Delta Delivers Premium Revenue Yields, but There Is No Free In-Flight Lunch

Equity Analyst

Nicolas Owens

Revenue segments as reported by the company.

Passenger

Cargo

Other Revenue

Revenue Segments

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Salaries

Aircraft fuel and related taxes

Regional carriers expense, excluding fuel

Contracted services

Passenger commissions and other selling expenses

Landing fees and other rents

Aircraft maintenance materials and outside repairs

Profit sharing

Passenger service

Ancillary businesses and refinery

Aircraft rent

Other expenses

Restructuring charges

CARES Act grant recognition

Pilot agreement and related expenses

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

Delta Air Lines positions itself as a premium airline, with the highest costs and revenue per seat mile in the North American market. Even in the relatively harmonious 2015-19 period after the airline industry consolidated and fuel costs fell, Delta's industry-leading operating margins declined due to increased fuel, labor, and depreciation expense on almost flat capacity. While we believe Delta will continue to garner premium revenue yields, we see the spread between those yields and its overall costs more closely resembling the industry's in the long term, especially as the levers of segmentation and the definition of a business traveler evolve.

A pillar of full-service airlines' strategy before the pandemic was price discrimination between so-called business and leisure travelers. More-frequent and shorter-stay travelers who booked through their employers' corporate travel agency got bulk discounts for last-minute bookings and premium seats. The pandemic scrambled this formula as travel habits rapidly evolved, and the reality is that business and leisure travelers can be the same person. Airlines must find new ways to attract and reward brand-loyal frequent travelers willing to pay up for a more comfortable travel experience.

Our outlook for U.S. airlines is quite rosy in the near term, but these companies are acutely governed by the laws of gravity and economics. As travel restrictions lifted in 2022, demand rebounded more quickly than airlines' capacity to meet it, constrained by shortages of planes, pilots, and other crew. As a result, airlines have recorded record revenue and profits. These conditions function as a boon to the whole industry, and we believe they will take until at least 2024 to even out. When they do, we forecast a return to more normalized operating conditions, which will erode airline profitability. When airplanes and personnel are no longer a constraint, we expect the incremental incentives that airlines constantly operate under to return to the fore, leading to competition over prices and market share anywhere their route maps overlap, which is almost everywhere.

Business Strategy & Outlook

Airlines rent out seats by the hour on aircraft designed to fly for decades, and their operations and financial results are subject to fluctuations beyond their control, including ticket prices, fuel costs, labor costs, weather, and seasonal variation in people's travel plans. The airline business is highly price-competitive, capital-intensive, and labor-intensive, all of which makes it difficult for an airline to generate any profit beyond its cost of capital. IATA, an industry group, estimated in 2018 that return on invested capital had only approached the industry's cost of capital once in the preceding two decades, never exceeding it. Our own modeling reflects the same reality. We conclude that Delta Air Lines does not have an economic moat.

What's more, the industry has been pummeled by three of the most severe global macroeconomic events of the last two decades: the terrorist attacks on Sept. 11, 2001, two global pandemics (SARS and SARS-Cov-2), and the great recession of 2007-08. In each case air carriers experienced drastic and systemic disruptions to their operations, staffing, and financial viability, including bankruptcies and increased leverage. Similar macroeconomic events are likely to recur in the foreseeable future, and investors in airlines would risk permanent capital loss in such a situation.

Airlines hire and train thousands of people with specialized skills, including ground crews, technicians, and air crews. They tend to plan their routes from a few months to a year in advance, and we observe that their costs for salaries, wages, and benefits usually total between one fourth and one third of revenue and tend to grow in tandem with their overall route capacity (measured as available seat miles, or ASMs). In the short term, these costs are fixed, even though they flex with capacity in the medium and longer term. Embedded in the cost of doing business as an airline, and exacerbating the challenge of staffing, is the strong seasonality of travel—over the last 20 years, U.S. carriers have collectively faced a 30% January-to-June spike in monthly demand (or you could see that as a 23% June-to-January slump), measured as aggregate monthly revenue passenger miles. International demand is more volatile and brings extra competition from non-U.S. carriers.

The most volatile expense an airline experiences is for fuel. Although the amount of fuel required to power a given aircraft on its daily routes is known to the gallon (or by weight at takeoff), the price the airline will have to pay for a gallon can vary widely over a year, seasonally, and even regionally. Airlines were paying more than $3 per gallon of jet fuel (kerosene) in 2011, and fuel prices spiked in the 2022 aftermath of postpandemic supply shortages as well as macroeconomic stress on the energy market caused by Russia's invasion of Ukraine. From 2011 to 2015, jet fuel prices stayed over $2 per gallon, and airline industry ticket prices (termed yield and measured as cents per passenger mile) approached 25 cents in the period. When jet fuel prices fell in 2016, airline yields did, too. The most important point about fuel prices is that each airline experiences them more or less the same way—they are a commodity. And airlines have shown they can pass this element of their costs on to customers by charging more per mile when fuel prices are high. Over the long term, airline CPI, a measure of inflation, has been remarkably stable, notwithstanding a bit of a bump in 2022-23, which reflects the spike in fuel prices and which we do not believe will persist as competition heats up again.

