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Earnings Preview: Is Delta Air Lines Turning the Corner?

By Adam Levine-Weinberg - Apr 13, 2021 at 10:20AM

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An uptick in air travel demand that began two months ago could propel Delta to positive cash flow as soon as this quarter.

The COVID-19 pandemic decimated Delta Air Lines' (DAL 1.90%) profitability last year. The global airline giant reported a whopping pre-tax loss of $15.6 billion for the full year. Even after backing out one-time items -- such as severance costs and asset writedowns related to the carrier's fleet simplification efforts -- the company logged an adjusted pre-tax loss of $9 billion.

Delta is set to report another ugly loss when it releases its first-quarter earnings results later this week. That said, business trends have improved dramatically over the past couple of months, which bodes well for the second quarter and beyond.

Choppy results continued last quarter

Entering 2021, Delta executives believed that a sustainable demand recovery had already begun. However, the pandemic was still raging in the U.S. and abroad in January.

This caused demand to fall short of management's expectations in January and early February. As a result, Delta slashed its first-quarter revenue forecast last month. It now projects that revenue will be near the low end of its initial guidance range: down about 65% compared to the first quarter of 2019. Making matters worse, costs came in higher than expected, primarily driven by a spike in jet fuel prices during February.

A Delta Air Lines plane taking off

Image source: Delta Air Lines.

By the beginning of March, demand had improved to be in line with management's expectations. But between higher costs and the weak start to the quarter, Delta told investors that it could post a Q1 pre-tax loss of nearly $3 billion.

Delta did have some good news to share in its mid-March guidance update. Daily net cash sales surged by 30% in the first two weeks of March relative to February. That put the airline on pace to cut its cash burn to around breakeven for the month of March. For the full quarter, it anticipated average daily cash burn between $12 million and $14 million, roughly in line with the $12 million per day it burned in the fourth quarter of 2020.

Demand continues to improve

While Delta's management was cautiously optimistic at this time last month, demand hasn't improved in a linear fashion over the past year. There have been several "false starts" as new waves of the COVID-19 pandemic undermined emerging demand recoveries.

Fortunately, the uptrend that began in February increasingly looks like it will be sustainable. When Delta issued its optimistic outlook for the month of March four weeks ago, the TSA had screened an average of 1.17 million passengers per day during the prior week. Last week, the TSA screened an average of nearly 1.43 million passengers per day: up 22% from four weeks earlier.

A Delta Air Lines plane parked on the ground

Image source: Delta Air Lines.

Admittedly, COVID-19 case numbers are rising again in many parts of the U.S. -- and in many international markets. Yet nearly half of the U.S. adult population has now received at least one dose of a COVID-19 vaccine. Vaccine hesitancy may delay the march toward full herd immunity, but by the summer, enough people will be immune to the coronavirus to limit the severity of future outbreaks.

In short, demand will likely continue to rise over the next few months -- at least for domestic travel -- as more Americans receive their COVID-19 vaccines.

Shifting gears

With demand climbing rapidly and vaccines starting to tame the pandemic, Delta announced late last month that it would resume selling all seats on its planes for flights on May 1 and thereafter. That unlocks a huge amount of capacity -- as Delta has kept middle seats empty for most of the past year -- while adding minimal incremental costs.

That makes management's goal of generating breakeven cash flow in the second quarter look conservative. Between the continued demand momentum and the big increase in sellable capacity coming next month, the full-service airline could return to positive cash flow this quarter.

Thus, investors should pay attention to Delta's Q2 guidance and any qualitative commentary about projected revenue, cost, and cash flow trends for the second quarter and the rest of 2021. After a year of setbacks and false starts, Delta may be on the road to recovery at last.

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