Hurricanes Harvey, Irma and future storms have put the airline industry through a period of turmoil, but one relative winner during these storms has been Delta Air Lines, Inc. (NYSE:DAL).
Airlines hubs such as Houston, Miami, Tampa, and Orlando faced disruptions recently. And customers in and out of the hurricane zones faced delays and cancellations. But with its market positioning and a strengthening financial outlook, DAL stock is in a fortuitous position to build a Delta competitive advantage that benefits customers and investors alike.
Delta Air Lines, along with its oldest competitors United Continental Holdings, Inc. (NYSE:UAL) and American Airlines Group (NYSE:AAL), has faced numerous challenges. Increased competition from Southwest Airlines Co. (NYSE:LUV) and numerous upstart competitors forced price and service cutbacks. Customer service complaints and a bankruptcy filing in 2005 have also served to weaken Delta’s image.
But while the bankruptcy is long behind them, customer service issues plagued the carrier as late as this year. In April, the airline removed a family from a Delta flight after refusing to give up a toddler seat. In July, political commentator Ann Coulter scathed Delta over a seat assignment.
Despite complaints, the hurricanes have served as an opportunity to rebuild the airline’s image. Delta gained some positive notoriety as one of its planes flew in, and out of the airport in San Juan. This occurred as the outer rings of Hurricane Irma were bearing down on Puerto Rico. Delta’s other competitors were unable to land in the area.
Delta Air Lines also capped fares out of the hurricane zone at $399 as some competitors faced allegations of price gouging. The airline also waived change fees and offered partial refunds for flights affected by Irma.It has kept the policies in place for flights affected by hurricanes Jose and Maria.
Finally, Delta avoided some financial issues simply by the good fortune of having hubs outside of the hurricane zone. United saw its hub in Houston shut down for days at an estimated cost of $265 million. American had to temporarily shutter operations at its Miami hub. Conversely, Irma affected Delta’s Atlanta hub minimally. Hence, the storms have only affected relatively few Delta flights.
Delta Stock is Flying High
Moreover, DAL stock remains inexpensive from a valuation perspective. In an industry where the average price to earnings (PE) ratio is approximately 10, Delta Air Lines trades at about 9.5 times earnings. While close to the average, Delta still compares favorably to Southwest’s approximate 17 PE ratio. This PE is also favorable considering DAL experienced a large increase from 2013-2016. The stock rose from a low of $8.42 in September 2012 to the high $40s today.
Additionally, having fallen about 12% from its 52-week high, this reduction in value creates a buying opportunity. The case for DAL is also helped by its dividends, both in yield and growth. Delta’s dividend yield is about 2.5%. The dividend rose every year since its 2013 inception and today stands at $1.22 per share, up from 66 cents per share in 2016.
The reaction of Delta Air Lines to a challenging hurricane season and improving financial metrics has served to make DAL a compelling investment. Its friendly treatment of customers affected by Harvey, Irma, and now Maria have countered negative publicity in the customer service arena. Also, having its hubs outside of the hurricane zones served to minimize cancellations and disruption of services compared with its competitors. Despite these locational advantages and a large increase in the stock’s price since 2013, DAL remains attractively valued.
With its improving image, strong price appreciation, dividend growth, and favorable valuation, airline industry investors should consider DAL.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.
