Delta Air Lines’ (DAL) stock has soared nearly 400% since 2012, including 140% gains in 2013 and 40% gains year-to-date. Comparatively, the airline industry has returned 45% for 2013 and 25% YTD … so Delta clearly is a standout among its stock peers.
With such a run-up in DAL stock, some investors might think it is too late to get into such a winning play and still make money, but that’s far from the truth.
Even after posting significant results for the first part of the year, the stock still trades at a price-to-earnings ratio of 3.1 compared to industry peers of 10.5.
DAL – Cost Cutting and Expansion
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Similar to other airlines, Delta is in a race to replace its current fleet with new, more fuel-efficient airplanes. Delta is expected to retire 47 planes this year, then up to 90 planes in 2015.
With jet fuel the largest expense for airlines, the new fuel-efficient planes should provide an immediate boost to earnings. The new planes also should translate into lower overall maintenance costs.
In July, Delta’s oil refinery subsidiary struck a deal with energy firm Bridger LLC that will supply 65,000 barrels of crude oil from the Bakken oil fields in North Dakota. This oil costs less than the international crude that the subsidiary has been refining and will account for about a third of the refineries’ total capacity going forward. The oil refinery subsidiary has been a drain on profits, and the new cheaper supply of oil should help improve profit outlooks for the company overall by decreasing total fuel costs. Of course, for the second quarter, Delta reported an average fuel price of $2.93 — below the industry average of $3.08 for the same period.
Delta also is seeking to take out $1 billion in structural cost reductions by increasing productivity and the implementation of new technology to keep nonfuel cost growth to less than 2% per year.
DAL also has been using the increased cash flow generated by improving economic conditions to pay down its long-term debt with non-current liabilities down to $25 billion last quarter from $33 billion at the end of 2012. The resulting interest rate decrease will bolster the bottom line.
Delta continues to expand its presence in the important New York City market by investing in new infrastructure in both LaGuardia and JFK airports. Delta also invested $390 million for a 49% stake in Virgin Atlantic, increasing Delta’s presence at Heathrow in the U.K. These combined investments will give Delta an edge in capturing international business travel to Europe.
In Seattle, Delta has expanded service to Asia to make it Delta’s Asian gateway. The demand for air travel on international Asian routes is growing faster than domestic demand and increased capacity may spur additional demand in the market as well.
DAL Stock – Buying Opportunity
Earlier this month, Delta warned investors that it expects higher fuel prices than initially estimated and pulled back its estimate for passenger unit revenue for the quarter from between 2%-4% to 2%-3%. The expected revenue decline was driven by geopolitical issues — such as the ebola threat, the conflict in Ukraine and the recent volcano eruption in Iceland.
The announcement dropped the stock from a one-month high of $41 to $39, and it trades just above there today. Nonetheless, this minor 5% selloff still has the stock trading above its 50-day simple moving average and offers a nice buying opportunity to get into Delta stock
After all, those recent geopolitical fears should not affect long-term travel trends, so the ability of Delta to generate per-passenger revenue growth, combined with cost savings, should produce higher operating profits and ultimately drive DAL stock higher.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities.
