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The CEO of Delta has had an unenviable job. Operating what was one of the world’s top-performing airlines in terms of revenue in the midst of a pandemic – something the industry has never experienced – meant a lot of reassessment and rebuilding. Now, as the airline struggles to chart a course, a note from CEO Ed Bastian shows the airline expects a tough road.
Delta CEO Memo
Traditionally, at the start of each new calendar year, airlines chart a course for the next 12 months and try to share that vision with their staff and customers. This year, those memos were nothing like the past 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 the consumption of cash.
“The start of 2021 is no different. Once again, we have ambitious goals for the next 12 months, and they center on our core values: taking care of our people and our customers. While I am optimistic it will be a year of recovery, the lingering uncertainty of the pandemic means we will need to be nimble, ready to adjust our course and adapt to an ever-changing environment.
After 2020, with the smallest number of passengers flying in a day in recent history, airlines are pretty sure 2021 will be much better.
Mr. Bastian expects the year to unfold in two different parts:
It is likely that we will experience two distinct phases over the next 12 months. The former will look a lot like 2020, with deeply depressed travel demand and our drive to ensure the health and safety of our employees and customers. The second phase will not begin until we reach a turning point with widely available vaccines that stimulate a significant return to travel, especially business travel. We continue to expect positive cash flow by the spring.
Break that
This statement is complicated and emphasizes the variable nature of today’s aviation industry. First, the industry is using a vaccine that has just started being distributed. Currently, almost no country has indicated what restrictions will continue to exist or the proof of vaccination that will be required for resumption of travel.
Most people waiting for a vaccine due to get one maybe in March and beyond, depending on where they live, governments have time to figure out how they want to handle this. However, airlines will know that this will not happen simultaneously in major markets and it will not happen uniformly with similar restrictions in every country. This forces airlines to face a complex array of restrictions before they can fly with paying customers again.
Until then, airlines must continue what they did in 2020: minimize cash consumption and consolidate liquidity. As Delta looks at it from a liquidity standpoint as 2021 approaches, that money can quickly evaporate in running a huge global airline.
A smaller and more agile delta in 2021
Delta Air Lines removed 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 of small size. First and foremost, the global market will continue to be volatile. And the airlines have adopted two different action plans.
First, carriers like United, JetBlue and Southwest have pursued an expansion plan. This means that the airlines have detected market opportunities and have jumped on them with the aim of obtaining new revenue and more passengers. These include point-to-point routes and hub-and-spoke routes where airlines can take advantage of connections to refuel their planes.
Delta has taken a second approach. He postponed orders for planes and preferred to stay small. Instead, it’s good to spill over into demand rather than having excess capacity. At least until March, the airline continues to block seats on its planes.
Staying small minimizes Delta’s risk and helps it achieve an investment-grade track record with balanced financial results. However, this comes at the expense of a robust road 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 been successful in routing passengers to partner hubs for international travel.
Delta is rebuilding itself. Mr Bastian is clear he doesn’t want to see Delta return in its 2019 form, but rather be a customer-focused airline from 2021 and beyond in 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 stay small and focus routes or postpone them until 2022 and beyond.
What about aircraft orders?
Delta’s order book remained constant throughout the crisis. The airline only postponed deliveries of new planes, but started taking some planes in the second half of the year. Delta has planned most of its fleet replacement strategy, with the exception of the Boeing 757s – for which there is no clear replacement, but unless there is something new from Boeing, the A321LR or A321XLR the will probably prevail.
Delta can go ahead and get slots for these new narrow-body long-range jets before losing them. He might even get a good deal from Airbus, given that it is a big customer of Airbus and the European aircraft manufacturer is also hoping to get new orders as Boeing has started to receive them.
The other joker could be the 737 MAX. Delta has had talks with Boeing about the plane, and Boeing will likely distribute them cheaply. It remains to be seen whether Delta chooses to fly. The MAX would be primarily a domestic, short-haul international aircraft for Delta, likely in the 160-170 seat range, as the A321neos and new A321ceos are in the 190+ category. The MAXs could easily replace the old 737-800 and Airbus A320.
In short, 2020 has been a tough year for airlines, but 2021 will be another tough year. At least the first half of the year will see the same uncertainty as 2020. Until vaccine guidelines are released, borders reopen, and more people are comfortable traveling. again, Delta will be in a tough spot when it comes to its plans for the year.
If demand returns in the second half of the year, Delta will suffer from a much smaller fleet and fewer non-stop international routes compared to its competitors. The Delta team believe this scenario will be unlikely and are bracing for a slow and unstable recovery.
What do you think the world of aviation will look like in 2021? Do you think Delta is on the right track? Let us know in the comments!
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