Company Reports

Delta Air Lines reported first-quarter financial results very close to our forecast and indicated it expects another record summer travel season this year. The airline is operating at similar capacity levels to 2019, with 10% more staff and nearly 3.5 cents more in structural unit costs. Management previously reined in its expectations for 2024 capacity growth and said the company will shift focus to “optimizing” the routes and fares it operates, meaning it will look to increase their profitability over time. While we expect no-moat Delta will likely persist in its ability to book higher revenues per seat than the industry average, we expect a more competitive environment in the medium term as capacity eventually laps 2019 levels and consumer spending normalizes.

Delta Air Lines positions itself as a premium airline, with the highest revenue and costs 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.

Delta reported final 2023 earnings and provided 2024 expectations that support our thesis that the airline industry is not returning to its pre-COVID-19 "goldilocks" era. The airline is operating at similar capacity levels to 2019, with 10% more staff and nearly 3.5 cents more in structural unit costs. Management reined in its expectations for 2024 capacity growth and said the company will shift focus to “optimizing” the routes and fares it operates, meaning it will look to increase their profitability.

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.

We've lowered our fair value estimate for no-moat Delta Air Lines to $40 per share from $41 to reflect incremental increases in the carrier's persistent operating costs and slightly higher average fuel costs in the near term than we previously anticipated.

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.

For the time being we are leaving our $41 fair value estimate of no-moat Delta Air Lines unchanged, but we will continue to evaluate potential impacts on the airline of the engine recall announced by Pratt & Whitney parent company RTX on Sept. 11. Delta operates approximately 100 airplanes powered by the recalled PW1100 engines, a mix of A220 and A320neos, the largest such fleet in North America (American Airlines flies more Airbus planes, but these have different engines). Delta's overall fleet numbers almost 1,000 planes.

Delta's second-quarter results mostly met our robust near-term expectations, with record revenue and profit and higher-than-expected load factors. Our fair value estimate remains at $41 per share.

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.

We've taken a fresh look at North American airlines and instituted an industry-based demand model for air travel, capacity, and revenue. As a result, we have lowered our fair value estimate for no-moat Delta Air Lines to $41 per share from $60. We also reduced Delta's capital allocation rating from exemplary to standard to account for the limited potential of any of its internal investments to create durable economic returns.

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 yield, we see the spread between those yields and its overall costs more closely resembling the industry in the long term, especially as the levers of segmentation and the definition of a "business traveler" evolve.

No-moat Delta reported passenger revenue 50% higher than the first quarter of 2019 on flight capacity essentially flat from that year (98.3%). However, the company's (and the industry's) operating costs have also swelled in the last three years, which suppressed profits in the quarter and disappointed investors who were expecting higher per-share earnings. We do not plan to change our $60 fair value estimate, and while we note that Delta's shares are undervalued, we don't believe the extraordinary tailwinds it is experiencing will persist indefinitely.

We believe Delta Air Lines is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business.

We believe Delta Air Lines is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business.

After reviewing Delta's fourth-quarter and full-year 2022 results, we don't expect to materially change our $60 per share fair value estimate. That said, we'll revisit our modeling assumptions after Delta's 10-K is filed. Delta's full-year 2022 revenue of $50.6 billion and $3.7 billion in operating profits came in a touch higher than we had anticipated, though Delta (along with other airlines) has seen fuel costs soar to double the running rate of several years ago, and there's also been an uptick in costs to hire, train, and retain flight crew personnel.

We believe Delta Air Lines is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business.

We’ve maintained our $57 per share fair value estimate for shares of Delta Air Lines following the firm’s third-quarter earnings release. It was a strong quarter for the no-moat-rated airline with total revenue of nearly $14 billion (approximately 11% higher than third-quarter 2019) and an 11.6% adjusted operating margin (the firm’s second consecutive quarter with a double-digit operating margin). Delta achieved these results despite less capacity and much higher fuel prices compared with the third quarter of 2019 (available seat miles were 17% lower and average fuel price per gallon was a whopping 80% higher).

We believe Delta is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business after the pandemic.

We believe Delta is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business after the pandemic.

We believe Delta is the highest-quality legacy carrier because it has been able to attract high-yielding business travelers through its product segmentation and credit card partnerships, primarily with American Express. Delta’s five-cabin segmentation strategy allows high-spending travelers to purchase premium options when they are able to. Frequently, business travelers use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. American Express pays top dollar for the miles given to these business travelers, as Delta-cobranded cards alone account for about a fifth of American Express’ loan book. We’re confident that Delta can continue expanding this higher-margin business after the pandemic.