Summary
- Delta has established the best cost structure of the major US airlines. The company is now well-positioned to take advantage of several key catalysts.
- Asia should continue to open up, more people will be coming back to work, and infrastructure spending should help boost air traffic capacity.
- Delta has done a better job with labor issues than peers such as United Airlines.
- DAL stock is cheap using a number of metrics.
There are few industries that are more distrusted by investors today than the Airlines industry. Over the last 50 years, the Airlines has dealt with a continual flow of labor issues, volatile energy costs, and near constant bankruptcies. Many Airline companies received government bailouts as recently as 2008 and then against after Covid impacted the US economy, and the travel industry in particular, throughout 2020 and 2021.
Today the Airlines industry is much better ran, and most major Airline companies have strong balance sheets as well. Leaders in this sector are now doing a much better job of managing costs, resolving labor issues, and making sure these companies have adequate liquidity for the inevitable cyclical downturns.
I think the best run US Airline right now is Delta Air Lines ( DAL ).
Delta's stock is up 188% over the last 10 years, the stock has also significantly outperformed peers such as United Airlines ( UAL ) over the last decade.
Delta's stock is up nearly 179% over the last decade, while United Airlines is only up 88.28% during this timeframe.
Delta has been the best run major U.S. Airline for some time, and this company is the best positioned domestic Airline in the United States to take advantage of several significant near-term catalysts.
Delta recently reached a tentative new agreement with pilots and employees while other companies such as United continue to struggle with labor issues, the company's energy costs are lower than peers because of their purchase of an East Coast refinery. Most Asian economies are also opening up more, and domestic travel is likely to accelerate in the back half of this year as growth rates increase and more people return from remote working locations well. Travel restrictions and apprehension about Covid should also ease as we are further removed from the Pandemic.
Delta has industry leading operating margins of 7.63% for several reasons. Delta's margins are strong for many reasons. This Airline has much lower energy costs than most competitors because of the company's decision to purchase a refinery in Pennsylvania in 2012 through Delta's wholly owned subsidiary Monroe Energy. This refiner has enabled the company to see a benefit of 20 cents on the gallon in Jet fuel, and this facility has also acted as a 40-50% hedge on energy costs across Delta's network. This refiner has provided significant benefits to Delta in particular since the energy costs rose significantly after the beginning of the Russia-Ukraine war in early 2021. Delta's margins are far better than peer United Airlines', whose operating margin is 5.71%.
Delta also has reached important new labor agreements with pilots and other labor groups that are likely to be ratified later this year and should set the benchmark for the industry. There are labor shortages throughout the economy, including in the Airline industry, where there is significant demand for pilots. United Airlines recently reported that the company will likely need more than a thousand additional Pilots than are currently available over the next several years. United does not have a contract with many of their pilots right now, and with the significant labor shortage in this field, Delta is smart to lock in contracts now, as the pilots' bargaining power will only likely rise moving forward. United Airlines is also replacing much of their ageing fleet right now, their capital expenditures should be significantly higher than Delta for some time.
Delta is also very well positioned to take advantage of Asian economies beginning to reopen and travel restrictions worldwide likely to continue to be eased. Delta was seeing nearly double digit growth in their flight traffic in Asia in 2019 prior to the pandemic, and the company is well positioned in this region with their joint venture with Korean Air. US-Korean flights have already surpassed pre-pandemic levels in 2019 by 10%. US Airlines are limited in China right now because of sanctions impacting US airplanes ability to fly over Russian airspace, but Delta is still well positioned to take advantage of Asia reopening.
Delta does face some challenges that most other major U.S. airlines do not. The company's refinery business that helped Delta hedge energy costs when fuel prices were rising can be a significant liability when energy prices fall and the margin spreads at the refinery are negative, as they have been in previous years. Delta also has more exposure in Asia than most major US airlines, since the company has a joint venture with Korean Air, so if China and other Asian countries continue to see Covid outbursts, travel restrictions would impact this airline more than most of its competitors. Delta has also chosen not to significantly expand the company's fleet right now, so if interest rates rise significantly in coming years the company's cost to replace or expand their portfolio could be much higher than what the rate would be right now.
Overall, Delta's stock looks cheap using a number of metrics overall. This airline trades at just 7.39x likely forward earnings, and 5.89x forward EBITDA. The industry average is 17.74x expected forward earnings, and 11.27x forward EBITDA. Analysts are expecting Delta to make $5.19 a share in 2023, and $6.91 in 2024. This airline trades at nearly 6x earnings estimates for 2024, which is very cheap. Since Delta is growing revenues at a double digit rates, the company will likely trade long-term at 8-9x earnings even in a more cyclical industry such as the airline sector, that would make this a $55 stock. The pandemic in 2020 and the complete collapse of the financial system in 2008 are likely to be one off events, and Delta is also very well capitalized today with $6.53 billion in cash and $6.36 billion in operating cash flow.
Many investors have had negative experiences investing in the airline industry over the last decade, but past results don't have to repeat themselves. The world will be much better prepared for another possible Pandemic, and a complete collapse of the financial system as we saw in 2008 remains highly unlikely with the banking system much better capitalized and regulated today. Increased infrastructure spending should also increase airport capacity in the United States as well. Delta is the best run company in the US Airline industry, and this industry leader is both cheap and well positioned to take advantage of a number of significant near-term and longer-term catalysts.
For further details see:
Delta Air Lines: Best Of Breed At A Discount