The most costly competition airlines engage in is for aircraft. Every handful of years, Boeing and Airbus offer new models of aircraft that can fly a bit farther or carry a few more passengers on almost the same amount of fuel. We observe a steady increase in the available seat miles per gallon consumed across all airlines, as they consistently upgrade their fleets. The major U.S. carriers—Delta, United, and American—were able to fly an average airplane seat about 60 miles on a gallon of fuel in 2012 and are approaching 70 ASMs per gallon in 2023; Southwest, which flies only variants of the narrowbody 737, went from 70 ASMs per gallon a decade ago to approaching 80 in 2023. While this trend reflects ongoing improvements in engine efficiency, wing, and fuselage design, it also represents a competitive ratchet that no airline can afford to ignore—multiplied over many hundreds of millions of seat miles per year, even a small difference in fleet efficiency would represent a structural disadvantage for an airline competing on the same routes. Thus, airlines constantly refresh their fleets to stay competitive. (New seats, bigger luggage trays, and the like are a side benefit of new planes that also may augment an airline's brand perception for a short time.) 

Major U.S. carriers have partnered with a credit card-issuing bank to promote loyalty programs that feature their frequent-flyer miles. For some, these programs, in which the bank pays the airline more for the miles up front than they are technically worth to redeem, represent the lion's share of ongoing operating profit. We do not see these programs as changing the competitive dynamic or structural profitability of the airline. The airlines have just time-shifted when they experience the profit of serving one of their most loyal customer segments, in many cases redeeming miles for services such as baggage allowance, priority boarding, and lounge access, that cost incrementally very little to provide over and above the actual cost of the flight.

Airlines provide invaluable service to their customers and communities, often stimulating the economies of those destinations they connect into the global travel network. However, investors in airlines are flying on a wing and a prayer, as we see no prospect for durable economic profit in this industry. Instead, Airbus and Boeing, the duopoly of airframe suppliers, reap the economic reward from providing successively more efficient, powerful aircraft, which airlines line up to buy or rent so their service and cost profile can keep up with competing carriers.

None

Economic Moat

Delta Air Lines

Delta Air Lines, Inc. engages in the provision of scheduled air transportation for passengers and cargo. It operates through the Airline and Refinery segments. The Airline segment provides scheduled air transportation for passengers and cargo. The Refinery segment consists of jet fuel and non-jet fuel products. The company was founded by Collett Everman Woolman in 1928 and is headquartered in Atlanta, GA.

Earnings data Q4 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Delta Air Lines, Inc. engages in the provision of scheduled air transportation for passengers and cargo. It operates through the Airline and Refinery segments. The Airline segment provides scheduled air transportation for passengers and cargo. The Refinery segment provides jet fuel to the airline segment. The company was founded by Collett Everman Woolman in 1928 and is headquartered in Atlanta, GA.

Wheels Up Experience

Wheels Up Experience said on Wednesday there was "substantial doubt" about its ability to continue operations, even as it received short-term funding from Delta Air Lines.

Jet charter firm Wheels Up says Delta funding may not be enough

CAESAREA, Israel--(BUSINESS WIRE)--Delta Galil Industries, Ltd. today reported financial results for the second quarter and first half ended June 30, 2023.

Delta Galil Reports Second Quarter 2023 Results

Copa Hlds

United Continental Hlds

Consumer spending is changing as the economy recovers and travel restrictions ease, making it easier for them to indulge their impulses to travel. This phenomenon has pushed travel and airline stocks higher.

The 3 Airline Stocks Set to Soar Highest This Summer

A leader of the Delta chapter of the Air Line Pilots Association is opposing his powerful union and backing an increase in the pilot retirement age to 67.

This Delta Pilot Leader Says His Union Has It Wrong On Age 65

Airbnb

Norwegian Cruise Line

Investors should have been looking at travel stocks to buy over the last few months, given the move we've seen in this group. Whether there's a recession coming or not, consumers don't seem to be worried.

3 Travel Stocks Worth Packing in Your Portfolio Right Now

CPI data indicates lower airfare pricing, potentially due to slowing future travel demand. Spending trends, including in the airline industry, are seeing signs of moderation. Oil prices are on the rise with an expectation for this trend to continue into the end of 2023 creating a macroeconomic headwind.

Delta Air Lines: Headwinds Are Taking Shape (Rating Downgrade)

WAPPINGERS FALLS, N.Y.--(BUSINESS WIRE)-- #education--While Michigan test scores declined sharply during the pandemic, the new MI Kids Back on Track program is working to tackle unfinished learning by providing $150 million for individualized tutoring and academic support. To help Michigan schools and districts get students on track in math, Littera Education has partnered with Ottawa Area Intermediate School District (ISD), the developers of the Delta Math RtI Program, to integrate the evidence-based Respo.

