Delta Air Lines will receive $5.4 billion in government aid according to a memo sent to employees on April 14th from CEO Ed Bastian. The money is earmarked to support the airline’s payroll. Also, the government will have the potential to acquire a one-percent stake in the airline.
Delta will receive government funding
In his memo to employees, CEO Ed Bastian announced that the airline had reached an agreement with the United States Department of Treasury for $5.4 billion in aid as made available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. With this aid, Delta will be able to delay furloughs and pay cuts through the end of September.
The $5.4 billion will come from the Payroll Support Program included in the relief package. $1.6 billion of that funding is in the form of a 10-year low-interest loan. As part of the terms, the airline will also provide warrants to the government to acquire one percent of Delta stock at $24.39 per share over five years.
Few industries are as volatile as airlines. 2020 so far, has been a bit rough on airlines. First, it started with tensions in Iran and Iraq, forcing airlines to fly around the airspace. And, then, the downing of a Ukrainian International Airlines Boeing 737. Then, in February, airlines started to feel the impact of the coronavirus as they cut flights to China, and then Italy, Iran, and South Korea.
Now, as the coronavirus ravages across the United States, Delta is faced with a whopping 95% drop in passenger traffic resulting in significant schedule reductions. However, there is some hope as the airline is now operating cargo-only flights and conducting repatriation flights.
Major schedule cuts
Delta has cut about 80% of its schedules and is parking 600 aircraft. However, for the next few months, the airline does have to meet minimum service requirements as outlined by the United States Department of Transportation. These are the conditions of the minimum service:
Airlines that receive government assistance under the CARES Act must maintain a minimum amount of domestic service. For destinations that are served by the airline for at least 25 times per week, the airline must continue to fly five times per week to that city.
For destinations served between five and 25 times per week, the airline only needs to operate at least three weekly flights to that destination. If a carrier flies to a destination fewer than five days a week, airlines must serve the destination with at least one flight on one day per week.
Cities served from multiple hubs only need to be serviced from at least one of those hubs so long as the carrier can continue to maintain minimum frequencies. This will be a massive help to Delta with its hub-and-spoke model. Many cities are served from multiple hubs. To reduce losses, Delta can cut down service to some points from only one of its hubs.
Airlines cannot cooperate on flights, however. Each carrier must serve its destinations per minimum service requirements. Regional carriers operating on behalf of the airline can help meet these requirements.
In terms of flight schedules, airlines can choose to either follow minimum service requirements based on their winter 2020 schedule or summer schedule from 2019. For places where service had ceased after March 1st, airlines will need to reinstate service within seven business days of receiving government assistance from the CARES Act.
What does this mean for Delta?
Receiving government assistance is a big deal. And, it does ruffle a few feathers at Delta. In the past few years, few CEOs have been as outspoken about airlines receiving government aid as Ed Bastian – especially concerning the big three Middle Eastern carriers. Even though Delta now needs government aid, it is unlikely that the airline will drop its opposition to the Gulf carriers’ expansion.
However, for Delta, this assistance is a way for it to stay afloat. For an airline that was burning through $60 million per day, any kind of funding matters. In fact, in March, the carrier was able to raise over $3 billion in new cash. Moreover, Delta consolidated airport facilities, paused new expenditures, and cut pay for officers and senior executives.
With $5.4 billion heading Delta’s way, the airline will be able to support its employees through September. Amid the global downturn, airlines are struggling to get by. If the situation improves by the fall, Delta and other airlines will likely be able to save more jobs and start to return to normal. However, if that doesn’t happen, then it could be a rough year for airlines and passengers.
What do you think about Delta receiving government aid? Let us know in the comments!