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Delta Sees ‘Good Shot’ at Midyear Profit as Demand Rebounds

Bloomberg logoBloomberg 1/14/2021 Mary Schlangenstein

(Bloomberg) -- Delta Air Lines Inc. has a “good shot” at turning a profit in the third quarter as Covid-19 vaccinations start containing the disease and pent-up travel demand turns into bookings, Chief Executive Officer Ed Bastian said. The shares rallied.

The carrier stood firm on its target of breaking even on a cash-flow basis in the second quarter despite little sign of improvement in the next few months. In the first quarter, daily cash burn will amount to $10 million to $15 million after totaling $12 million in the last three months of 2020, Delta said Thursday as it reported earnings.

The outlook from the first major U.S. airline to report results fueled industry hopes that a recovery will begin later this year after a punishing winter. Except for short-lived gains during the holidays, U.S. passenger totals in the fourth quarter languished at about a third of 2019 levels as the pandemic and government travel restrictions spurred an unprecedented drop in demand for flights.

Clouds Parting © Bloomberg Clouds Parting

“We expect 90 days from now, hopefully, the virus is going to be in a much more contained state,” Bastian said in an interview. That will help “start to get consumer confidence going, not just in air travel but in public life, and businesses will start to reopen.”

Delta advanced 3.8% to $41.99 at 2:20 p.m. in New York after climbing as much as 5.4%, the most intraday since Dec. 3. Other airline stocks rose as well. Delta’s shares dropped 32% in the 12 months through Wednesday, while the S&P 500 Airlines Index declined 30%.

‘Aggressive’ Goal

Further growth in travel bookings are necessary for Delta to hit its break-even goal, and it’s too early to tell when vaccinations become readily available and what that means for summer travel, Cowen analyst Helane Becker said in a note.

“Our stance remains that cash break-even by the spring is aggressive, given what we know now,” she said. “2021 will be a tale of two halves, with 2022 likely when a new normal is formed.”

American Airlines Group Inc. has projected hitting the milestone “hopefully some time in 2021.” United Airlines Holdings Inc. and Southwest Airlines Co. haven’t set targets.

A choppy recovery in demand early this year will be followed by an inflection point in the spring as travel restrictions ease and customer confidence starts to grow, Delta President Glen Hauenstein said on a conference call to discuss results. Sustained improvement in demand and pricing will begin in the second half.

Winter Caution

Leisure markets remain the best performers in Delta’s network, while New York and Boston are among the weakest, the carrier said. With Congress having approved billions of dollars more in airline aid, Delta has returned all workers to full pay. The company is also reactivating some parked aircraft to prepare for renewed travel demand.

But the winter outlook remains weak. Travel during upcoming school spring-break holidays likely “is not going to be very strong,” Bastian said, although insight is limited because consumers have been booking trips shortly before they occur. The first quarter historically is the weakest for U.S. travel.

U.S. airlines have been relying on demand for leisure travel, however meager, after business passengers all but stopped flying last year. Delta has the most at stake among big U.S. carriers from corporate travel, which usually accounts for about half the company’s passenger revenue.

Still, about 80% of Delta’s corporate accounts have resumed 10% to 15% of 2019 travel levels, Bastian said. Additional gains should be in the offing as coronavirus vaccines take hold.

The Atlanta-based airline reported an adjusted loss of $2.53 a share in the fourth quarter, compared with the average $2.49 loss estimated by analysts surveyed by Bloomberg. Adjusted revenue plunged 69% to $3.53 billion.

Middle Seats

A requirement from the Centers for Disease Control and Prevention that visitors flying into the U.S. must first test negative for Covid-19 “is the first phase of starting to reopen international borders,” Bastian said.

The measure initially will hurt travel from Mexico and the Caribbean, where U.S. residents have been taking vacations during the pandemic but which don’t have sufficient testing resources, he said. Delta, other carriers and the CDC are discussing how to address the issue.

Delta is the only major U.S. carrier to continue blocking middle seats on its planes, at least through March 30, in an effort to promote social distancing. The airline will decide when to start selling the seats based on demand and “customer sentiment,” Bastian said.

The policy has helped Delta gain a revenue premium over rivals, he said, and “we want to be very careful how we make that decision.”

(Updates with recovery outlook in ninth paragraph)

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