DOI: 10.25625/tfvnas
title: DELTA AIR LINES INC

description: Description Delta is the best-in-class airline and has been executing at a very high level. Over the last several quarters, Delta has been able to responsibly manage its capacity, retain the strong travel demand from consumers, and increase its premium exposure. Consumers have shown that they are more willing to spend on experiences than goods, which would support higher spend on travel in the future. DAL can offer nearly 40% upside over the next 12-18 months.   At their most recent investor day, they outlined a plan over the medium term where they can get to a mid-teens operating margin, 10% EPS growth and $3-5B in Free Cash Flow while ultimately strengthening its balance sheet to 1x gross leverage. This should lead to a15%+ ROIC as well. What further underpins the long DAL thesis is that management expects premium revenue to exceed main cabin revenue by 2027, which is driven by greater premium capex (more cabin segmentation), aligning customer value to price and optimizing through technology. One of Delta’s main advantages is its credit card partnership with American Express. Since1991, it has partnered with Amex and has produced co-branded credit cards and most recently extended the partnership until 2029 (early extension). The key strengths of the program are that it contributes to Delta’s industry leading revenue premium, customer loyalty and constant customer engagement, enables retention of premium travelers, extensive network of longstanding partner relationships, offers significant diversity of cash flows with long-term track record of stable and growing performance through cycles and it allows them flexibility to control costs and preserve margins. Below is a chart of how the program works. Delta sells miles to the SkyMiles program and then co-brand and accrual partners then purchase miles from SkyMiles program or there are 3rd party redemptions. Delta has an extensive network of longstanding partner relationships, which further enhances the value and attractiveness of the platform. Additionally, the mix of travelers also gives Delta a tailwind as nearly 2/3rds of the cohort is less than 54 years old creating a likely retentive base of consumers willing to prioritize Delta given the benefits.  best stock websites AI Stock Screener how to invest in SpaceX how to invest in OpenAI warren buffett indicator current yield curve In 2014, the company announced that Amex remuneration to Delta totaled $2.0B with the co-branded credit card representing about 6% of Amex customer card spend and 15% of card loans. Then in 2019, it was announced that Amex remuneration to Delta was $4.1B, up from 21% from 2018 and 116% from 2014. As of 2019, it represented about 8% of Amex customer card spending and 22% of card loans. This year, Amex remuneration should total north of $7B, well on its way to reaching its long-term goal of $10B.  If you try to back into some numbers from the SkyMiles program, using the UAL disclosures, you are able to back into a 35-40% EBITDA margin range. Assuming a similar margin, that would imply that SkyMiles accounted for 22-25% of 2019 EBITDAR. So, including SkyMiles their EBITDAR margin was over 20% in 2019 and excluding SkyMiles it was closer to 17%. Year to date (2024), the EBITDAR margin has been 15.4% and excluding SkyMiles, its likely closer to 12%. So overall it is beneficial for both American Express and Delta to have the co-branded credit cards meaning it is rather unlikely the partnership doesn’t exist in the near-term. Additionally, it further fuels the DAL flywheel with customer loyalty and increased spend. The network carriers have been increasing their premium revenue as a percentage of its total revenue over the last several years. At its last investor day, Delta laid out long-term plans to get premium revenue ~37% and 40% for main cabin with loyalty & other. This would imply that as a percentage of total revenue, main cabin revenue would shrink 16pts from 2014, premium cabin would increase 14pts and loyalty & other would increase 3pts. The main driver is the overall mix of capacity and consumer trends. Post-COVID, consumers are more willing to pay extra for extra legroom, first class/business class or even other programs like Delta One or comfort plus. The chart below shows that over the last 15 quarters, the share of main cabin revenue has been decreasing while premium revenue has been increasing, thus leading to a more margin accretive revenue mix. We are even seeing LCCs now introduce more premium offerings and that is a pretty meaningful tailwind on yield and mix as structural constraints continue with capacity. DAL leads the industry in premium offerings as well. However, we believe that the LCCs and ULCCs adding premium is actually more of a tailwind for the network carriers as the product is much better. After the pandemic, there was a more structural shift to higher spending on experiences rather than goods. While it initially started as revenge spending and pent-up demand immediately following the pandemic, it is now at more normalized levels but still above pre-2019 levels as this increase is likely to last. MS released a consumer survey and for the last four years, travel has been noted as the third highest spending intent category after household staples and groceries. High end consumers noted that travel is their number one priority while GenZ noted it was the third highest priority. More GenZ consumers are renting homes as well (rather than buying) so if you take the three most expensive spending categories out of the equation, there is a fair bit of money you can spend on other things including travel. Capacity has always been a key driver of results for the airlines. Since 2015, the airline industry has averaged +LDD% capacity growth, thus limiting pricing opportunities. Since COVID, there have been numerous supply chain and idiosyncratic issues that have prevented more structurally constrained capacity growth, including supply chain delays, lack of labor, the problems at Boeing, and Airbus being fully booked for the next several years and thus not delivering many aircraft. As a result, capacity growth over the last eight quarters has decelerated materially to +LSD%. The LCCs and