A Surprising Airline Stock Still Not Ready to Soar

Does optimism pay? Sure, especially when pessimism is riding high.

Two years ago, Delta Air Lines (NYSE: DAL  ) was a one-star stock in our Motley Fool CAPS database. Few believed the carrier would turn itself around; most believed another bankruptcy filing was inevitable. Today, these skeptics aren't exactly eating crow -- Delta shares have lagged the market -- but they have to be getting nervous.

This week, the carrier reported a 14% increase in revenue and reversed last year's losses, posting $0.19 in earnings per share for the December quarter. That's both good and bad news. While a profit definitely beats a loss, analysts were expecting $0.24 per share in profit.

Yet there's definite reason for optimism. Passenger revenue per available seat mile (PRASM) rose 9%, while total operating cost per seat mile (CASM) rose 2%. (Here's the skinny on airline operating metrics.) The implication? Management is finding leverage in the business model, which should continue to yield profits over time. Increased efficiency has also manifested in big gains in returns on capital, which soared from 0.3% in 2009 to 9.9% over the past year.

Not that the bears have learned anything. Shares of Delta are down more than 8% over the past week and more than 1% today. Investors don't believe there's much upside from current levels, apparently. Expectations for higher fuel prices appear to be dampening enthusiasm for the stock. Management's cautious optimism could also be taking a toll.

"Industrywide fare increases, combined with growth in Delta's ancillary products and services, will provide a more long-term, revenue-based solution to addressing the high fuel environment," said Ed Bastian, Delta's president, in a press release.

Here, "ancillary products and services" probably refers to baggage and other service fees as much as in-cabin premium food and entertainment sales. But add-ons can only do much. Cost-cutting will remain important for the foreseeable future. For example, in a call with analysts, CEO Richard Anderson expressed interest in new, more efficient engine technology from Airbus and Bombardier.

"A 20% [improvement in] fuel efficiency at $95 a barrel for fuel is a very important development," Anderson said, raising questions about the company's commitment to Boeing (NYSE: BA  ) if it fails to boost fuel economy in its lineup.

Delta is also joining AMR (NYSE: AMR  ) in getting aggressive about controlling its costs for distributing tickets, which Anderson said equals about $400 million a year when you factor in payments to online travel agencies such as Orbitz Worldwide (NYSE: OWW  ) and Expedia (Nasdaq: EXPE  ) .

Add it up, and you've got an airline trying to convince investors that it's capable of outmaneuvering the economic forces conspiring to drive fuel prices higher. Should you buy it? History says no, and I'm not one to argue.

Now it's your turn to weigh in. Would you bet on the carriers or the travel agents in this fight? Use the comments section below to explain your thinking. You can also rate Delta Air Lines in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Delta Air Lines, AMR, Boeing, Expedia, or Orbitz Worldwide to your watchlist.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has neither given nor received a nice Hawaiian Punch.


Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2011, at 9:22 PM, TMFMileHigh wrote:

    @longtheworld4,

    Sorry, but that's spam. Legit comments welcome -- repeating the same comment over and over in the hopes of attracting links isn't.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 19, 2011, at 10:06 PM, B757blaine wrote:

    Look, the company just reported a 1.4 Billion dollar profit for 2010. That's with a "B". Remember, American airlines lost almost a half-a-billion last year and the new United/Continental still has a lot of work to do making their merger a success...As far as Delta is concerned, they are on the right track and moving smartly up the revenue charts. After completing the Northwest merger (one of the most successful in any industry), Delta has nowhere to go but up. Watch this stock go for the upper teens by the end of the year. This year's profit stands to be even higher than last. JMHO....

  • Report this Comment On January 20, 2011, at 1:56 AM, jaketen2001 wrote:

    Its great that there is 20% greater efficiency in fuel consumption...........it can help soak up some of the 20% increase in fuel costs coming this year.

  • Report this Comment On January 20, 2011, at 9:32 AM, mnbear56 wrote:

    In all the talk about the stability of Delta Airlines and it's value, I haven't seen anything mentioned concerning their Technical Operations department headed by Tony Sharaf. This is virtually a separate company under Delta, and seems to be increasing profits every day. Delta Tech Ops is taking maintenance contracts from other airlines around the world, even contracts from the U.S. government (Air Force Two and Air Force Three among them). Delta recently won approval from the FAA to do more contract work at it's maintenance facilities in Minneapolis/St. Paul, and they expect the additional profit to reach $1 billion by 2013. I am not a big fan of Delta, but this seems to be a smart move, and I am all in favor of bringing more work of this kind back to the U.S. I believe this "ancillary product and service" is more important and profitable than baggage fees.

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