| Impact of the COVID-19 Pandemic | IMPACT OF THE COVID-19 PANDEMIC The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel. After initially impacting our service to China beginning in January, the spread of the virus and the resulting global pandemic next affected the majority of our international network and ultimately has significantly affected our domestic network. Beginning in March, large public events were cancelled, governmental authorities began imposing restrictions on non-essential activities, businesses suspended travel and popular leisure destinations temporarily closed to visitors. Certain countries that are key markets for our business have imposed bans on international travelers for specified periods or indefinitely. As a result, demand for travel declined at a rapid pace and has remained depressed, which has had an unprecedented and materially adverse impact on our revenues and financial position. Although demand improved through the quarter, it remains significantly below the prior year. The exact timing and pace of the recovery are uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for most U.S. residents. Additionally, some states have instituted travel restrictions or advisories for travelers from other states. Our forecasted expense and liquidity management initiatives may be modified as the demand environment evolves. In response to these developments, beginning in March and continuing throughout the June 2020 quarter, we have implemented enhanced measures focusing on the safety of our customers and employees, while at the same time seeking to mitigate the impact on our financial position and operations. Taking Care of our Customers and Employees. The safety of our customers and employees is our primary focus. As the COVID-19 pandemic has progressed, we have taken numerous steps to help promote the safety of our customers and employees on the ground and in the air in keeping with current health-expert recommendations, including: • Adopting new cleaning procedures on all flights, including disinfectant electrostatic spraying on aircraft and sanitizing high-touch areas like tray tables, entertainment screens, armrests and seat-back pockets before each flight. • Taking steps to help employees and customers practice social distancing and promote safety, including: ◦ Creating a Global Cleanliness Division to ensure a consistently safe and sanitized experience across our facilities and aircraft. ◦ Requiring all customers and customer-facing employees to wear masks. ◦ Blocking middle seats and capping load factor at 60% throughout our aircraft through at least September 30, 2020. ◦ Modifying our boarding and deplaning processes, while providing food and beverage service that is designed to reduce physical touch points. ◦ Installing plexiglass shields at all Delta check-in counters, Delta Sky Clubs and gate counters across the U.S. as well as adding social distance markers in the check-in lobby, Delta Sky Clubs, at the gate and throughout the jetbridge. ◦ Implementing significant workforce social distancing and protection measures, including reconfiguring call center spaces to promote social distancing, increasing cleaning and disinfecting of our facilities and having virtually all employees who can telecommute do so. • Giving customers flexibility to plan, re-book and travel including extending expiration on travel credits through September 2022. Additionally, we are extending 2020 Medallion Status an additional year, rolling Medallion Qualification Miles into 2021 and extending Delta SkyMiles American Express Card benefits and Delta Sky Club memberships. • Offering pay protection to employees who have been diagnosed with COVID-19, who must quarantine due to exposure to COVID-19 or who have self-identified as being at high-risk for illness from COVID-19 according to the Centers for Disease Control and Prevention ("CDC") guidelines and do not have the ability to telecommute (through July 31 for high-risk individuals). • Beginning in June 2020, onsite COVID-19 testing became available for employees in select Delta hubs. Testing began in our Atlanta and Minneapolis hubs and is expanding through the September 2020 quarter, with the expectation that all employees will be tested. Capacity Reductions. Beginning in the second half of March, we experienced a precipitous decrease in demand as COVID-19 spread throughout the world. We significantly reduced our system capacity to a level that maintained essential services to align capacity with expected demand. For the June 2020 quarter, system capacity was reduced 85% compared to the June 2019 quarter, with international capacity reduced by 94% and domestic flying reduced by 80%. For the September 2020 quarter, system capacity is expected to be down approximately 60% compared to the September 2019 quarter, with international capacity to be reduced approximately 80% and domestic capacity to be reduced approximately 50%. As a result of reduced demand expectations and lower capacity in the September 2020 quarter and beyond, we have parked approximately 50% of our fleet, including the permanent retirement of certain aircraft, as discussed further below. Expense Management. In response to the reduction in revenue, we have implemented, and will continue to implement, cost saving initiatives, including: • Reducing capacity as described above to align with expected demand, which has resulted in parking approximately 600 aircraft as of June 30, 2020. In the June 2020 quarter we retired our MD-90 fleet, seven 767-300ER aircraft and 10 A320 aircraft and will retire our 777 and 737-700 fleets by October 2020. These retirement decisions follow the March 2020 quarter decision to accelerate the retirement of our MD-88 fleet from December 2020 to June 2020. • Consolidating our footprint at our airport facilities, including temporarily closing most Delta Sky Clubs. • Reducing employee-related costs, including: ◦ Voluntary unpaid leaves of 30 days to 12 months offered to most employees. Approximately 45,000 of our employees have taken or have volunteered to take voluntary leaves. ◦ Offering employees early retirement and voluntary separation programs, with most departures scheduled for August 1, 2020. The enrollment period for these programs will close in July 2020. See Note 8, "Employee Benefit