Delta can’t avoid shrinking-airline syndrome

Delta Air Lines Inc. may be the best positioned of the U.S. carriers to weather the pandemic slump in air travel, given its relatively strong balance sheet and historically top-tier operating performance. But even Delta sees reason for further cutbacks. It’s yet another reminder of just how painful the near-term trajectory is for the aerospace industry.

Delta on Tuesday reported a third-quarter loss that was 11% worse than analysts had been anticipating and said it was delaying $5 billion of aircraft purchases until after 2022. Most of the deliveries were meant to be Airbus SE jets, although a small number of Bombardier CRJ regional planes are also affected. Delta is also planning to accelerate the retirement of 400 older jets by 2025, some 200 of which will be grounded this year. Collectively, the moves point to a much smaller operating fleet at both Delta and its peers as people’s reticence to travel proves difficult to kick amid a byzantine network of quarantine requirements and the absence of a widely available vaccine. Already, Delta is 20% smaller overall than it was at the beginning of the year, CEO Ed Bastian said on a call to discuss the earnings. 

The deferral is a blow to Airbus, but at least Delta is delaying rather than canceling the order. Separately, Boeing Co. on Tuesday said a net 983 planes were removed from its backlog so far this year because the orders were either outright canceled or classified as doubtful. Orders fall into the latter category if a buyer’s finances are strained or if lengthy delays — such as the more than 18-month grounding of the Max — give them an out under the terms of the contract. Three more Max orders were canceled in September and another 48 were removed as a result of the accounting assessment of the buyers’ health. Boeing delivered just 11 planes last month, compared with 57 for rival Airbus.(2)

The deferral of Delta’s Airbus deliveries and the rash of Max cancellations are just the tip of the iceberg. As I’ve written, airlines’ shrinking fleets have significant knock-on effects for the broader industry of aerospace suppliers. These companies make most of their money through maintenance work, and if planes aren’t flying, they don’t need tune-ups. The worst may still be yet to come. Delta said Tuesday that maintenance expenses fell by 75% in the third quarter, with nearly 40% of its mainline fleet parked or retired. These kinds of cost cuts will help the company get to breakeven free cash flow by the spring of 2021, a few months later than the airline had previously hoped but still an impressive feat amid the pandemic upheaval. Delta’s gain is its suppliers loss, though. 

In the absence of a fresh stimulus bill out of Congress — and there’s little tangible hope for much progress before Election Day — Delta and its rivals will be allowed to make even bigger adjustments to their capacity. The government payroll aid program had required the carriers to maintain some level of flights to the destinations they had serviced pre-pandemic. That provision has now expired, which means even as demand inches gradually upward, there likely won’t be a big snapback in the operating fleet. 

In an interview with CNBC, Delta’s Bastian expressed some optimism that people were getting more comfortable flying and said early signs on holiday travel were “encouraging.” But the company still expects capacity to be down 40% to 45% in the fourth quarter, or down 60% including seats that are left empty to allow for social distancing. That compares with a 52% year-over-year decline in domestic capacity in the third quarter, with a 63% reduction worldwide. 

If you were hoping for some good news on Tuesday, best not to look at the aerospace sector. Shares of Delta, Boeing and Airbus all declined. 

(1) If that wasn’t enough, the World Trade Organization said Tuesday that the European Union could proceed with $4 billion of tariffs on U.S. exports — including aircraft — because of illegal state subsidies provided to Boeing. The decision could be a much-needed catalyst to bring the U.S. and Europe toward a settlement over a long-standing dispute over aircraft aid. But for now, it’s just another dark cloud.