Delta’s CEO had an unenviable job. Managing one of the world’s best performing airlines in revenue in the middle of a pandemic – something the industry has never experienced – has meant a lot of reevaluation and reconstruction. Now, as the airline works to chart a way forward, a memo from CEO Ed Bastian shows that the company expects a rocky road ahead.
Delta CEO’s memo
Traditionally, at the beginning of each new calendar year, airlines chart a path for the next 12 months and try to share that vision with their employees and customers. This year, these memos were nothing like the past few years. Bastian’s memorandum this year marks the beginning of what the airline expects to be another difficult year, but one in which it can 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 on our core values: taking care of our people and our customers. Although I am optimistic, this will be a year of recovery, the continuing uncertainty of the pandemic means that we will need to be nimble, ready to adjust our course and adapt to an ever-changing environment ”.
After 2020, saw the smallest number of passengers flying in one day in recent history, airlines are almost sure that 2021 will be much, much better.
Bastian expects the year to be divided into two parts:
We are likely to experience two distinct phases over the next 12 months. The first will be much like 2020, with the demand for travel deeply depressed and our focus on ensuring the health and safety of our staff and customers. The second phase will begin only when we reach an inflection point with widely available vaccines that encourage a significant return to travel, especially business travel. We continue to expect to achieve positive cash flow in the spring.
Breaking it down
This statement is complicated and emphasizes the changing nature of today’s aviation industry. First, the industry is putting together a vaccine that has just started to be distributed. Currently, almost no country has indicated which restrictions will continue to exist or proof of vaccination that will be required to resume travel.
With most people waiting for a vaccine, they are expected to get it perhaps in March and then, depending on where they live, governments have some time to figure out how they want to deal with it. However, airlines know that this will not happen simultaneously in the main markets, or even with similar restrictions in each country. This causes airlines to deal with a complex set of restrictions before they can fly to paying customers again.
Until then, airlines need to continue what they did in 2020: minimize cash burn and increase liquidity. While Delta is looking from a liquidity perspective towards 2021, that money could quickly evaporate in the management of a huge global airline.
A smaller and more agile Delta in 2021
Delta Air Lines cut more than 200 aircraft from its main and regional fleet in 2020, making the airline much smaller and more agile. In many ways, 2021 is the year to be small. First, the global market will remain volatile. And airlines have adopted two different courses of action.
First, operators like United, JetBlue and Southwest sought an expansion plan. This means that airlines have realized market opportunities and seized them in an attempt to earn new revenue and more passengers. This includes point-to-point routes and hub-and-spoke routes where airlines can take advantage of connections to fuel their aircraft.
Delta took a second approach. She postponed aircraft orders and preferred to remain small. Instead, it’s okay to overload demand instead of overcapacity. Until at least March, the airline continues to block seats on its aircraft.
Staying small minimizes Delta’s risk and helps you obtain an investment grade balance sheet with balanced financial results. This, however, comes at the expense of a robust route map that could prove to be a decisive blow to the airline in the future. Although previous expansions have not always worked well for Delta during a crisis, it has successfully routed passengers through partner hubs for international travel.
Delta is rebuilding itself. Bastian made it clear that he does not want to see Delta return in its 2019 form, but rather to be a customer-focused airline starting in 2021 amid an uncertain market. 2021 will be a decisive year in Delta’s future strategy. In this industry, anything is possible. Delta is more likely to remain small and modify routes or postpone them until 2022 and beyond.
What about aircraft orders?
Delta’s order book remained constant during the crisis. The airline just postponed deliveries of new planes, but started receiving some planes in the second half. Delta has most of its fleet replacement strategy planned, except for the Boeing 757 – for which there is no clear replacement, but except for anything new from Boeing, the A321LR or A321XLR is likely to win.
Delta can go ahead and secure slots for these new long-range narrowbody aircraft before losing them. You can even get a good deal with Airbus, as it is a major customer of Airbus and the European aircraft manufacturer also hopes to register some new orders, as Boeing has started to receive some of them.
The other wildcard could be the 737 MAX. Delta is in talks with Boeing about the aircraft, and Boeing is probably distributing them at a great price. Whether Delta will choose to take the plane remains to be seen. The MAX would be primarily a domestic and international short-haul aircraft for Delta, probably in the 160-170 seat range, as the A321neos and the new A321ceos fall into the 190+ category. MAXes could easily replace the old 737-800s and Airbus A320s.
In short, 2020 was a difficult year for airlines, but 2021 will be another difficult year. The first half of the year, at least, will see the same uncertainty as 2020. Until the vaccine guidelines are released, the borders reopen and more people feel comfortable traveling again, Delta will be in a difficult situation when it comes of your plans for the year.
If demand increases in the second half of the year, Delta will suffer from having a much smaller fleet and fewer international routes with no stops compared to its competitors. The Delta team believes that this scenario is unlikely and is preparing for a slow and unstable recovery.
What do you think the aviation world will look like in 2021? Is Delta on the right track, in your opinion? Let us know in the comments!