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Delta Airlines Analysis: the strongest player among airlines?

David Boulder
9. 4. 2023
5 min read

Delta Airlines is a well-known superpower in the airline industry. However, they have been hit hard by the pandemic and the airline outage. Can they recover? And how quickly?

Delta Airlines $DAL-0.8% is one of America's largest airlines. It was founded in 1924 and is headquartered in Atlanta, Georgia. Delta operates over 5,500 flights a day to more than 300 destinations in 52 countries on six continents. It has major hubs in Atlanta, Detroit, Los Angeles, New York, Seattle and Salt Lake City.

Delta's fleet consists of over 900 aircraft of various types. The most common models are the Boeing 717, 737, 757 and 767 and the Airbus A320, A330 and A350. Delta SkyMiles is Delta Airlines' frequent flyer program, one of the most widely used airline frequent flyer programs in the world.

Sector

Delta Airlines operates in the passenger airline sector. It is a highly competitive industry that faces a number of challenges:

  • Strong competition - Delta faces stiff competition from other major US airlines such as American Airlines, United Airlines, as well as low-cost carriers such as Southwest and Spirit. This leads to downward pressure on prices and costs.
  • High operating costs - Airline operations are very financially challenging due to the high cost of aircraft, fuel, airport fees and maintenance. This places high demands on efficiency and low costs.
  • Dependence on oil prices - Aviation fuel prices account for a significant part of airline costs. Delta is therefore dependent on the price of crude oil and petroleum derivatives. If oil prices rise, airline profits fall.
  • Economic sensitivity - The airline industry is sensitive to economic cycles. During economic downturns, people travel and spend less, which negatively impacts airline revenues and profits.
  • Regulation - The airline industry is subject to strict safety and other regulations that impose additional costs on airlines. The Civil Aviation Authority (CAA) strictly monitors and penalizes any violations of regulations.
  • Pandemics - As it turns out, disease pandemics can have a profound effect on airlines. Moreover, after the covida one that scared the world and everyone will now remember.

Competition

Delta Airlines' competition mainly includes the other big US airlines (the Big Three):

  • American Airlines - the largest airline in the world by passenger numbers. It operates an extensive network of routes in the US, Canada, the Caribbean and Latin America. Its market capitalisation is around USD 12 billion.
  • United Airlines - the third largest US airline. It flies to more than 360 destinations in over 60 countries. It has a market capitalisation of USD 23 billion.

Dalta's competitors also include:

Low-cost airlines such as Southwest Airlines $LUV-3.8% and Spirit Airlines. These have been successful in pulling in passengers through lower fares.

Overall, it is a very competitive environment. The key to success for airlines is the ability to offer low prices, quality service, an extensive network of connections and customer loyalty. In recent years, the US market has consolidated through mergers (Delta merged with Northwest Airlines, American with US Airways), which has strengthened the big players.

Current situation

DAL reported very impressive results for 2022. As of 12/31/2022, DAL had revenues of $50 billion, surpassing its pre-COVID revenues of $47 billion and growing 69% from the previous year. DAL also reported a huge increase in EBITDA, growing from -$6.0 billion in 2021 to $5.6 billion in 2022.

DAL's EBITDA is turning around. Source

Although the company has significant fixed payments, it has shown that revenues are starting to stabilize and profits are returning, and it should have no trouble servicing its debt.

Covid's tooth is clearly evident

Moreover, DAL is dominating the competition. Looking at a peer analysis, DAL outperforms all competitors on an LTM revenue, EBIT and EBITDA basis.

After the lifting of travel restrictions under the COVID program, people started to travel and use airline tickets again. DAL's recent investor presentation detailed the following chart of long-term trends in air travel. As of 2020, the airline industry is steadily returning to normal, with a return to historical levels of 1.2% of GDP in 2022. Increasing airline revenue to GDP ratios are an indicator that airline stocks are returning to normal.

This metric is incredibly useful in determining future demand associated with the airline industry. Assuming DAL is able to capture the same revenue share as in the past, the increase from 0.8% to 1.2% of GDP indicates strong demand for the airline industry going forward. Given that DAL has been leading the competition in terms of revenue and profitability over the past twelve months, it should have no problem in surpassing the implied growth rate of -12% over the next 5 years.

Overall, Delta stock appears cheap by a number of indicators. The airline trades at just 7x probable future earnings and 6x future EBITDA. The industry average is 17.5x expected future earnings and 11x EBITDA.

This airline is trading at nearly 6x 2024 earnings estimates, which is very cheap. Considering Delta is growing revenue at a double-digit rate. Delta is also very well capitalized today with $6.53 billion in cash and $6.36 billion in operating cash flow.

As with $LUV-3.8% - I'm not looking for a representative in this sector for the portfolio, but Delta appears to be one of the better representatives in this sector - especially because of its strong financial position and outlook.

What about you? Do you have a representative among the airlines? Which one and why?

Disclaimer: This is by no means an investment recommendation. It is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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