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.

PepsiCo

Markets continued to move higher early Thursday. Delta Air Lines released quarterly financial results that showed an ongoing recovery for air travel.

What Recession? Delta, PepsiCo Pop on Positive Signs.

Delta Air Lines NYSE: DAL surprised the market when it released preliminary results for Q2. The news included a robust outlook for revenue and earnings driven by solid demand for travel.

Delta Takes Flight: Double-Digit Upside In Sight

Delta Air Lines (NYSE:DAL) has increased its full-year profit outlook for the second time in less than a month after surpassing Wall Street estimates with its second-quarter earnings. Delta now expects adjusted earnings of $6 to $7 per share for the year, up from the previous forecast of $5 to $6 per share.

Delta Air Lines raises profit outlook after 2Q earnings beat

Delta Air Lines (DAL) came out with quarterly earnings of $2.68 per share, beating the Zacks Consensus Estimate of $2.42 per share. This compares to earnings of $1.44 per share a year ago.

Delta Air Lines (DAL) Beats Q2 Earnings and Revenue Estimates

Kingston, Ontario--(Newsfile Corp. - July 13, 2023) - Delta Resources Limited  ( TSXV : DLTA ) ( OTC Pink: DTARF ) ( FSE : 6G01 )  ("Delta" or "The Company") is pleased to announce that it continues to further expand the Delta-1 property in Thunder Bay, Ontario by doubling its land position. Following the previously announced acquisitions on September 7, 2022, October 31, 2022, December 13, 2022, February 16, 2023, and May 4, 2023, Delta has now acquired the exclusive rights to an additional four (4) mineral exploration properties covering a total of approximately 4,716 hectares contiguous to its Delta-1 property package.

Delta Doubles Its Land Position at the Delta-1 Property in Thunder Bay, Ontario

Delta triggered an airline stock rally Thursday after topping earnings estimates.

Delta Air Lines Hikes Full-Year Guidance After Earnings Fly 86% In Q2; Airline Stocks Rally

American Airlines

United Continental Hlds

Airlines are enjoying a sharp decline in fuel prices, which will help boost their bottom lines this season.

Airfare is cooling as carriers add service for summer peak period

Shares of Delta Air Lines Inc. surged toward a more-than two-year high Thursday, after the air carrier reported second-quarter profit and revenue that rose above forecast, and boosted its full-year outlook citing continued “robust” travel demand.

Delta Air Lines stock surges to 2-year high after earnings beat, raised outlook

Delta Air Lines on Thursday lifted its full-year profit outlook after its second-quarter earnings topped Wall Street estimates on a relentless post-pandemic travel boom.

Delta Air forecasts stronger earnings on post-pandemic travel boom

The surge in flying shows no signs of slowing, with demand continuing into autumn, CEO Ed Bastian says.

Delta Says Travel Boom Drove Record Revenue

The airline benefitted from strong travel demand and cheaper fuel.

Delta posts record quarterly earnings, hikes outlook on travel boom

Delivered highest quarterly revenue and profitability in Delta's history Strong June quarter operating cash flow enabled accelerated debt reduction Expect record September quarter revenue, mid-teens operating margin and EPS of $2.20 - $2.50 Raising full year EPS outlook to $6 - $7 and reiterating free cash flow guide of $3 billion ATLANTA , July 13, 2023 /PRNewswire/ -- Delta Air Lines (NYSE: DAL) today reported financial results for the June quarter and provided its outlook for the September quarter 2023.  Highlights of the June quarter, including both GAAP and adjusted metrics, are on page five and incorporated here.

Delta Air Lines Announces June Quarter 2023 Financial Results

Driven by upbeat traffic, Delta (DAL) expects impressive passenger revenues in Q2. This is likely to boost the carrier's performance in the to-be-reported quarter.

Delta (DAL) Expects Passenger Revenues to Aid Its Q2 Earnings

JetBlue Airways

Southwest Airlines

Relentless travel demand has sent bookings at U.S. carriers soaring, translating into bumper earnings. However, their shares have not shown the same trajectory as questions linger about the sustainability of consumer spending.

US airline stock valuations stuck on runway despite travel boom

The airline is having a bumper season in the air and in the stock market. The carrier's second-quarter numbers Thursday will reveal just how well the peak travel period is going.

Delta Is Having a Hot Summer. Its Earnings Will Reveal How Long It Can Last.

DraftKings

More Room to Run: 3 Stocks to Buy at 52-Week Highs

Copa Hlds

Spirit Airlines

The airline industry expects demand to soar coming out of the pandemic. What does that mean for airline stocks?

Airline Stocks Are Flying High As Air Travel Demand Increases; Are They A Buy Or A Sell?

Conagra Brands

The earnings season for the June quarter gets rolling this week, with reports for several of the largest U.S.

Earnings Previews: Conagra, Delta Air Lines, PepsiCo

The aviation industry is getting creative regarding reducing its carbon footprint — a sector that contributes between 2% and 3% of all greenhouse gas emissions.

Aviation Sector Buys Into Cutting-Edge Ways To Reduce CO2 Footprint

The IBD airline stocks group has gained more than 49% in 2023, the fifth best increase among 197 industries.

Delta Air Lines Stock Rides 47% YTD Gain Into Q2 Earnings. Why Are Airline Stocks Flying High?

The airline recently upgraded its full-year guidance. Delta's cash flow generation should offset concerns over its debt load.

Up 46%, Is Delta Air Lines Stock a Buy?

GE HealthCare Technologies Inc

Johnson Controls

nVent Electric plc

An exciting new technology in healthcare promises to add growth for this leading healthcare company. People are traveling again, and airlines are flourishing.

4 Top Trends to Invest $1,000 in Right Now

JPMorgan Chase & Co

JPMorgan stock is back near a buy point ahead of the company's Q2 report. Citigroup, Wells Fargo and Delta Air Lines are also set to report.

Earnings Watch: Sellers Hit JPMorgan Stock Ahead Of Q2 Results; DAL Gains Altitude Amid Rosy Fundamentals

Delta (DAL) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Delta Air Lines (DAL) Earnings Expected to Grow: Should You Buy?

Solid travel demand is likely to aid Delta Air Lines' (DAL) second-quarter 2023 results.

News for Delta Air Lines Stock (DAL)