Delta Air Lines Is Poised to Soar (DAL)

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Confident consumers, robust job generation, plummeting energy costs and a resurgence in passenger demand are providing major tailwinds for air carriers especially Delta Air Lines (DAL).

DELTA AIR LINES LOGOAs the world’s second-largest airline, Delta Air Lines commands a burgeoning domestic and international presence.

DAL stock is on a flight path for growth, as global economic recovery propels ticket sales, especially in developing countries where newly ascendant middle class consumers are increasingly eager to travel.

Delta is opening new routes in the United States and expanding overseas, all while keeping a tight lid on costs. Delta Air Lines even went to the extraordinary length of buying its own oil refinery to give it greater control of fuel costs.

The cost of fuel is onerous for air carriers — their second-greatest expense, after labor. But the plummeting price of oil has put more money into travelers’ pockets and slashed operating costs for airlines. The price of oil is now 50% off its mid-summer highs and hovers at around $50 per barrel, a huge bonanza for DAL stock that should continue paying off in 2015.

According to a recent report from the International Air Transport Association (IATA), falling oil prices should dampen average airfares by 5% in 2015. IATA also estimates that the world’s airlines will post a collective net profit of $19.9 billion in 2014 and $25 billion in 2015.

Delta is plowing the money that it’s saving on fuel to make substantial purchases of next-generation aircraft capable of long-haul routes. These aircraft feature durable, lightweight carbon composite structures that burn less fuel and require less maintenance, repair and overhaul. This expanded fleet of advanced, highly efficient planes will result in more international flights in 2015, which confer higher margins than domestic routes.

Delta also is expanding its partnerships with key regional operators. Notably, Indianapolis-based Republic Airways Holdings Inc. (RJET) reached an agreement with Delta in December to operate nine additional 69-seat aircraft as “feeders” into Delta’s major U.S. routes.

Regional airlines took the Great Recession of 2008-2009 on the chin, with scores of carriers filing for bankruptcy. However, economic recovery is lifting the fortunes of this once-struggling sector, and Delta-partner Republic Airways is enjoying robust health.

DAL Stock: Fueled for Takeoff

Nonetheless, falling oil prices presented Delta Air Lines with a paradox in the most recent quarter. Delta saved $2 billion in fuel costs overall in 2014, but today the company reported a loss in the fourth quarter of 2014 because the sharp and unexpected plunge in the price of oil forced it to write down the value of its fuel-hedging contracts.

Major airlines typically lock into complex fuel contracts to limit their exposure to volatile fuel costs. Almost no one foresaw the precipitous drop in oil prices over the last six months, including Delta.

After taking $1.4 billion in special charges that mostly stemmed from fuel hedging losses, Delta’s fourth-quarter loss came to $712 million. However, excluding those charges, Delta racked up earnings in the quarter of $649 million, or earnings per share (EPS) of 78 cents, exceeding Wall Street’s expectations for EPS of 77 cents.

Operating revenue in the fourth quarter came in at $571 million, a year-over-year increase of 6%. Traffic in the quarter increased 4% compared to the same quarter a year ago.

For full year 2014, Delta’s pre-tax income, excluding special items, was $4.5 billion, a year-over-year increase of $1.9 billion. Delta’s net income for the year was $2.8 billion with an operating margin of 13.1%, excluding special items.

With the fuel hedging losses behind it, Delta Air Lines is now poised for an exceptional year — and DAL stock is a bargain. Sporting a trailing-12-month price-to-earnings (P/E) ratio of 4.1, DAL stock is cheap in comparison to the average P/E of 11.2 for the sector of major airlines.

Boasting a lean cost structure, a continuing windfall in the form of low fuel costs, and rising passenger demand amid economic expansion, Delta Airlines is a solid recovery play that should fly high in 2015 regardless of any future market turbulence. Grab a seat on this growth ride while it’s still a bargain.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/delta-airlines-dal-stock/.

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