Before the markets opened on Jan. 14, Delta Air Lines (DAL, Financial) reported earnings results for the fourth quarter and full year of 2020.
While Delta missed analyst predictions in terms of earnings, it posted a revenue beat and cut its cash burn in half. The company said it expects to be cash flow-positive by the time spring rolls around, which is made possible by the fact that its balance sheet is in much better condition than the other major U.S. airlines.
Following the news, Delta's stock gained 2.52% throughout the day's trading to close at $41.47.
Earnings results
For the fourth quarter ended Dec. 31, 2020, Delta posted total GAAP revenue of $3.97 billion and a loss per share of $1.19. On an adjusted basis, revenue was $3.53 billion while the loss per share was $2.53. Analysts had been expecting adjusted revenue of $3.59 billion and loss per share of $2.50.
Both metrics represented a significant downturn from the same quarter of 2019, when the company reported revenue of $11.43 billion and earnings per share of $1.70.
The adjusted operating expense was $5.53 billion for the quarter, down from $9.96 billion a year ago, due to capacity reduction and other cost-cutting measures related to the sharp decrease in demand for flights resulting from the pandemic.
For full-year 2020, GAAP revenue was $17.09 billion while the loss per share was $19.49. Adjusted revenue was $15.9 billion, while the loss per share came in at $10.76. In comparison, adjusted revenue was $46.71 billion in 2019 and earnings per share totaled $7.32.
CEO Ed Bastian had the following to say about the quarter:
"Our December quarter results capped the toughest year in Delta's history. I want to thank the Delta people who have risen to the occasion, focusing on delivering results for all of our stakeholders by putting our customers at the center of our recovery…
While our challenges continue in 2021, I am optimistic this will be a year of recovery and a turning point that results in an even stronger Delta returning to revenue growth, profitability and free cash generation."
Financials
As of the quarter's end, total debt and finance lease obligations stood at $29.2 billion with adjusted net debt of $18.82 billion, nearly double last year's adjusted net debt of $10.48 billion. Meanwhile, cash and cash equivalents stood at $8.30 billion, higher than $2.88 billion at the end of 2019 as the company seeks to maintain greater financial flexibility.
Despite the increase in debt, Delta's balance sheet still stands in a better position than most of its peers. The median cash-debt ratio for the transportation industry is 0.33 compared to Delta's 0.52, while American Airlines (AAL, Financial) and United Airline Holdings (UAL, Financial) have cash-debt ratios of 0.2 and 0.42.
Delta's stronger balance sheet in relation to the other airlines has helped it weather the pandemic with fewer losses. However, Delta does have an Altman Z-Score of 0.8, which means there is still a sizeable risk of bankruptcy if the company does not see more optimistic business conditions soon.
Cash burn during the December quarter averaged $12 million per day, marking an approximately 90% reduction in cash burn since late March and a 50% reduction since the third quarter.
The company plans to receive approximately $3 billion from the U.S. Treasury under the PSP extension during the March quarter, which will further help decrease the cash burn.
Looking forward
According to Gary Chase, Delta's interim co-chief financial officer, the company expects to cash breakeven in the spring:
"Remaining agile and disciplined with our cost structure will be key to our success, and when combined with an improving demand environment, will allow us to return to the free cash flow generation needed for debt reduction."
In 2020, Delta managed to avoid involuntary furloughs by a combination of generous voluntary separation and early retirement programs, voluntary unpaid leaves, job sharing and other initiatives. The company expects to be able to continue avoiding making involuntary job cuts in 2021.
For the March 2021 quarter, Delta expects scheduled capacity to remain down 35%, with total revenue expected to decline 60% to 65% year-over-year while operating expenses decline 35% to 40%. Additionally, it aims for cash burn between $10 billion and $15 billion per day. Glen Hauenstein, Delta's president, separated the company's anticipated recovery process into three parts:
"We see three distinct phases in 2021. The early part of the year will be characterized by choppy demand recovery and a booking curve that remains compressed, followed by an inflection point, and finally a sustained demand recovery as customer confidence gains momentum, vaccinations become widespread and offices re-open. For each phase, Delta has the levers to pull to successfully react to the emerging demand environment, including tightly matching our sellable capacity to expected demand."
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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