Business Context and Reporting Period
This Form 8-K, filed on June 10, 2020, by Delta Air Lines, Inc. (DAL), discloses a preliminary prospectus supplement for an underwritten public offering of senior unsecured notes. The filing addresses the severe impact of the COVID-19 pandemic on the airline's operations, liquidity, and capital structure as of the second quarter of 2020.
Key Financial Metrics and Liquidity
- Revenue and Capacity Outlook (Q2 2020): Revenue is expected to decline by 90% compared to Q2 2019, with systemwide capacity down 85%.
- Cash Flow: Average daily cash outflow is projected to decrease to approximately $40 million by June 30, 2020, down from $100 million as of March 31, 2020. Management aims to reduce this to zero by December 31, 2020.
- Financing Raised: Since early March, Delta has raised over $10 billion, including $3.5 billion in senior secured notes (2027), $4.4 billion in secured term loans, and $3.8 billion in CARES Act Payroll Support Program funding.
- Liquidity Position (As Adjusted): As of March 31, 2020, adjusted for recent financing, cash, cash equivalents, and short-term investments totaled $16.26 billion. Total debt stood at $23.41 billion.
- Collateral: As of June 30, 2020, the company expects approximately $6-7 billion in unencumbered collateral (primarily aircraft).
Material Changes and Operational Adjustments
Delta has significantly reduced flight capacity and capped load factors to mitigate costs. The company has added 100 domestic flights in June and plans to rebuild the schedule in the September 2020 quarter as demand returns. Operating expenses for the June 2020 quarter are expected to be reduced by more than 50% compared to the prior year. The company has waived change fees and extended rebooking options, leading to significant ticket cancellations and refund requests that negatively impact liquidity.
Guidance, Risks, and Contingencies
- Debt Covenants: Delta expects it will not be able to satisfy the minimum fixed charge coverage ratio under its primary credit facilities by early next year due to reduced demand. The company plans to seek amendments to these facilities to avoid an event of default.
- Partner Risks: Significant investments in international carriers face impairment risks. Partners such as LATAM Airlines and Virgin Australia have filed for bankruptcy or administration, which could lead to write-downs of Delta's equity investments.
- Pandemic Uncertainty: The duration of the pandemic and the persistence of travel restrictions remain unknown. There is a risk of permanent behavioral changes, including a reduction in business travel due to increased virtual conferencing.
- Forward-Looking Targets: Management targets $10 billion in cash and borrowing capacity by December 31, 2020, but explicitly states it cannot assure these targets will be achieved.
Investor Verification Checklist
- Verify the successful amendment of credit facility covenants to avoid an event of default regarding the fixed charge coverage ratio.
- Monitor the actual realization of the $10 billion liquidity target by year-end 2020 versus the current $14 billion+ adjusted position.
- Assess the extent of impairment charges related to international airline partners (e.g., LATAM, Virgin Australia) in upcoming financial reports.
- Track the pace of domestic leisure travel recovery versus the lagging international demand recovery.
- Confirm the final terms and closing of the senior unsecured notes offering referenced in the preliminary prospectus.