Plans," for additional information. ▪ Pilots are also eligible for an early retirement program, however, separation dates will be based on training and staffing requirements. ◦ Salary reductions of 50% for our officers and, with respect to our director level employees through the June 2020 quarter, 25%. Beginning in the September 2020 quarter, a 25% reduction in work hours has been implemented for our director level employees, consistent with the 25% reduction in work hours for all other management and most front-line employee work groups. ◦ Instituting a company-wide hiring freeze. • Delaying non-essential maintenance projects and eliminating nearly all other discretionary spending. Balance Sheet, Cash Flow and Liquidity. Our cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities balance ("liquidity") as of June 30, 2020 was $15.7 billion as a result of the following actions to increase liquidity and strength our financial position during the six months ended June 30, 2020: • Reducing planned capital expenditures by approximately $3.5 billion for the year, including working with original equipment manufacturers ("OEM") to optimize the timing of our future aircraft deliveries, delaying aircraft modifications and postponing certain information technology initiatives and replacement of ground equipment. • Receiving $4.9 billion as part of the CARES Act payroll support program as described below. • Obtaining financing through the following actions: ◦ Drawing $3.0 billion from our previously undrawn revolving credit facilities. We have extended the maturity for $1.3 billion of these borrowings from April 2021 to April 2022 and also secured $2.7 billion of these borrowings with our Pacific route authorities and certain related assets. ◦ Entering into a $3.0 billion 364-day secured term loan facility. ◦ Entering into $2.8 billion of sale-leaseback transactions as described below. ◦ Issuing $3.5 billion of senior secured notes and entering into a $1.5 billion term loan, both of which are secured by certain slots, gates and routes. ◦ Issuing $1.3 billion of unsecured notes. ◦ Completing $1.4 billion in transactions secured by aircraft, including EETC issuances and aircraft loans. • Amending our credit facilities to replace fixed charge coverage ratio covenants with liquidity-based covenants. • Suspending share repurchases and dividends. • Postponing $500 million of planned voluntary pension funding. We continue to evaluate leveraging our unencumbered assets to pursue future financing opportunities and our possible participation in the CARES Act loan program, discussed below. In response to the impact that the demand environment has had on our financial condition, our credit rating has been downgraded by Standard & Poor's to BB in March 2020 and by Fitch to BB+ in April 2020. Our credit rating from Moody's remains Baa3. Our primary credit facilities have various financial and other covenants that require us to maintain a minimum liquidity ratio and a minimum collateral coverage ratio. The minimum liquidity ratio replaced the fixed charge coverage ratio previously in the facilities as part of the amendments we completed in June 2020. We expect to remain in compliance with these and other covenants in our debt agreements. See Note 7, "Debt," and the sale-leaseback transactions section in this footnote for more information on our financing activities during the six months ended June 30, 2020. Valuation of Goodwill and Indefinite-Lived Intangibles We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Our December 2019 quarter quantitative impairment tests of goodwill and intangibles concluded that there was no indication of impairment as the fair value exceeded our carrying value: Carrying Value at Fair Value Excess at 2019 Testing Date (in millions) June 30, 2020 December 31, 2019 Goodwill (1) $ 9,753 $ 9,781 234% International routes and slots 2,583 2,583 15% to 29% Airline alliances (2) 1,863 1,005 67% to 576% Delta tradename 850 850 185% Domestic slots 622 622 61% to 181% Total $ 15,671 $ 14,841 (1) The reduction in goodwill relates to the combination of Delta Private Jets with Wheels Up in the March 2020 quarter. See Note 5, "Investments," for more information on this transaction. (2) As part of our strategic alliance with and inv estment in LATAM Airlines Group S.A. ("LATAM"), we hav e recorded an alliance-related indefinite-lived intangible asset of $1.2 billion , which was not reflected in the 2019 quantitative impairment assessment. See Note 5, "Investments," for more information on this transaction. Despite the significant excess fair value identified in our 2019 impairment assessment, we determined that the reduced cash flow projections and the significant decline in Delta's market capitalization as a result of the COVID-19 pandemic indicate that an impairment loss may have been incurred. Therefore, we qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of June 30, 2020. We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic, (2) current discount rates, (3) the reduction in Delta's market capitalization, (4) observable market transactions, (5) changes to the regulatory environment and (6) the nature and amount of government support that has been and is expected to be provided in the future. Based on our interim impairment assessment as of June 30, 2020, we have determined that our goodwill and indefinite-lived intangible assets are not impaired. However, we are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on air travel and our business. Any measure that requires or encourages potential travelers to stay in their homes, engage in social distancing or avoid larger gatherings of people is highly likely to be harmful to the air travel industry in general, and consequently our business. We expect any traveler wariness of airports and commercial aircraft to have a similar effect. Valuation of Long-Lived Assets Our flight equipment and other long-lived assets, which are classified as property and equipment, net on our Consolidated Balance Sheet ("balance sheet"), have a recorded value of $28.5 billion at June 30, 2020. We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. As part of our capacity reductions related to the negative effect on our business from the COVID-19 pandemic, we have removed approximately 600 aircraft