John Grant, Senior Analyst at Aviation Data Specialist OAG, joins Yahoo Finance’s Zack Guzman to discuss the outlook for airline earnings after Delta posted a massive loss.
Video Transcript
ZACK GUZMAN: We did get an update on the earnings front here from the first major airline to report, that would be Delta, and again, it was trying to address the fears out there of a travel slowdown. We’ve seen that over the last few months here in this pandemic, but overall, the numbers came in not really reassuring a lot of investors. Well, maybe, it depends on which side you’re on here.
Delta posted a net loss of $5.4 billion in Q3 compared with a profit of $1.5 billion in the year ago period. Including their second quarter, Delta has lost more than $11 billion in this pandemic. Revenue also slipped, dropping 76% from $12.56 billion in 2019 to 3.06 billion in Q– well, the three months ended September 30. That came in slightly under the forecasts that analysts had been pegging to the quarter.
But let’s just do some more simple math here in digging into how they were able to weather the storm, because notably, the company stressed it has cut its cash burn by a sizable amount when you look at what they did over the last reporting month here. So for more on that, I want to bring on our next guest, that would be John Grant, Senior Analyst at Aviation Data Specialist, OAG.
And John, thanks again for coming on, man. I mean, when we look at the numbers, maybe you could say, all right, this is pretty terrible quarter, but you’re already kind of bracing for those numbers. But beyond that, they had about $21.6 billion in liquidity. It burned, as I said, 11 billion in the last two quarters. So how much trouble is Delta, and by extension, the rest of the airlines, in right now?
JOHN GRANT: Hi, Zack. The industry is in serious trouble. There’s no doubt about that. We’re talking here about one of the better performers in the industry, the US big three along with a couple of other US airlines, accounted for 50% of the industry’s profit last year and probably for the last five years. So when we’re talking about this scale of revenue reduction, losses, cash burn, liquidity, you know, it’s just symptomatic of a wider issue that we face globally in the airline industry.
ZACK GUZMAN: Yeah, and I mean, well, we can dig in to kind of the wider picture here, but sticking with Delta, I mean, they did stress this cash burn. I want to highlight the numbers there, because the average in the quarter was $24 million a day. That’s a large number, but it was $18 million a day in September–
JOHN GRANT: It’s huge.
ZACK GUZMAN: Versus $27 million in June. So it’s a noted improvement, as big as those numbers are, but when you talk about the length of this recovery to get back to normal, we just saw TSA traveler data hit a pandemic high. So there were hopes that this is moving in the right direction, but still about half, more than half, when you look at it compared to last year’s. So when you think about this recovery that Delta here is trying to stress and saying, look, we’re bringing our cash burn down, it’s going to be fine, what do you say to that?
JOHN GRANT: I say they’re doing all the right things, but the market is working against them. We’ve looked at their data out through the winter program, and they’re cutting their capacity by about 50%, nearly 60% compared to the winter season we had last year. You know, and the total market, the amount of seats in the market and demand, are really quite flat compared to July. And importantly for the US domestic market, we’re missing the corporate traveler, you know, the road warrior or the air Warrior is firmly at home, and there’s no conferences and there’s no conventions, and you know, we’re not seeing that premium traffic.
And one of the things Delta has sort of skirted over is actually average fares have probably fallen by about 10% as well. So you know, it’s grim, and of course, we have this whole issue of the CARES Act version two hanging around. We don’t know what’s going to happen there. It’s uncertainty for the airlines, really difficult for them to plan. Are they planning for this scenario or another scenario? But you know, I’ve heard rumors that we could see up to 40% of the current domestic capacity cut if there is no solution found for the major airlines.
ZACK GUZMAN: Yeah, and I mean, when you think about how long kind of these concerns would be hanging over these airlines, that is a question if you are cutting 40%, 50% of your production here in the coming winter months. I mean, they stressed on the call, we heard from Delta CEO saying that holiday travel appears to be strengthening. As I said, when you look at that TSA traveler data, we did hit a pandemic high, close to a million travelers when you think about TSA throughput numbers being reported daily.
But at the same time, it has not necessarily come back the way a lot of people expected. You yourself, you came on here and said, look, if we’re not seeing this by Labor Day, that’s just traditionally kind of the peak in terms of summer travel. We’re hitting that later, so maybe there is hope that we would see a stronger holiday season. So how do you kind of pair those data points together and say, you know, it might not be as strong or it will be as strong as Delta saying come the holiday season.
JOHN GRANT: Well, yeah, I mean, he’s right. You know, there is a recovery underway, but when you’re starting from a very low base, anything is a recovery, and it’s semantics, and it’s numbers, and it’s trying to be reassuring to the market. But if you look at the level of production that we’ve seen in previous years and what we now have out there and what we expect to see, you know, I think you can’t square the circle.
We are in the middle of a crisis. We don’t have enough consumer confidence. It is coming back slowly, and speaking to some airline CEOs in the last couple of days, you know, they’re more optimistic about Q1 2021 than they of Q4 2020, particularly in terms of, you know, that leisure market that flows down to Florida and the sun spots. So domestically, those types of airlines could be quite well placed, but you need to remember and reflect, of course, that for Delta, American and United, a large proportion of their valuable revenues are coming in those international markets, and they are closed.
ZACK GUZMAN: Yeah, and that was one of the other things that we heard on the earnings call as well. Not a lot of hope that you would start to see that transatlantic kind of thruway start to reopen here until maybe testing improves or something else happens on that front. We’re going to get the update from United after market close tomorrow.
But I mean, not to dig too much into Delta specifically, when you back up and say, all right, this is what the entire industry is looking like, since they’re all facing a lot of the same problems. I mean, Delta poured a lot of effort into kind of putting an emphasis on business travelers. We know those aren’t necessarily coming back as quickly as the leisure travelers.
So when you back up and stack Delta up against the competitive set and look at its competitors facing a lot of the same issues, who do you think right now is in the most dire straits if we’re not going to see as strong a recovery as a lot of people hoped in international or domestic air travel here?
JOHN GRANT: Probably, to be honest, I think all of the big three are swimming in the same sort of pool. It’s not looking good for them. I would think United is slightly weaker than the other two. You know, they’re the first out of the blocks but actually the Delta results you might find are relatively pretty impressive compared to some of the others that we’re going to see in the next week and a half.
But looking beyond those, you know, my sweet spot continues to be around Southwest. They’ve continued to operate much more capacity during the summer season. They have a much more leisure focus. They’re able to stimulate markets more effectively than others, and they seem to have a better control on their costs. They don’t have to worry about connecting passengers. They like carrying them, but it’s not a crucial part of their business. So you know, they’re probably the ones who are best placed at the moment, I think.
ZACK GUZMAN: We’ve heard that from a few guests digging in all the numbers, but we’ll see what happens. We’re going to get the updates from all the big players in the coming days.
But John Grant, Senior Analyst at Aviation Data specialist, OAG, thanks again for coming on, man.
