, dilution and shareholder returns.