Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Does Delta Air Lines Boost Its Returns?

As investors, we need to understand how our companies truly make their money. A neat trick developed for just that purpose -- the DuPont formula -- can help us do so.

So in this series we let the DuPont do the work. Let's see what the formula can tell us about Delta Air Lines (NYSE: DAL  ) and a few of its peers.

The DuPont formula can give you a better grasp on exactly where your company is producing its profit, and where it might have a competitive advantage. Named after the company where it was pioneered, the formula breaks down return on equity into three components:

Return on equity = net margin x asset turnover x leverage ratio

What makes each of these components important?

  • High net margins show that a company can get customers to pay more for its products. Luxury-goods companies provide a great example here.
  • High asset turnover indicates that a company needs to invest less of its capital, since it uses its assets more efficiently to generate sales. Service industries, for instance, often lack big capital investments.
  • Finally, the leverage ratio shows how much the company is relying on liabilities to create its profits.

Generally, the higher these numbers, the better. That said, too much debt can sink a company, so beware of companies with very high leverage ratios.

So what does DuPont say about these four companies?


Return on Equity

Net Margin

Asset Turnover

Leverage Ratio

Delta Air Lines NM 2.4% 0.81 (173.72)
Southwest Airlines 2.7% 1.1% 0.93 2.56
United Continental Holdings 47.6% 2.3% 0.95 21.96
Alaska Air Group 21.5% 5.7% 0.85 4.48

Source: S&P Capital IQ. NM = not measurable.

Here you have the airlines in a nutshell: low margins, low asset turnover, high leverage. United Continental Holdings' (NYSE: UAL  ) has by far the highest returns on equity of the listed companies -- more than double that of Alaska Air Group (NYSE: ALK  ) , which has the second highest ROE. This can be largely attributed to its huge leverage ratio, which is nearly five times higher than that of any other company. Alaska Air has the second highest ROE, with net margin more than double that of the other listed companies and the second highest leverage ratio.

Southwest Airlines (NYSE: LUV  ) has returns on equity below 3%, which can largely be attributed to its very low net margins. Delta Air Lines' return on equity is not meaningful due to its negative leverage ratio (more liabilities than assets), but its asset turnover is the lowest of the listed companies and its net margins are comparable to United Continental Holdings'.

Delta, along with the rest of the airline industry, suffered a number of challenges during the recession. First, both individuals and businesses were cutting down on travel expenses to save money, which hurt Delta's revenues. Second, increases in fuel prices raised Delta's expenses, cutting further into its profit margins. Along with most other peers, the company faced this crisis by adding fuel surcharges and fees for baggage and food, which were previously complimentary. However, even with these moves, Delta needs to find ways to face the fundamental challenges facing airlines in order to find long-term success in the face of future rises in fuel charges and other challenges.

Using the DuPont formula can often give you some insight into how a company is competing against peers and what type of strategy it's using to juice return on equity. To find more successful investments, dig deeper than the earnings headlines.

If you'd like to add these companies to your watchlist, or set up a new one, just click below:

Jim Royal, Ph.D., does not own shares in any company mentioned. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1838386, ~/Articles/ArticleHandler.aspx, 10/22/2016 12:17:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 15 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:01 PM
DAL $41.17 Down -0.29 -0.70%
Delta Air Lines CAPS Rating: ***
ALK $74.56 Down -0.73 -0.97%
Alaska Air Group CAPS Rating: ****
LUV $42.43 Up +0.14 +0.33%
Southwest Airlines CAPS Rating: ****
UAL $55.60 Down -0.97 -1.71%
United Continental… CAPS Rating: **