The airline industry and its stocks, like Delta Air Lines, Inc. (NYSE:DAL), has gone through a very bumpy history, one that has been very cyclical, and one that I fear is going to suck in a lot of investors into making some bad decisions.
The major airlines went through a multi-year consolidation phase. That’s because running an airline is extremely difficult. Not only is it capital-intensive, it’s essentially a commodity. The airlines have to distinguish themselves by offering differences in experience, and in service.
In most cases, that means distinguishing between awful experience in service and just plain bad experience in service. The one exception to this seems to always been Southwest Airlines (NYSE:LUV).
The Least Miserable Way to Fly
At the end of the day, though, it’s a matter of the least miserable way to fly. Up until a few years ago, savvy travelers were offered ways that might make a material difference in their experience. For example, if you knew what you were doing, you could earn miles on your favorite airline, and then redeem them by purchasing an economy coach ticket and upgrading to a fancy business class seat for a transcontinental flight. That’s something I did on American Airlines (NYSE:AAL) for many many years.
Then, the airlines finally got smart. They started figuring out ways to squeeze more revenue out of consumers. The 25,000-mile economy-to-coach upgrade on American, round-trip no less, soon became 30,000 miles. Then it became 35,000 miles. Then they started adding co-pays of $75 each way. And so on.
Elite flyer status became easier and easier to get. The benefits of being an elite flyer, such as priority boarding, were effectively taken away by allowing individuals who had the airlines-branded credit card many of the same benefits.
How Delta Air Lines Is Different
Delta Air Lines and DAL stock have benefited from a slightly more prudent strategy towards enhancing revenue. In the company’s most recent earnings report, we learned that passenger revenue grew 7% or $525 million. Delta is also focusing more on its business travelers and catering more to them, resulting in the fastest pace of revenue growth for business travelers since 2014.
But DAL stock is also benefited from Delta’s focus on improving cargo revenue. For the first time in almost 6 years, the last quarter delivered a revenue increase for this division.
It’s always difficult to tell whether an airlines domestic revenue premium, which is 118% of industry average for DAL stock, is the result of having less competition on major routes or because people are willing to pay more for the Delta experience. I tend to believe the former. Nevertheless, it is a premium. And that’s been very good for DAL stock.
Some of this may also be the result of having more success with its Comfort Plus product and up-selling people to first class.
Bottom Line on DAL Stock
Nevertheless, one can’t get too enthusiastic. Net income for DAL stock was $4.5 billion in 2015, but only $3.58 billion in 2017. Operational cash flow for DAL stock fell from $7.93 billion to $5.1 billion. Free cash flow fell from $5 billion to $1.25 billion.
While Delta stock has tripled over the past five years, I remain wary of airline stocks in general. They’re just too many variables at play, including oil prices, even if you reduce the impact using hedges. The slightest bad news can cause any individual airline to lose a lot of business.
Airlines are too unpredictable in general for a long-term investment, but speculators and traders may find Delta shares to be of interest.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
