(Updated May 20, 2020 at 1 P.M. with comments from Delta CEO)
Don’t mistake green shoots in travel demand for the summer as a sign that recovery from the coronavirus crisis is around the corner for the airline industry, an executive for a major U.S. airline cautioned Tuesday.
After suspending most flight activity because of widespread quarantines, air carriers this week announced plans for incremental capacity increases in June and July to accommodate an uptick in passenger interest, with bookings some days slightly outpacing refunds for the first time in two months.
More planes in the air is also good news for shippers, who will have more avenues to transport high-value goods.
Delta Air Lines (NYSE: DAL) announced Monday it is adding 100 flights in June to make sure there are enough seats for customers while adhering to a 60% load factor for social distancing reasons, but Chief Financial Officer Paul Jacobson told investors not to draw any hard conclusions about the state of the industry because the data is too limited and preliminary to be meaningful.
“We think this is really driven by leisure bookings for domestic travel . . But we have to be careful that those actually translate into trips and don’t just cancel as people book travel on the expectation and the hope that the environment gets better,” he said in a virtual presentation during a Wolfe Research transportation conference.
CEO Ed Bastian said Wednesday on Fox Business News that Delta would actually add 200 flights in June and possibly up to 300 flights in July. Decisions will be determined by reaching load factors of 60% on a given route, with planes today only about 35% full.
Aviation analysts and executives say people may not want to plan an expensive vacation if they can’t do much when they get to their destination because entertainment venues, shops and restaurants are closed, or severely limited in the services they can provide. Plus, the millions of people who lost their jobs, took pay cuts or used up vacation and sick leave during the lockdown may not have the financial ability to take a trip anytime soon.
Corporations are also going to be cautious about bringing back employees to offices and sending them on trips, let alone allowing visitors into their facilities, according to Jacobson.
Airlines are raising their level of hygiene to give customers confidence to start flying again and experts say everyone in the travel chain, from hotels to car rental companies, has to do their part.
Delta is not looking at its hygiene practices as a competitive advantage, Jacobson added, “because we think this is an industry issue, so we’re collaborating with others in the industry as well as with others outside the industry.”
Aircraft manufacturer Boeing last week said it would offer its expertise to help airlines make travel safer.
Liquidity and Scenario Planning
Delta’s top priorities, besides deep cleaning and health, are building up liquid assets and right-sizing the company to align with lower demand. Airlines have warned that they don’t expect travel demand and revenues to recover to 2019 levels for at least three years.
Jacobson, who postponed his retirement to help steer Delta through the coronavirus crisis, predicted load factors would be below 75% in 2021, compared to the high 80s last year.
The airline expects to reduce its cash burn to $40 million per day by the end of the second quarter and to zero by the end of the year through its ongoing austerity program, according to Jacobson.
“Every dollar that we save in the enterprise is a dollar we don’t have to borrow tomorrow,” he said, “and that’s important for the long-term restoration of the health of the balance sheet.”
Last week Delta, the world’s second largest airline in terms of scheduled seats, announced plans to retire its entire fleet of 18 Boeing 777 aircraft by the end of 2020. It also will retire high-maintenance MD-88 and MD-90 aircraft in June, earlier than previously planned. The 47 remaining MD-88s and 29 MD-90s, which were workhorses in Delta’s domestic network for years, were set to exit the fleet by the end of the year.
Jacobson said fleet simplification would help Delta structurally reduce maintenance, fuel and training costs for an airline with 13 fleet families and 25 aircraft types.
It is noteworthy that the airline is shutting down relatively young aircraft and ones that have been recently retrofitted. Ten 777 Long Range aircraft average 11 years old and eight 777-200 Extended Range aircraft average 20.3 years of age, according to Cowen airline analyst Helane Becker. The refreshing process, which included installation of seat-back entertainment systems, LED ambient lighting and reconfigured seating in the main cabin, began in 2018 and ended last year.
Going forward, Delta’s fleet will consist of Boeing 737s, and Airbus A220 regional jets, A321, A330 and A350 aircraft.
American Airlines has also pulled forward planned retirements of older, less efficient aircraft, as the airline industry engages in a crash campaign to save every possible dollar while the coronavirus pandemic depresses passenger travel to historic lows.
Delta will need fewer pilots after putting dozens of planes to pasture and temporarily parking hundreds more until travel demand bounces back. As Reuters first reported, Delta sent a memo to its 14,500 pilots last week saying it would have 7,000 more pilots than needed in the fall, and after mandatory retirements expects to have 2,500 to 3,500 more pilots than needed in the third quarter of 2021.
Many pilots and other employees could be let go Oct. 1, when government payroll assistance for domestic carriers ends. Cowen estimates Delta has 11,000 more flight attendants than it will need for the foreseeable future.
More than 40,000 Delta workers have taken voluntary, unpaid leave ranging from one to 12 months. Jacobson said Delta will soon begin offering voluntary separation and early retirement packages and hopes those programs will address most of the required headcount reductions.
Delta has raised more than $10 billion in the past 90 days and expects to have $12 billion on hand at the end of June.
The Atlanta-based carrier has borrowed aggressively even though pricing for loans and bonds is higher than before. The company wanted to quickly fill cash reserves so it could have time to adjust to the new business environment. If more cash was raised than needed it can be applied to maturing debt next year, Jacobson said.
Synchronizing the airline’s network with demand and adding capacity only when bookings meaningfully pick up is critical.
“We really can’t afford to have false starts. That’s going to be the challenge for the industry. We have to think about restarting in the face of demand information that’s probably going to bounce around before it starts to settle out on positive trends,” Jacobson said. “The cost structure has to be flexible to drive that positive cash flow at lower load factors, but also be scalable in case demand comes back faster than we think.”