Delta Air Lines and the United States Department of the Treasury have reached an agreement for additional funding. The PSP Extension Agreement Extension Agreement gives Delta access to nearly $ 3 billion in funds, which can only be used for wages, salaries and employee benefits.
Delta reaches new PSP extension agreement
Delta Air Lines expects to receive $ 2.9 billion in payroll support payments. Conditional on Delta’s agreement to continue essential air service in accordance with US Department of Transportation (DOT) guidelines until March 1, 2022, limitations on executive compensation through October 1, 2022 and prohibitions on repurchase of shares and dividends by March 31, 2022, the airline will receive the money to avoid involuntary layoffs or leave of US employees by March 31, 2021.
Relief payments come in two different types. First, there is $ 2.0 billion in grants and another $ 830 million in a 10-year unsecured loan. The first installment of $ 1.4 billion has already been given to Delta as of January 15. The remaining balance will be delivered to the airline before the end of the first quarter.
The Delta loan comes with an annual interest rate of 1.00% for the first five years, until January 15, 2026, and the guaranteed overnight financing rate applicable plus 2.00% for the final five years. Of the $ 1.4 billion already delivered to Delta, the airline received 70% in the form of a donation and 30% in the form of an unsecured loan.
Under the terms of the loan, Delta issued a promissory note to the Treasury of approximately $ 400 million with respect to the term loan. Delta also agreed to issue Treasury guarantees to acquire approximately 2.1 million Delta common shares.
Delta has avoided licenses so far
While some other airlines had to lay off thousands of employees, Delta was able to avoid any layoffs through an aggressive unpaid leave program. The long-term effect on the airline is not yet clear, but the carrier believes it will be able to operate a competitive and efficient operation in the future.
However, although Delta apparently does not need additional PSP funding, the carrier will not say no to some “free” money. At the end of 2020, the airline had $ 16.7 billion in liquidity. With that $ 2.9 billion, Delta has about $ 19.6 billion in liquidity, plus or minus a few million.
The airline did not appear to be in danger of needing additional licenses. Still, the demand environment has not been materially approved, and until Delta reaches the tipping point it had hoped for, which it believes will occur this spring, the airline could use all possible liquidity.
What to expect from Delta this year
Delta’s first quarter of 2021 will be similar to its fourth quarter of 2020. Compared to the first quarter of 2019, the airline expects its scheduled capacity to decrease by 35%. However, its sales capacity for the same quarter will be reduced by about 55% due to the airline’s policy of blocking seats on board its aircraft.
The airline predicts that revenue will fall by around 60-65%, while operating expenses will fall by 35-40% compared to the first quarter of 2019. The carrier has been aggressively working on its cash burn and is now looking at an average $ 10-15 million daily burn during the first quarter – down about 90% since the first days of the crisis in March.
Delta also emerged from this structurally minor crisis, with 227 aircraft withdrawals in 2020 and around 200 others scheduled by 2025. Delta will now receive 34 new aircraft in 2021.
Basically, the airline was in a good position in the future. It anticipated making a profit in the summer months and hoped to reach the cash balance point this spring. That $ 2.9 billion will certainly help Delta after a massive annual loss of $ 12.4 billion, although it did not need the money as much as some of its network peers.
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