from active service as of June 30, 2020. Other than the MD-88, MD-90, 777 and 737-700 fleets and certain of our 767-300ER and A320 aircraft, which we have retired or are in the process of retiring, the aircraft removed from service are being temporarily parked. In the March 2020 quarter we recorded an impairment charge of $22 million related to the MD-88 fleet. In the June 2020 quarter we recorded impairment charges of $1.4 billion related to the 777 fleet, $330 million related to the MD-90 fleet, $220 million related to the 737-700 fleet, $180 million related to the seven retired 767-300ER aircraft and $60 million related to the ten retired A320 aircraft in restructuring charges in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income ("income statement"). These impairment charges were calculated using Level 3 fair value inputs based primarily upon forecasted future cash flows, recent market transactions, published pricing guides and our assessment of existing market conditions based on industry knowledge. Following the impairment charges, the remaining cumulative net book value for these aircraft is $370 million. To determine whether impairments exist for active and temporarily parked aircraft, we group assets at the fleet-type level or at the contract level for aircraft operated by regional carriers (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel and labor costs and other relevant factors. Given the substantial reduction in our active aircraft and diminished projections of future cash flows in the near term, we evaluated the remainder of our fleet and determined that only the fleet-types discussed above were impaired as the future cash flows from operation of the fleet through the respective retirement dates exceeded the carrying value. As we obtain greater clarity about the duration and extent of reduced demand and potentially execute further capacity adjustments, we will continue to evaluate our current fleet compared to network requirements and may decide to permanently retire additional aircraft. See Note 5, "Investments," for information on the valuation of our equity investments. CARES Act On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing the airline industry with up to $25 billion in grants to be used for employee wages, salaries and benefits. In April 2020, we entered into an agreement with the U.S. Department of the Treasury to receive $5.4 billion in emergency relief through the CARES Act payroll support program to be paid in installments through July 2020. The relief payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020. Other conditions include prohibitions on share repurchases and dividends through September 30, 2021, continuing essential air service as directed by the U.S. Department of Transportation and certain limitations on executive compensation. The relief payments include $3.8 billion in a grant and $1.6 billion in an unsecured 10-year low interest loan. The loan bears interest at an annual rate of 1.00% for the first five years (through April 2025) and the Secured Overnight Financing Rate ("SOFR") plus 2.00% in the final five years. In return, we agreed to issue to the U.S. Department of the Treasury warrants to acquire over 6.5 million shares of Delta common stock. These warrants have an exercise price of $24.39 per share and a five-year term. The relative fair value of the warrants is recorded within stockholder's equity and as a discount reducing the carrying value of the loan which will be amortized as interest expense in our income statement over the term of the loan. The proceeds of the grant are recorded in cash and cash equivalents when received and will be recognized as contra-expense in CARES Act grant recognition in our income statement over the periods that the funds are intended to compensate, which is expected to be through the end of 2020. In the June 2020 quarter, we received $4.9 billion under the CARES Act payroll support program, which consists of $3.5 billion in a grant and $1.4 billion in an unsecured loan. The remaining amount will be received in July 2020. As of June 30, 2020, we recognized $1.3 billion of the grant as contra-expense with the remaining $2.2 billion recorded as a deferred contra-expense in other accrued liabilities on our balance sheet. We expect to recognize the remainder of the grant proceeds from the CARES Act payroll support program as contra-expense by the end of 2020. See Note 7, "Debt," for further discussion of the unsecured loans and warrants to acquire Delta shares issued under the CARES Act payroll support program. The CARES Act also provides for up to $25 billion in secured loans to the airline industry. We are eligible and have entered into a non-binding letter of intent to the U.S. Department of the Treasury for $4.6 billion under the loan program. We have not decided if we will participate, and we have until September 30, 2020 to decide whether to participate in this program. Finally, the CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. This is expected to provide us with approximately $200 million of additional liquidity during the current year. Sale-Leaseback Transactions In the June 2020 quarter, we entered into $2.8 billion of sale-leaseback transactions for 85 aircraft including 25 A321-200s, 25 A220-100s, 23 CRJ-900s, 10 737-900ERs and two A330-900s. Of these transactions, 74 did not qualify as a sale as they are finance leases or have an option to repurchase at a stated price. The assets associated with these transactions remain on our balance sheet within property and equipment, net and we recorded the related liabilities under the lease. These liabilities are classified within other accrued or other noncurrent liabilities on our balance sheet. These transactions are treated as financing inflows on the Condensed Consolidated Statements of Cash Flows ("cash flows statement"). The other 11 transactions qualified as sales, generating an immaterial loss, and the associated assets were removed from our balance sheet within property and equipment, net and recorded within operating lease right-of-use assets. The liabilities are recorded within current maturities of operating leases and noncurrent operating leases on our balance sheet. These transactions are treated as investing cash inflows on the cash flows statement. |
