Delta Our Top Pick Among U.S. Airlines

No-moat

Delta outlined its objectives over the 2018 to 2020 timeframe. These objectives included 16%-18% operating margins coupled with roughly $8.5 billion in operating cash flow and $4.5 billion to $5 billion in free cash flow. Delta plans to reinvest 50% of its operating cash flow back into the business via re-fleeting and information technology. Complementing this reinvestment, Delta still plans to return at least 70% of free cash flow to shareholders.

The carrier expects to increase operating margins to around 16% in 2018 up from around 15% in 2017. To achieve these higher margins, the carrier needs to keep capacity growth constrained, contain unit costs, and continue to grow PRASM. In 2017, the carrier is only growing capacity 1% and we expect Delta to grow capacity below GDP across most of its regions over the next few years. On the cost side of the equation, the carrier targets unit cost growth of roughly 2% per year excluding fuel. For PRASM, Delta expects to come in at the high end of its 1%-3% second-quarter 2017 guidance, which is not surprising given the PRASM growth achieved in April despite disruptive storms. Over the midterm, the carrier continues to see strength in U.S. business fares, which have shown double-digit growth since bottoming out in 2016.

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