Delta Air Lines, Inc. (NYSE:DAL) has flown mercifully under the radar in comparison to United Continental Holdings Inc (NYSE:UAL), which had to navigate recent public relations debacles that made their way in viral fashion throughout media outlets. Yet for the year-to-date, DAL stock is actually about 1% in the red.
With the spotlight on UAL, however, the market seems to have overlooked the quality and positive business implications of Delta’s earnings.
After a strong March earnings report and a much defter touch dealing with PR matters, Delta is my airline pick at the moment.
Delta Earnings Highlights
Though the remainder of this year will not be without its challenges, Delta’s most recent results indicate that better times are ahead, including forecast margin expansion (17%-19% targeted) in the second half of the year. This will help offset higher costs, namely fuel.
For the first quarter since November 2015, year-over-year Passenger Revenue per Available Seat Mile (PRASM) was positive buoyed by favorable fare and demand trends. Corporate travel demand has also recovered some from the double-digit declines in early 2015.
Overcapacity in international routes continues to plague DAL. Increasing competition in the transatlantic corridor is part of the reason. Delta will probably seek to cull new aircraft supply in response, though management has not yet made any concrete decisions. Latin America was the highlight in the International segment, where revenue per average seat mile (RASM) continues to increase.
Domestic revenue and capacity are growing, and Pacific unit revenue while down year-over-year is up quarter-over-quarter so trending in the right direction. Delta’s RASM commands a 9% premium relative to the rest of the industry. Management maintains that given superior products and service, this is sustainable.
Delta also bought back a hoard of DAL stock and maintained its dividend, which yields a modest 1.7% as of this writing. The $349 million it spent returning cash to shareholders will be well supported by the cash flow spinning off of the lucrative credit card loyalty programs. Bloomberg recently outlined the high margins and dependable cash flow generated by these programs.
Thus far, though, airlines have not been forthcoming on this front. United won’t even disclose Mileage Plus membership numbers.
DAL Stock Is a Cash Cow
In a presentation in March, DAL estimated the partnership with American Express Company (NYSE:AXP) on the co-brand card portfolio (Membership Rewards, Sky Club and Merchant Services) to deliver $300 million of incremental value this year alone and a whopping $4 billion annual contribution by 2021. New card acquisitions have shown strength with double-digit growth.
This represents 7% of American Express’s worldwide billed business based on numbers from last year. So yes, it’s significant.
Given the “addictive nature of miles,” these loyalty programs can also effectively serve as a cushion for airline revenues in economic down cycles. Until airlines increase transparency on exact numbers and give the market more clarity as to the nature of the cash flows, the share price will not reflect the true value of this steady, very profitable stream of income.
This is a very nice balance for what is traditionally a rather lumpy business both on the top and bottom line, subject to the vagaries of commodity prices, global events and individual travel idiosyncrasies.
The fact remains that DAL stock, the most attractively priced of the major U.S. airlines, is definitely heading in a positive direction in terms of keeping an eye on costs, securing debt at favorable rates (first investment grade, unsecured debt issuance completed in almost twenty years), and continuing to generate free cash flow ($17 billion cumulative from the dark days of the late 2000s).
As Delta delivers on its promises on operations, capital allocation, and customer service and the market fully realizes the value of its credit card loyalty program, Delta stock should rise in sync with those developments.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.