On Tuesday morning, Delta Air Lines (NYSE:DAL) became the first airline to report its second-quarter results, covering the period when the COVID-19 pandemic had its greatest impact on U.S. air travel. For the first half of the quarter, TSA passenger screenings were down more than 90% year over year every single day.
Not surprisingly, Delta posted a massive loss for the period. On a GAAP basis, its pre-tax loss amounted to $7 billion. Its adjusted pre-tax loss was a bit better, though still quite daunting at $3.9 billion. However, investors shouldn't worry too much about these short-term losses, as Delta has taken aggressive steps over the past few months to reduce its cash burn, bolster its liquidity, and lock in permanent cost cuts.
The headline numbers
Excluding sales of petroleum products from the refinery it owns, Delta Air Lines generated just $1.2 billion of revenue last quarter: down 91% year over year. Delta's industry-leading loyalty program and credit card partnership with American Express helped cushion the impact of evaporating demand. Loyalty revenue declined "only" 44% year over year, compared to a 94% plunge in passenger revenue.
While Delta Air Lines was able to reduce adjusted operating expenses by $5.5 billion -- 53% year over year -- the even sharper erosion in its revenue led to its adjusted pre-tax loss of $3.9 billion. That compared to a $2 billion adjusted pre-tax profit in the second quarter of 2019.
Delta also incurred a $2.5 billion impairment charge last quarter (mostly related to its decision to retire more than 100 aircraft earlier than previously planned) and wrote down the value of its investments in LATAM Airlines, Aeromexico, and Virgin Atlantic by a combined $2.1 billion. LATAM and Aeromexico both filed for bankruptcy recently, while Virgin Atlantic announced an out-of-court restructuring this week. These special charges -- offset by one-time gains from payroll support grants provided under the CARES Act -- brought Delta's total pre-tax loss to $7 billion.
Abundant cash and slowing cash burn
While Q2 was a rough period for Delta Air Lines, the company is in better shape than it seems. For one thing, Delta burned just $801 million of cash in June: about $27 million per day. This was significantly better than its April projection that it would burn $50 million per day in June. In late March -- when refund requests were peaking and Delta hadn't yet had a chance to slash costs -- cash burn topped out at around $100 million per day.
Furthermore, Delta ended the quarter with $15.7 billion of cash and short-term investments. Even if cash burn were to remain near recent levels for the rest of 2020, Delta would still exit the year with more than $10 billion of cash on hand and ample access to additional capital.
Importantly, despite its year-to-date cash burn, Delta Air Lines ended the second quarter with just $13.9 billion of adjusted net debt: up from $10.5 billion at the beginning of 2020 but lower than the $17 billion of adjusted net debt that it carried at the end of 2009.
Cutting costs to seize the future
Aside from reducing cash burn and shoring up liquidity to alleviate near-term risk, Delta Air Lines has also moved quickly to implement permanent cost reductions. On Tuesday, Delta announced that it will retire its small subfleet of 10 Boeing 737-700s this year, in addition to its previously announced moves to retire the MD-88 and MD-90 fleets in June and its 777 fleet later this year. Delta also plans to retire some of its A320s and 767s ahead of schedule to shrink its fleet even further.
These aircraft retirements are part of a broader fleet simplification program that will drive hundreds of millions of dollars of annual savings. With fewer aircraft models in the active fleet, Delta will benefit from higher pilot productivity, lower maintenance costs, and a better ability to recover from severe weather events and other disruptions.
Furthermore, over 17,000 Delta employees -- nearly 20% of the 91,000 full-time equivalents in its workforce at the beginning of 2020 -- have signed up for early retirement or other buyout packages. In addition to reducing the need to implement involuntary layoffs or furloughs, these buyouts and early retirements will help reduce future costs by removing many of Delta's most senior and highest-paid employees.
Delta's management is very clear-headed about the challenges ahead: moreso than the leaders of some of its airline industry peers. CEO Ed Bastian doesn't expect demand to recover for at least two years and thinks business travel may never return to 2019 levels. Delta's success at reducing cash burn since March and its aggressive cost-cutting plans should give investors confidence that it will be able to rebuild its profitability in the years ahead despite these headwinds.