ULCCs have also been cutting capacity more aggressively as they are under financial pressure and losing routes and passengers to the network carriers. This is while the network carriers have been adding capacity, although small amounts, to take advantage of the robust travel demand. Below is a chart that helps show the dynamics of the persistent travel demand (green line) while capacity has dramatically declined over the last several quarters. The dynamics discussed above are leading to strong travel trends. Both Boeing and Airbus are fully committed to for the next 3-4+ years meaning there will be limited growth, and all players will be acting responsibly in terms of supply. As a result of this supply and demand imbalance, the airlines, especially DAL, are able to take pricing on different routes leading to increased PRASM. This should not only help drive results, but it should also drive more profitable growth. DAL should be able to continue to benefit from the robust travel demand. I am modeling TRASM moderately above the Street this year with it accelerating vs Street expectations in 2026 and 2027 as increased passenger ticket, cargo and ancillary revenue should continue to grow above expectations. Passenger revenue will be driven by increasing average ticket fares driven by pricing, but also increased premium mix. This should drive +MSD% growth in total revenue (ex-3P refinery). With now +LSD% capacity growth with increases on routes that are more popular including several in LATAM, APAC and Europe.  More importantly, this environment will allow Delta to leverage fixed costs given they can obtain a higher load factor. This is what will lead CASM-ex to only grow slightly each year, equating to RASM&gt;CASM-ex trends and margin expansion. Barring any macroeconomic or geopolitical shocks, salary & benefits (largest cost bucket) should remain relatively lower growth.  Jet Fuel is currently $2.41 and up nearly $0.30 from the end of December. It is something to watch closely, but the sustained demand, continued inflection in corporate travel and strong USD should drive upside to results and mitigate any potential increase in costs due to the rise in oil prices. DAL reported a strong Q1 with beats across all revenue segments with TRASM and PRASM both beating the Street while CASM-ex was in line. Revenue growth was above the high-end of guidance while fuel was in the middle of their guided range. Management spoke to accelerating demand throughout the quarter with four of their top 10 revenue days in history coming during November and December with double digit growth in cash bookings driven by leisure and corporate travelers. All three international geographies improved sequentially with Trans-Atlantic (largest) delivering +6.0% growth in unit revenue marking the strongest improvement of any entity this year. Managed corporate sales were +10% YoY in the quarter with growth led by technology and financial services sectors. Recent corporate surveys also suggest that corporate travel should continue to tick up with 90% of companies expecting their travel volumes to increase sequentially. Furthermore, the CEO noted on CNBC that advanced bookings for 2025 look great, and demand came very nicely across the board after the election. He believes that they can sustain the momentum they have developed into the future. As a result, the company guided FY25 EPS growth of above 10% (above MT plan). 1Q was guided above the Street on topline while the operating margin was guided above the Street at the middle of their range and EPS was also above the Street when looking at the middle of the range, which is probably somewhat conservative to an extent. In 1Q25, I am modeling 4.8% capacity growth as management is currently expecting between 4.5% and 5.0% growth. Given the continued strength in demand, I am modeling PRASM growth of +3.8% ($17.65) vs Street at $17.50 and CASM-ex of +2.8% growth YoY ($14.49), which is inline with the Street. My revenue assumptions for Q1 sit at the high-end of DAL’s guidance of +7-9%, while my operating margin sits at the midpoint of their range of +6-8% (I am modeling 7.2%).  Overall, I currently sit about +4.0% above the Street on EPS ($0.90 vs Street $0.87). I am modeling the forward fuel curve at $2.35 per gallon with the fully loaded fuel per gallon at $2.54. This is something to watch because every $0.05 move in the forward curve of oil equates to about $0.04 in EPS. On a full year basis, that would equate to about $0.18 of EPS change for every $0.05. For the full year, I am modeling PRASM of $18.40 (Street $18.14), CASM-ex $13.81 vs Street at $13.90 and EPS of $7.77 (Street $7.53), which is 26% EPS growth. Additionally, I am modeling FCF of $4.45, which is directionally in line with the company’s guidance of greater than $4B. sp500 pe ratio vti vs itot schd vs dgro ixj vs xlv vwo vs iemg tip vs schp In the March quarter, Trans-Atlantic revenue is expected to lead driven by the extension of the season and good visibility in the spring and summer. Domestic revenue remains robust as capacity continues to come out of the system. LATAM unit revenue is expected to improve sequentially and inflect positively as capacity investments mature while Pacific geography should lead overall growth driven by unit revenues trends improving sequentially and margins being at record levels. The airlines are relatively cheap compared to their history but also are growing EPS +DD% and only trading at a single-digit P/E ratio vs the S&P in the high-teens/low-20s. DAL is currently trading at 7.8x next year’s earnings, which is in the 68th percentile. During the last airline’s upcycle, DAL was trading in the low- to mid-teens on a P/E basis. The relative multiple is currently at 0.39x, which is low when compared to the last upcycle when it traded north of 0.55x relative to the SPX. That equates to a nearly 30%+ discount. I am embedding a 12x P/E multiple, which is below what it was trading at in 2014. This ultimately could prove to be a bit conservative, but one can definitely make the case for them to trade above their longer-term average given the supply/demand imbalance and the fact that airlines, especially DAL, are able to flow through profits and more importantly return more cash to shareholders.