LUV - Delta: Better Travel Outlook Better Stock (Rating Upgrade)

2024-05-20 01:19:40 ET

Summary

• The US travel sector is experiencing a surge in demand, with Delta Air Lines anticipating a surge in passenger numbers and first-class ticket sales.
• DAL has shown strong operational performance and is projected to have strong earnings and free cash flow, supported by increased passenger volumes.
• Despite challenges in the industry, the Company has effectively managed issues such as aircraft delivery delays and higher operational costs, positioning it for sustained growth and profitability.

Investment Thesis

In December, I rated Delta Air Lines ( DAL ) as a hold because of my concerns about their potential pension issues and a perceived downward trend in demand for air travel. At that time, I was worried Delta Air Lines pension fund was too highly exposed to private fund investments and the unfavorable market conditions for private equity was a risk factor that we could not ignore. Together with what looked like an impending softening of domestic travel, I rated the stock as a hold until these concerns could be addressed.

However, despite my previous concerns, the broader US travel sector is now exceeding industry expectations, with multiple reports indicating a record-setting summer travel season. In particular, Delta along with other major carriers anticipate a surge in passenger numbers, especially for first-class tickets. What's more interesting, I think, is that this is not isolated with one airline, but will be felt by the larger industry....

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