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Delta Air Lines, Inc. (DAL) Stock Isn’t Loud, It’s Just Good

Buffett's bullishness on airlines and Delta's operational successes should have investors piling into DAL stock

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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.

Put Delta Air Lines, Inc. (DAL) Stock on Your Radar
Source: via Delta

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.

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