Delta is not sure if it can pay back the debt to its lenders. The reason for this non-payment is not that the airline doesn’t have sufficient cash. But, the airline cannot meet the current terms of its borrowing.
However, Delta is negotiating with its lenders to make amendments in those terms. The airline said, “Based on the reduction in demand that we have experienced and are continuing to experience as a result of the Covid-19 pandemic. We expect that we will not be able to satisfy, some of the existing terms of our lenders by early next year.”
Costs to Be Covered
The loan terms that are questionable are the company’s fixed charge coverage ration. The company’s capability of how it will pay its fixed expenses. These fixed expenses include payment of aircraft leases, rents of the airport.
Other fixed costs such as debt payments, rather than variable expenses, which include salaries, benefits, and fuel costs.
The company will not be able to comply with the current terms of the debt agreement, as its ration could be too low, and not that the company does not have enough cash.
Delta’s condition is a sign of how the current situation is affecting the business of a company even though it has sufficient cash. By the end of June, the company should have $14 billion in cash informed Delta in the filing.
Similarly, the company will have available cash of $10 billion by the end of 2020. To keep up the cash reserves, the company is selling more of its debt in the public markets.
Low Travel Low Profit
Delta’s is expecting a fall by 90% in its profits for the second quarter as compared to last year. But the cost-cutting measure taken by the company will help with its daily cash burn to $40 million by the end of June. In March the daily cash burn was nearly $100 million.
The airlines filing default are a sign of cash crunch the airline companies are experiencing due to this pandemic. In the airline, industry travel is low by more than 80% as compared to last year. However, at the start of the summer travel season, there was some improvement in the number of bookings.
On Wednesday, in late morning trading shares of Delta fell nearly 10%. But, most US airline stocks were lower even more. JP Morgan airline analyst Jamie Baker suggested that a sudden rise in airline stocks lifted share prices too high and that trouble lies ahead once the summer travel season ends.
Delta has seen a change in demand in the last few weeks. People are booking more than canceling the flights as compared to March and April. United Airlines also expects an increase in demand for the coming months for its domestic and international flights. Southwest also reported the same.
There was an increase in demand in the summer season. But, once summer is over we are not sure if the demand for airlines will remain the same.