Delta’s CEO has had an unenviable job. Running what was one of the world’s top-performing airlines by revenue through the middle of a pandemic– something the industry has never experienced– meant a lot of reevaluation and reconstruction. Now, as the airline works to chart a path forward, a memo from CEO Ed Bastian shows the airline expects a rocky road ahead.
The memo from Delta’s CEO
Traditionally, at the start of each new calendar year, airlines chart a path forward for the next 12 months and try to share that vision with their staff and customers. This year, those memos were nothing like the last few years. Mr. Bastian’s memo this year marks the start of what the airline expects to be another difficult year, but one where it can hopefully minimize losses and cash burn.
“The beginning of 2021 is no different. Once again, we have ambitious goals for the next 12 months, and they are centered around our core values: taking care of our people and our customers. While I am optimistic this will be a year of recovery, the continued uncertainty of the pandemic means we’ll need to be nimble, ready to adjust our course and adapt to an ever-changing environment.”
After 2020 saw the lowest number of passengers flying in a day in recent history, airlines are pretty certain that 2021 will be much, much better.
Mr. Bastian expects the year to be in two different parts:
It’s likely that we’ll experience two distinct phases during the next 12 months. The first will look a lot like 2020, with travel demand deeply depressed and our focus on ensuring the health and safety of our people and customers. The second phase will begin only when we reach a turning point with widely available vaccinations that spur a significant return to travel, particularly business travel. We continue to expect that we will achieve positive cash flow by the spring.
Breaking this down
This statement is complicated and emphasizes the varying nature of the current aviation industry. First, the industry is riding on a vaccine that has just started being distributed. Currently, almost no countries have indicated what restrictions will continue to exist or proof of vaccination that will be necessary for a resumption of travel.
With most people waiting for a vaccine expected to get one in perhaps March and beyond, depending on where they live, governments have some time to figure out how they want to handle this. However, airlines will know that this will not happen simultaneously across major markets, nor will it happen uniformly with similar restrictions in each country. This sets airlines up to deal with a complex array of restrictions before they can fly paying customers again.
Up until then, airlines need to continue what they did in 2020: minimize cash burn and shore up liquidity. While Delta is looking from a liquidity standpoint heading into 2021, that cash can evaporate quickly in managing a massive global airline.
A smaller, more nimble Delta in 2021
Delta Air Lines cut down over 200 aircraft from its mainline and regional fleet in 2020, making the airline much smaller and more nimble. In many ways, 2021 is the year to be small. First and foremost, the global marketplace is going to continue to be volatile. And, airlines have taken two different courses of action.
First, carriers like United, JetBlue, and Southwest have pursued an expansionary plan. This means airlines have sensed market opportunities and jumped on them in a bid to get new revenue and more passengers. These include point-to-point routes and hub-and-spoke routes where airlines can leverage connections to fill up their aircraft.
Delta has taken a second approach. It has deferred aircraft orders and preferred to remain small. Instead, it is fine spilling over demand rather than having excess capacity. Through at least March, the airline is continuing to block seats on its aircraft.
Staying small minimizes Delta’s risk and helps it get to an investment-grade balance sheet with break-even financial results. This, however, comes at the expense of a robust route map that could prove to be a decisive blow against the airline in the future. While past expansions have not always worked well for Delta during a crisis, it has seen success in funneling passengers through partner hubs for international journeys.
Delta is rebuilding itself. Mr. Bastian is clear that he does not want to see Delta come back in its 2019 form but rather be a customer-focused airline from 2021 and beyond amid an uncertain marketplace. 2021 will be a decisive year in Delta’s future strategy. In this industry, anything is possible. It is more likely that Delta stays small and axes routes or postpones them until 2022 and beyond.
What about aircraft orders?
Delta’s order book has remained constant throughout the crisis. The airline has only deferred new aircraft deliveries but started to take some planes in the second half of the year. Delta has most of its fleet replacement strategy planned out, except for the Boeing 757s– for which there is no clear replacement, but barring anything new from Boeing, the A321LR or A321XLR will likely win out.
Delta may go ahead and secure slots for these new long-haul narrowbody aircraft before it loses out on them. It may even get a good deal from Airbus, given how it is a big Airbus customer and the European planemaker is also hoping to log some new orders as Boeing has started to receive some of them.
The other wild card could be the 737 MAX. Delta has been in discussions with Boeing on the aircraft, and Boeing is likely giving them out at a great price. Whether Delta chooses to take the plane remains to be seen. The MAX would mainly be a domestic and short-haul international aircraft for Delta, likely in the 160-170 seat range, as the A321neos and new A321ceos fit the 190+ category. The MAXes could easily replace the older 737-800s and Airbus A320s.
In short, 2020 was a tough year for airlines, but 2021 will be another difficult year. The first half of the year, at least, will see the same uncertainty that 2020 saw. Until vaccine guidelines are out, borders reopen, and more people are comfortable to travel again, Delta’s going to be in a tight spot when it comes to its plans for the year.
If demand rockets back in the second half of the year, Delta will suffer from having a much smaller fleet and fewer nonstop international routes compared to its competitors. Delta’s team believes this scenario will be unlikely, and it is preparing for a slow and choppy recovery.
How do you think the aviation world will look in 2021? Is Delta on the right track, in your opinion? Let us know in the comments!