Delta Air Lines (DAL -0.80%) reported its third-quarter earnings on Tuesday. As expected, the headline numbers were awful. Indeed, Delta missed analysts' estimates for revenue and earnings, posting adjusted revenue of $2.65 billion (down 79% year over year) and an adjusted net loss of $3.30 per share. The analyst consensus had called for an adjusted loss of $3.00 per share on $3.11 billion of revenue.
Shares of Delta Air Lines moved lower following the earnings report. However, Delta demonstrated good progress where it matters: cutting costs, reducing cash burn, and aligning its aircraft orders with projected demand.
Cost performance gets better and better
Since the pandemic began, Delta Air Lines has moved aggressively to secure structural cost reductions. It has retired (or made plans to retire) numerous aircraft types, simplifying its fleet to improve productivity and reduce maintenance costs. It has cut overhead spending. The airline also rolled out a voluntary early retirement program, coaxing nearly 20% of its workforce -- mainly senior, higher-paid employees -- to leave the company permanently.
Delta has also implemented short-term cost cuts. Tens of thousands of employees have taken voluntary temporary leaves this year. Some of those leaves will extend into 2021. The airline has also reduced its maintenance spending dramatically by temporarily or permanently grounding planes that were due for expensive maintenance events.
As a result, Delta was able to reduce adjusted operating expense 52% last quarter. That was similar to the 53% reduction it achieved in Q2 but was even more impressive, because capacity was "only" down 63% year over year in the third quarter, compared to down 85% a quarter earlier.
The benefit from Delta's cost actions is continuing to build. During Delta's earnings call on Tuesday, management said that total unit costs would likely be flat or down year over year in the fourth quarter, despite a projected 40% to 45% capacity decline. To be fair, this includes a benefit from lower jet fuel prices. Nevertheless, this is a great sign that Delta has reset its cost base so that it can be profitable long before demand returns to 2019 levels.
Cash burn is slowing again
While Delta was able to reduce cash burn from around $100 million a day in late March to $27 million a day by June, progress on cutting cash burn stalled over the summer.
The good news is that cash burn started improving again in September. Delta averaged daily cash burn of $18 million last month, bringing average daily cash burn for the third quarter to $24 million. With air travel demand continuing to improve (albeit slowly), management expects cash burn to subside further to around $10 million a day in December. The company's previous target of reaching cash breakeven by year-end now seems far-fetched, but the full-service airline should be able to turn cash positive sometime in the first half of 2021.
Delta ended September with $21.6 billion of liquidity and expects to finish the year with about $16 billion of liquidity after repaying some near-term debt maturities. With such a sizable cash cushion available, Delta's current level of cash burn isn't very worrisome.
More clarity on fleet plans
Finally, Delta announced on Tuesday that it had reached agreements with jet makers (mainly Airbus) to restructure its order book. By deferring unneeded near-term deliveries to 2023 and thereafter, Delta has reduced its aircraft capital expenditures by more than $2 billion in 2020 and by more than $5 billion for the 2020 to 2022 period.
As of the end of June, Delta had $2.35 billion of aircraft capex planned for the second half of 2020 and $9.7 billion of aircraft capex scheduled through 2022. Thus, Delta has cut aircraft capex for the rest of 2020 to nearly zero. It appears that deliveries of aircraft that had already entered the production process will be spread across 2021 and 2022 by and large, while most of those that had not yet entered production will be deferred to later years.
These moves to trim near-term capex should help keep Delta Air Lines' cash burn in check next year and give the airline a good chance at returning to positive free cash flow in 2022. With hundreds of planes earmarked for retirement between 2020 and 2025, the deferrals do point to a period of elevated capex starting in 2023. That should be just fine for Delta, though. By 2023, cash flow is likely to recover to around pre-pandemic levels, enabling the airline to handle increased capex with ease.