3 Charts That Show How Delta Air Lines Is Dominating

Delta Air Lines (NYSE: DAL  ) has been steadily improving since the Great Recession, but in the last year, it has really put some distance between itself and the rest of the airline industry. Competitors like American Airlines (NASDAQ: AAL  ) and United Continental (NYSE: UAL  ) are looking to rebound in 2014, but they have a tough mountain to climb.

First, Delta has a huge lead over its competitors in terms of earnings power. Despite having slightly less revenue than American and United, Delta's superior margins allow it to earn industry leading profits. Second, Delta has successfully won the hearts of corporate travel managers -- the key to long-term profits for legacy carriers. Third, Delta's string of profitability has allowed it to clean up its balance sheet at a phenomenal pace, giving the company superior financial flexibility going forward.

An earnings machine
At the company's recent investor day, Delta executives pointed out that the company has earned more than twice as much pre-tax profit as its nearest competitor over the last 12 months.

Source: Delta investor day presentation, filed with the SEC on 12/11

To be fair, American Airlines and US Airways combined had a pre-tax profit of more than $1.5 billion, which would have put them in second place. That said, it is a distant second place; Delta would still be leading by more than 50%.

United Continental is even further off the pace. Analysts do expect its earnings to rebound next year, with EPS growing to $4.06, which implies a pre-tax profit around $1.6 billion. However, by then, Delta's pre-tax earnings could easily be in the $3 billion range.

Winning the corporate travel battle
Much of Delta's recent earnings success can be attributed to its strength in the corporate travel market. While United and American have explicitly focused on serving the largest U.S. metropolitan areas (New York, Los Angeles, Chicago, Dallas, and Houston) in order to win corporate travel business, Delta has been the clear winner so far.

Source: Delta investor day presentation, filed with the SEC on 12/11

As the table above shows, Delta blew its competitors out of the water in the Business Travel News Annual Airline Survey. It received the highest ranking in nine out of 10 categories, and beat American, United, and US Airways in every single category.

Business travelers pay the highest fares, as they often need to book at the last minute and will frequently pay for upgrades to business class or first class seating. They are also much less price sensitive than leisure carriers. This makes them the most valuable customers for the network carriers. Delta has figured out how to win more than its fair share of business traffic, and unless it stumbles, competitors will have a hard time catching up.

Delta continues to bolster its appeal to business travelers. Like its competitors, Delta is investing heavily in updated airport lounges, flat-bed business class seats for international flights, and onboard Wi-Fi. However, one place where Delta is really gaining ground is in its international network. Delta recently formed a joint venture with Virgin Atlantic that dramatically boosts its service to Heathrow Airport in London: the top international business travel destination.

Rapid debt reduction
Delta's industry-leading profitability has allowed it to rapidly clean up its balance sheet. At the end of 2009, the company had a whopping $17.0 billion of adjusted net debt! In just four years, it has nearly cut this in half.

Source: Delta investor day presentation, filed with the SEC on 12/11

Delta has a better balance sheet today than either United Continental or American Airlines. This will generate benefits for years to come. Delta's balance sheet improvements have reduced its interest expense dramatically. Looking ahead, with moderate debt levels, Delta will have more flexibility to invest in its business while also returning cash to investors than United or American.

Foolish bottom line
Delta Air Lines has become by far the most profitable airline in the country over the last few years. This has allowed it to quickly improve its balance sheet, giving it plenty of flexibility for the future.

Moreover, Delta's high standing among corporate travel managers virtually guarantees it a strong share of the highly lucrative business travel market. By improving its amenities and boosting service to in-demand destinations like London, Delta will entrench itself further as the leading carrier for business travelers. This should allow Delta to continue its dominance of the U.S. airline industry for the foreseeable future.

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  • Report this Comment On December 15, 2013, at 6:08 PM, DVCAZ wrote:

    Great information Mr. Weinberg. Just some thoughts, questions: When you say, "Competitors like American Airlines (NASDAQ: AAL ) and United Continental (NYSE: UAL ) are looking to rebound in 2014, but they have a tough mountain to climb." this idea, to me, dovetails neatly into your insights on Delta's success with the Business flyer. With a year of planning and large purchases of new aircraft is the "climb" really going to be that hard for American?

    In the "Seeking Alpha" article, "Merged American Airlines Offers Significant Upside Opportunity" the author makes the point that, "...US Airways management did a superb job in pulling off the America West/US Airways merger from 2005 and in recent years has managed to improve customer service while at the same time delivering record profits." I have read a lot of favorable, upbeat opinions that Doug Parker will help American (which ranked below U.S. Airways right up to Dec. 9th) make considerable improvements in customer service which, in time, will erase or mitigate what many have said was a heavily negative attitude towards American. I think DAL and AAL will make things quite interesting as they start really going toe to toe. Do you agree?

    Also isn't it worth considering Americans new fleet of the more comfortable and fuel efficient Regional Jets as an advantage for AAL in the making? As these new R.J.'s enter service won't more travelers make American their choice as to avoid the past issues of flyers complains of small cabins and over booking?

    I appreciated you article "Delta wants to change the conversation". There were two points in that article that caught my attention. Under your, "Will It Work" (Your articles are always well laid out point by point.) 1. "Delta will ultimately face much stiffer competition than most industrial transportation companies due to the nature of the airline industry." 2. "Meanwhile, American Airlines has vastly strengthened its transatlantic route network by merging with US Airways, and low-cost carriers are likely to continue gradually expanding point to point service throughout the U.S." Here again I see American moving closer to a competitive position thus giving Delta reason to keep an eye on its rear-view mirror.

    If we agree that American is off to a good start and that, as you wrote in this article, "This should allow Delta to continue its dominance of the U.S. airline industry for the foreseeable future." How far into the future will said, "foreseeable future" be? Into 2014 or further? My opinion is to say it will be well into 2014.

    And finally; about the share prices of DAL & AAL. As of today they seem to be closing in on each other. With DAL at $28.35 (down slightly) and AAL at $26.23 (up slightly) do you think that AAL might catch up to DAL before January? From the afore mentioned "Seeking Alpha" article; would you agree with the authors conclusion, "Multiple analysts who follow this company have put it on their top picks list, with near term price targets of between $31 and $39. Analysts are, obviously, not always right, but consensus in opinion is difficult to achieve. Other carriers in this industry remain attractive, especially Delta (DAL), but the upside to American is hard to beat."?

    I think that you and Terry Maxon are my two top "go to" analysts on this topic.

    Many thanks & kudos,

    Daniel Victor

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