DAL - Delta Airlines

[Castanza]

What are the odds this is a strategic move to end up buying these companies for pennies on the dollar in a month or two? Someone else pointed out that this filing now gives him a 45 day buffer window where no further filings are needed. Probably just my selfish hopeful optimism grasping at straws as I can see my Spirit position hitting zero.

[Spekulatius]

What are the odds this is a strategic move to end up buying these companies for pennies on the dollar in a month or two? Someone else pointed out that this filing now gives him a 45 day buffer window where no further filings are needed. Probably just my selfish hopeful optimism grasping at straws as I can see my Spirit position hitting zero.

 

I just don’t think so. It wouldn't be Buffet like. I think they just realized they these airline are impaired and may go to zero. If you think about it and look at the cash burn and make a timeline when this epidemic truly is over (Spring next year is earliest  in my opinion due to vaccine availability) then it makes sense.

 

The problem is they none of the airline companies lasts that long without bankruptcy.

[Guest roark33]

Smart move. In my opinion, DAL is likely a zero. They will run out of cash by fall. LUV will last longer but even they could be done in winter or spring.

 

I think it was UAL who said they are burning 60m a day. That’s craziness

 

Delta CEO said that in 8-k filing today.  Revenue for Q2 expected to be down 90%

[Castanza]

What are the odds this is a strategic move to end up buying these companies for pennies on the dollar in a month or two? Someone else pointed out that this filing now gives him a 45 day buffer window where no further filings are needed. Probably just my selfish hopeful optimism grasping at straws as I can see my Spirit position hitting zero.

 

I just don’t think so. It wouldn't be Buffet like. I think they just realized they these airline are impaired and may go to zero. If you think about it and look at the cash burn and make a timeline when this epidemic truly is over (Spring next year is earliest  in my opinion due to vaccine availability) then it makes sense.

 

The problem is they none of the airline companies lasts that long without bankruptcy.

 

Probably right, thanks for sharing.

[BG2008]

Alice Shcroeder said in Snowball that Buffet has a weakness for things with wings.  His batting average isn't so great in this area.  Netjets, US Airlines in 2010s, US Airway Preferred stock? Flight safety seems to have done okay. 

 

As the NFL coaches will tell new millionaire football players,

 

"if it flies floats or fornicates rent it"

[RadMan24]

He's or lieutenants have sold stock April 1 and 2nd. https://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0000027904

[Castanza]

FWIW: Completely anecdotal, but I know a ton of people who are taking advantage of the cheap airfare and booking flights for August/September and even as early as Mid-late July.

 

Obviously there are still near term issues. But if I had to pick an airline to make it through this ass beating. I would probably go with a well capitalized budget leisure focused airline. Business travel will no doubt take longer to come back up to speed.

[decko]

I think Delta is summarized in one question; is it going bankrupt?  Feel free to give your opinion on the chances %%% of delta going bankrupt..    If its not, then its a phenomenal buy!  So, does it whatever bailout they receive keep them afloat?

 

[FCharlie]

I think Delta is summarized in one question; is it going bankrupt?  Feel free to give your opinion on the chances %%% of delta going bankrupt..    If its not, then its a phenomenal buy!  So, does it whatever bailout they receive keep them afloat?

 

The quick answer to your question is.... Not any time soon. After all, this is a $20 stock and if bankruptcy were imminent it would be a penny stock.

 

But I've been thinking about this a lot ever since Berkshire sold 13 million shares last week.

 

Delta had $2.9 billion of cash at year end. They had $3.1 billion of revolver capacity. They drew that down plus took $2.6 billion + $1.0 billion secured financing. That's $9.6 billion of liquidity. They will receive about $5.7 billion of grants from the US Government to pay labor expenses.

 

The main two expenses for airlines are fuel and labor. Fuel prices have dropped from about $2.00 per gallon to about 75 cents per gallon. On top of this, Delta has cut capacity by about 70%. Between capacity cuts and fuel prices falling their fuel expense should be down by 85%-90%. Labor for the next six months is paid for with the grants from the government.

 

So if Delta is burning $50 million per day, the question is, on what? If they are burning this on refunding cancelled flights, there has to be an end point where the refunds stop. If they are burning it on lease payments and capex, I suspect they can defer some level of capex, and I suppose they could work out an agreement with the leases the same way that commercial real estate tenants will work out agreements with landlords.

 

Beyond that, why couldn't Delta sell forward blocks of miles to Amex at a discount to bring in cash? Why can't they take on more secured debt?

 

The point is, I don't see this as a zero at any point this year. That said, I also don't know what it takes to reassure investors that this is a screaming buy either. I'm definitely watching, however... Waiting for more clarity.

 

The same logic applies to JetBlue and Southwest and others. I don't see bankruptcy in the imminent future for these either.

[5xEBITDA]

All of the airlines have various purchase obligations, capital expenditures, cash interest on their debt, short-term maturities on their debt, working capital needs, various fixed SG&A...also, receiving bailout money does not mean bankruptcy is impossible. See GM.