Littera Education Now Offers the Delta Math RtI Program to Help Michigan Students Complete Unfinished Learning in Math

Kingston, Ontario--(Newsfile Corp. - July 31, 2023) - Delta Resources Limited ( TSXV : DLTA ) ( OTC Pink: DTARF ) ( FSE : 6G01 ) ("Delta" or "The Company") is pleased to announce the appointment of Justin Reid to its Board of Directors. Mr. Reid is a geologist and capital markets executive with over 25 years of experience focused exclusively on the mineral resource space.

Delta Appoints Justin Reid to Its Board of Directors

Arcos Dorados Hlds

Navigator Hlds

Veritiv

Here we present four top-ranked stocks, ARCO, NVGS, VRTV and DAL, with solid net profit margins that can contribute toward making a strong portfolio.

4 Solid Net Profit Margin Stocks to Boost Portfolio Returns

Cisco Systems

QUALCOMM

The Conference Board recently reported that American consumer confidence improved again in July, reaching its highest level in two years despite economist concerns about rising inflation. Specifically, the business organization's consumer confidence index was at 110.1 in June and now is at 117.

3 Stocks to Buy that Wall Street Won't Stop Upgrading

American Airlines

Airline stocks have rallied collectively around 47% in 2023. But fuel prices, capacity issues and employee challenges threaten the trend.

Are Highflying Airline Stocks Headed Into Turbulence?

Southwest Airlines

We're in the thick of earnings season, with an extensive list of companies scheduled to unveil quarterly results in the coming weeks.

Should Investors Buy Southwest Airlines Shares Ahead of Earnings?

The average of price targets set by Wall Street analysts indicates a potential upside of 27.6% in Delta (DAL). While the effectiveness of this highly sought-after metric is questionable, the positive trend in earnings estimate revisions might translate into an upside in the stock.

Wall Street Analysts Believe Delta (DAL) Could Rally 27.55%: Here's is How to Trade

Axcelis Technologies

Carnival

Extreme Networks

Alphabet

Green Brick Partners

M/I Homes

Sterling Construction

The first half of 2023 marked a turnaround in the markets, with a tech rally and the S&P 500 logging a total return of +16%, despite signs of recession. Major indices hit session highs, and I am bullish on ten stocks for the second half of 2023. Outperforming the S&P 500, which is +18% YTD, my Top 10 picks overall portfolio that kicked off the year is +39%.

Top 10 Stocks For H2 2023

Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

Is Delta Air Lines (DAL) Stock Undervalued Right Now?

PepsiCo

We also take a look at a memo from legendary investor Howard Marks.

Airline Travel and Snacks Are on Investors' Radar as Delta and PepsiCo Report

Recent airlines earnings announcements paint an encouraging picture of the sector this year.

What to Make of Airlines Earnings So Far

U.S. Transportation Secretary Pete Buttigieg said the department is investigating why Delta Air Lines passengers remained on board a plane at the Las Vegas airport that sat on the tarmac in extreme heat on Monday, citing reports that the plane sat there for four hours.

US investigating why Delta passengers remained on plane in extreme heat -Buttigieg

Airlines' cargo businesses were lifelines during the pandemic when travel demand dried up.

Airline cargo revenue is cratering. Here's why that's actually good news

Delta's revenue is growing 13% year over year at the moment. Margins are expanding due to lower fuel prices and more credit card revenue.

Are Investors Underestimating Delta Air Lines?

Allegiant Travel Company

Royal Caribbean Cruises

SkyWest

Controladora Vuela Cia de Aviacion SAB de CV

Travelers tired of being cooped up during the pandemic are hitting the road with a vengeance. And you can cash in on this "revenge travel.

Nine Stocks Let You Cash In On Obscene Flight And Hotel Prices

United Airlines and Delta Air Lines have posted record earnings, beating analysts' expectations, with American Airlines expected to follow suit. As the demand for air travel increases, this earnings season saw top-performing airline stocks post significant year-over-year growth and robust quant-rated fundamentals. Despite risks and the cyclical nature of the airline industry, analysts anticipate it to continue its strong performance due to healthy travel demand.

Top Airline Stocks To Buy In 2023

MGM Resorts

Travel is rebounding across the U.S. After two difficult years during the Covid-19 crisis, record air travel was predicted during the recent Fourth of July weekend.In fact, hotel occupancy rates are back near or above pre-pandemic levels. This is great news for travel stocks that were previously decimated a few short years ago.

The 3 Most Undervalued Travel Stocks to Buy Now: July 2023

Earnings season shifts into a higher gear this week, with a full slate of companies scheduled to unveil quarterly results. It'll be a mighty important period, especially following the incredible first half for the market.

Previewing Airline Earnings: Time to Buy?

American Airlines Group Inc. and United Airlines Holdings Inc. are scheduled to report second-quarter earnings this week — United after the bell on Wednesday and American before the bell on Thursday.

News for Delta Air Lines Stock (DAL)