Delta Deep Dive: Airline resets cost structure for long term

A big white Delta jet next to a smaller one at airport.

The coronavirus is forcing airlines to throw out their strategic playbooks and reimagine their cost structure both for near-term survival and preparing for a future with fewer customers.

The ability to quickly pivot and conduct scenario planning for completely new market conditions was one of the big takeaways from Delta Air Lines’ (NYSE: DAL) April 22 earnings call. 

CEO Ed Bastian talked about saving 50% of operating costs ($5 billion) in the second quarter, tapping government aid and the financial markets for about $12 billion, shrinking in size and being a leader in hygiene to give customers the confidence to fly again.

Let’s dig into the details:

Financing: Bastian told analysts on the call that Delta would raise more money this quarter. It didn’t waste any time. By the end of the day (April 22) the Atlanta-based carrier announced a $1.5 billion bond offering and plans to borrow $1.5 billion over three years. Delta also plans to apply to the U.S. Treasury for a loan, in addition to the $5.4 billion direct grant it has received in federal aid.

Mitigating cash burn: Delta has chopped $5 billion in costs for the second quarter with the help of 37,000 workers electing to take unpaid leave and $2 billion in fuel savings from reduced flying and lower fuel prices. It also cut $550 million in discretionary spending. The savings come from avoiding maintenance on 650 parked jets, consolidating concourses, temporarily closing Sky Clubs, and eliminating most advertising and use of third-party contractors. 

An 80% reduction in maintenance costs is largely achievable because the fleet that remains in operation doesn’t need as large an inventory of serviceable parts and components. 

Delta is on track to spend $50 million per day this quarter, a 50% reduction from a few weeks ago. A large part of that is because the airline is issuing fewer refunds as time goes on.

The airline has also been able to negotiate deferred payments to airports, vendors and equipment lessors, and cut $3 billion in capital expenditures originally planned for 2020.

Expectations for significantly lower revenue over the next three years are driving decisions to contain future costs, which translates into being a smaller company for the near future, executives said.

Fleet management: Delta is accelerating retirement plans for airplanes previously scheduled to leave the fleet during the next five years. The airline was in the process of removing old MD 80s from the fleet this year and MD 90s will probably be pulled soon too, Bastian said. Boeing 757s and 767s are also likely to get culled, as are smaller regional jets.

Delta is in discussions with Airbus on how to defer deliveries or payments for 184 aircraft that are on order, Bastian said. The company will not spend cash on any aircraft this year, but has not decided whether to finance some acquisitions. 

Health and safety: Bastian said Delta, with the help of outside medical experts, is developing protocols and procedures for keeping employees and customers safe from disease. Extensive cleaning of hard surfaces in gate and seat areas, and spraying disinfectant in planes each day, is already underway. Chief Financial Officer Paul Jacobson, who called off his retirement plans to help the company through the crisis, said the new sanitizing effort contributed, along with transaction costs for raising debt, to $200 million of unplanned expenditures this quarter.

Bastian floated the idea of “immunity passports” as a way authorities might try to keep everyone safe when traveling. The comment follows news that Chile may issue such a document for those who have recovered from coronavirus and test positive for antibodies, with the aim of getting people to return to work faster.

But Helane Becker, lead airline analyst at Cowen investment bank, says airports will also have to make sure restaurants, bars, shops and security checkpoints are sterilized to give consumers confidence. 

Cargo: Transporting goods is one of the few bright spots for passenger airlines like Delta. In the past six weeks, Delta has made operational many aircraft for on-demand and scheduled cargo service. It has been heavily involved bringing personal protective equipment from Asia to the U.S. for healthcare workers battling the COVID-19 disease. Bastian said on the call that Delta is ripping seats out of some planes to make room for more cargo, but the Federal Aviation Administration has not given its blessing for that type of modification.