[Spekulatius]

All of the airlines have various purchase obligations, capital expenditures, cash interest on their debt, short-term maturities on their debt, working capital needs, various fixed SG&A...also, receiving bailout money does not mean bankruptcy is impossible. See GM.

 

They have ~11.5B in contractual obligations coming due in 2020 per 2019 10k $8.2B in current assets and $20.2B incurrent liabilities. It’s a highly operationally levered business.  Also, they will declare bankruptcy before cash runs out.

[Uccmal]

Others have noted the huge fixed costs in the airline business.  Fuel costs would be lower but to what end; they aren't using fuel, and are still on the hook for hedging programs which may be a net positive. 

 

The end game here is massive dilution of common shareholders via debt or expensive convertible/preferred share issuances.  Huge loans to keep operating will need to be paid back and will keep share prices stagnant for the better part of a decade, until the next recession when we can rinse and repeat.  Nationalization of airlines outside the US is likely where it is more palatable to Unions and the public.  That will give certain airlines a competitive advantage. 

 

I never understood the Berkshire bet on this.  Every number of years the whole industry comes crashing down.  This is likely the worst hit ever experienced by the entire industry, and it was not really a black swan, as is the popular narrative.  We have had multiple warnings this may come with SARS, Ebola, MERS, H1N1, or a major terrorist event.  The industry is wickedly cyclical in nature, and beholden to other cyclical industries that sometimes run opposite to the travel industry (labour and fuel cost). 

[Edward]

Agree regarding dilution.

 

Buffett thought (correctly) that because of industry consolidation the industry can earn a decent return on capital going forward.

 

What he did not expect is the virus. So this is a case of being somewhat correct on something but at the end it doesn't matter because the underlying business is just so highly leveraged operationally it still sucks bad during a downturn. So I would say - B+ on tactics, D- on strategy.

[rb]

Yea. He probably thought he'll pull something similar to the rails.

 

The thing is that airlines are such a bad industry that even when you think of all the ways they can go sideways and check the boxes, the airlines will just come up with a new ways to go bust. That's why i never bought. Somehow they ALWAYS find a way to go bankrupt.

[Foreign Tuffett]

Others have noted the huge fixed costs in the airline business.  Fuel costs would be lower but to what end; they aren't using fuel, and are still on the hook for hedging programs which may be a net positive. 

 

The end game here is massive dilution of common shareholders via debt or expensive convertible/preferred share issuances.  Huge loans to keep operating will need to be paid back and will keep share prices stagnant for the better part of a decade, until the next recession when we can rinse and repeat.  Nationalization of airlines outside the US is likely where it is more palatable to Unions and the public.  That will give certain airlines a competitive advantage. 

 

I never understood the Berkshire bet on this.  Every number of years the whole industry comes crashing down.  This is likely the worst hit ever experienced by the entire industry, and it was not really a black swan, as is the popular narrative.  We have had multiple warnings this may come with SARS, Ebola, MERS, H1N1, or a major terrorist event.  The industry is wickedly cyclical in nature, and beholden to other cyclical industries that sometimes run opposite to the travel industry (labour and fuel cost).

 

10-K for FY ended 12/31/18:

 

"The rapid spread of contagious illnesses can have a material adverse effect on our business and results of operations.

 

The rapid spread of a contagious illness, or fear of such an event, can have a material adverse effect on the demand for worldwide air travel and therefore have a material adverse effect on our business and results of operations. Moreover, our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness. Similarly, travel restrictions or operational issues resulting from the rapid spread of contagious illnesses in a part of the world in which we have significant operations may have a materially adverse impact on our business and results of operations."

[rb]

So Delta just filed an 8K saying that they will be in breach of covenants by year end. They're going for covenant modification and if they can't get it they'll be in default.

[Peregrine]

So Delta just filed an 8K saying that they will be in breach of covenants by year end. They're going for covenant modification and if they can't get it they'll be in default.

 

Not really surprising. There's been a huge number of companies that have been in breach of covenants due to the lockdown. But covenants are also highly massaged numbers and include provisions for extraordinary circumstances, etc.

[Hielko]

So Delta just filed an 8K saying that they will be in breach of covenants by year end. They're going for covenant modification and if they can't get it they'll be in default.

 

Not really surprising. There's been a huge number of companies that have been in breach of covenants due to the lockdown. But covenants are also highly massaged numbers and include provisions for extraordinary circumstances, etc.

That's not how it works. Lenders might agree to waive or modify covenants, but there can be no assurance that breaking them won't cause problems...

[Peregrine]

So Delta just filed an 8K saying that they will be in breach of covenants by year end. They're going for covenant modification and if they can't get it they'll be in default.

 

Not really surprising. There's been a huge number of companies that have been in breach of covenants due to the lockdown. But covenants are also highly massaged numbers and include provisions for extraordinary circumstances, etc.

That's not how it works. Lenders might agree to waive or modify covenants, but there can be no assurance that breaking them won't cause problems...

