On Thursday, Delta Air Lines (DAL -1.59%) reported another ugly loss, as the COVID-19 pandemic continued to wreak havoc on the U.S. airline industry last quarter. In fact, following two quarters of sequential improvement in the airline's profitability, Delta posted its biggest adjusted pre-tax loss since the second quarter of 2020.

Yet while Delta's results for the full quarter were nothing to write home about, business trends improved dramatically in March. Barring any new setbacks, that points to much better financial results during the remainder of the year.

Rising costs lead to a bigger loss

Delta's revenue plummeted toward the end of the first quarter last year, as the spread of the COVID-19 pandemic caused air travel demand to dry up. At the peak of the crisis -- the second quarter of 2020 -- adjusted revenue fell 90% year over year to just $1.2 billion, causing the full-service airline to book a $3.9 billion adjusted pre-tax loss.

Revenue began to recover in the subsequent quarters, helping Delta reduce its losses. But while revenue ticked up sequentially again to $3.6 billion last quarter, the company's adjusted net loss jumped to $2.9 billion from $2.1 billion in the final quarter of 2020.


Adjusted Revenue

Adjusted Pre-Tax Loss

Q1 2020

$8.6 billion

$422 million

Q2 2020

$1.2 billion

$3.9 billion

Q3 2020

$2.6 billion

$2.6 billion

Q4 2020

$3.5 billion

$2.1 billion

Q1 2021

$3.6 billion

$2.9 billion

Data source: Delta Air Lines quarterly earnings reports. Table by author.

This discrepancy emerged because Delta's costs rose significantly on a sequential basis. First, fuel prices jumped more than 30% compared to the fourth quarter. Second, Delta increased capacity by 10% sequentially, leading to higher variable costs. Third, Delta restored employees to full hours at the beginning of 2021 and ramped up maintenance activity as it prepares to meet higher demand later this year.

Entering the quarter, Delta's management had hoped for sequential revenue growth to offset more of the carrier's increased spending. However, the surge in COVID-19 cases in early 2021 and new travel warnings dampened demand in January and February.

A cash flow inflection

While the size of Delta's first-quarter loss was somewhat disappointing, demand improved rapidly beginning in March. It was too late to mitigate the pressure on Delta's Q1 profitability from rising costs, but a surge in bookings for future travel during the month of March did bolster the airline's cash flow.

In fact, Delta Air Lines generated positive free cash flow last month, even excluding payroll support funds it received from the federal government. That reduced its average daily cash burn for the quarter as a whole to $11 million: slightly better than its most recent guidance of $12 million to $14 million. Delta actually burned slightly less cash in the first quarter than it did in the fourth quarter of 2020, despite posting a much wider loss.

A Delta Air Lines plane parked on the ground

Image source: Delta Air Lines.

Management expects the recent momentum in bookings to continue this quarter. That could enable the company to generate positive cash flow in the second quarter.

Positive signs for the future

Thanks to the recent uptick in demand, Delta executives expect the company to make rapid progress toward breakeven over the next few months. (The airline has also resumed selling middle seats on its planes for travel on May 1 and thereafter, increasing its revenue potential.)

Specifically, Delta projects that revenue will increase by about $2 billion sequentially and its adjusted pre-tax loss will narrow to between $1 billion and $1.5 billion this quarter. That would represent its smallest loss by far since the pandemic began. Furthermore, management expects the company to post breakeven results for the month of June.

Delta executives were careful not to overpromise with respect to future quarters, since a lot depends on the course of the pandemic. While demand for leisure travel to the U.S. and nearby international destinations has almost fully recovered, corporate demand and long-haul international travel demand remain below 25% of pre-pandemic levels. Nevertheless, CEO Ed Bastian confirmed that Delta has "a path to return to profitability" in the third quarter.

A Delta Air Lines plane taking off

Image source: Delta Air Lines.

Looking a year or two ahead, though, Delta is positioned for a sharp profit recovery. The carrier has gained market share with business travelers over the past year, and 52% of its corporate customers expect to return to pre-pandemic travel volumes by 2023. (Only 8% say that they expect to permanently reduce corporate travel.) Meanwhile, it will face much less competition from budget airlines on long-haul international routes. Lastly, Delta has significantly reduced its cost structure over the past year.

Thus, while Delta posted subpar top- and bottom-line results for the first quarter, investors shouldn't give up on the airline's turnaround effort.