 

Of course there are no assurances but from the lender's standpoint, why force a debtor into default at the exact moment that their liquidity is most precarious? And debt covenant ratios can be massaged in a myriad of ways so that the debtor can still be in line. In practice, it's not actually as big of a sticking point, especially during crises like these.

[writser]

 

Of course there are no assurances but from the lender's standpoint, why force a debtor into default at the exact moment that their liquidity is most precarious?

 

Because it is a cheap way to get equity? I agree with Hielko: there is often some leeway with covenants breaches, but I think that depends mostly on the leniency and incentives of the lenders, and not on the massaging skills of the borrower.

 

I do not particularly care about DAL and whether its lenders are interested in pressing for a bankruptcy, but in general if somebody like Carl Icahn or Paul Singer owns your bonds I'd be careful with saying "it's not a big deal, we can massage the numbers".

[Peregrine]

 

Of course there are no assurances but from the lender's standpoint, why force a debtor into default at the exact moment that their liquidity is most precarious?

 

Because it is a cheap way to get equity? I agree with Hielko: there is often some leeway with covenants breaches, but I think that depends mostly on the leniency and incentives of the lenders, and not on the massaging skills of the borrower.

 

I do not particularly care about DAL and whether its lenders are interested in pressing for a bankruptcy, but in general if somebody like Carl Icahn or Paul Singer owns your bonds I'd be careful with saying "it's not a big deal, we can massage the numbers".

 

Equity in an illiquid company that is sure to go insolvent quickly without access to capital. Debt holders are not stupid - they'll have extremely limited recovery if they force a company like this into default at a time like this.

[rb]

What do you mean sure to go insolvent? If the debt guys got the equity the company is insolvent. Why would the equity be illiquid? Seems pretty liquid to me.

 

Also if the bondholders would have limited recovery then the equity surely is a zero now.

[writser]

Equity in an illiquid company that is sure to go insolvent quickly without access to capital. Debt holders are not stupid - they'll have extremely limited recovery if they force a company like this into default at a time like this.

 

I don't think you quite understand what we are trying to say. If you force the company into default now it doesn't have to mean that they sell all planes, stop operating and that all bondholders face massive losses. At this point the market is valuing the equity at $20b and that is a large cushion for bondholders, because even if bondholders cannot get their principal back they can appropriate some of the equity currently valued at $20b to get a stake in the company. Basically you extend your loans, snap up some of the equity for free upside and in the meantime the company just keeps operating. Winner: bondholder. Loser: shareholder.

 

A bondholder could even go short the common at that point for a hypothetical arbitrage. I'm absolutely not saying that that is going to happen, but you seem to have a limited view of what a bankruptcy entails and who could profit from that. Or I am misunderstanding you.

[Peregrine]

Equity in an illiquid company that is sure to go insolvent quickly without access to capital. Debt holders are not stupid - they'll have extremely limited recovery if they force a company like this into default at a time like this.

 

I don't think you quite understand what we are trying to say. If you force the company into default now it doesn't have to mean that they sell all planes, stop operating and that all bondholders face massive losses. At this point the market is valuing the equity at $20b and that is a large cushion for bondholders, because even if bondholders cannot get their principal back they can appropriate some of the equity currently valued at $20b to get a stake in the company. Basically you extend your loans, snap up some of the equity for free upside and in the meantime the company just keeps operating. Winner: bondholder. Loser: shareholder.

 

A bondholder could even go short the common at that point for a hypothetical arbitrage. I'm absolutely not saying that that is going to happen, but you seem to have a limited view of what a bankruptcy entails and who could profit from that. Or I am misunderstanding you.

 

I'm not talking about liquidation. A company like this can't survive without continuous access to capital even in normal times - at a time when revenue is down 90%? What kind of signal would a debtholder send to the credit markets if they forced DAL into default in order to extract an equity stake? You don't think other creditors would seek to do the same if they deemed it advantageous? And if that happens, how would DAL ever be able to refinance its debt and remain a going concern? And if it's not a going concern, what is that equity even worth?

 

It's not that simple for a debtholder to think that they have leverage to extract a pound of flesh if a covenant ratio was somehow breached.

[writser]

Thanks for the clarification. I think we're mostly on the same page. It was mostly your initial point that I disagreed with: you seemed to suggest that the covenants provide a lot of leeway. Hielko's point was hat the covenants do NOT provide a lot of leeway, i.e. they are pretty tight and a secured debt holder has a very strong negotiation position. I agree with you, it is often not desirable to burn down the house, but that bondholders don't do that often doesn't imply they can't do it. Hence my Singer / Icahn examples.

 

You don't think other creditors would seek to do the same if they deemed it advantageous? And if that happens, how would DAL ever be able to refinance its debt

 

Well, if the equity is worth $20b in a going-concern scenario, I'm pretty sure you can find somebody willing to refinance your debt.

 

Anyway, mostly a theoretical discussion. I'm absolutely not interested in owning DAL common or bonds.