Delta Air Lines, Inc. Keeps Dominating

For the last two years or so, Delta Air Lines  (NYSE: DAL  ) has been surging toward the top of the airline industry in terms of unit revenue and profitability. While the whole airline industry has become vastly more profitable in that time frame, Delta has been leading the charge.

Last week, Delta reported stellar Q1 results and strong guidance for Q2, capping the company's resurgence with an exclamation point. Delta is on track to meet all of its long-term financial goals in 2014, and it is poised for further improvements next year. As a result, it has fully earned its 300% stock gain since late 2012.

Delta's rise to the top
Network improvements and new amenities for business travelers have helped Delta post strong unit revenue growth for the past few years. For example, on the network side, Delta has been taking a lot of market share away from United Continental (NYSE: UAL  ) by expanding in New York.

Delta has been taking market share from United Continental in New York. Photo: The Motley Fool

United Continental's Newark hub has traditionally won the lion's share of business traffic in New York. However, Delta vastly improved its position in New York through a 2012 slot swap with US Airways that made Delta the largest carrier at LaGuardia Airport. Delta has also bolstered its international service through initiatives like its recent joint venture with Virgin Atlantic, which has vaulted it ahead of United into second place for service to London (a key business market).

On the product side, Delta has rolled out Wi-Fi across its entire domestic mainline fleet and on many regional jets. It also recently became the first U.S. carrier to offer flatbed seats with direct aisle access on every long-haul wide-body flight.

More recently, Delta has demonstrated strong cost control, allowing it to turn unit revenue gains into higher earnings. In 2012, Delta's 7% unit revenue improvement was almost fully offset by a 6% rise in unit costs. By contrast, Delta's unit revenue grew just 3% last year, but unit costs fell 1%, creating significant margin leverage.

Last quarter, Delta maintained its momentum, with unit revenue up 3% and unit costs down 1% once again. Moreover, the company's forecast for a Q2 operating margin of 14%-16% implies another quarter of substantial margin growth ahead.

Exceeding its financial goals
Late last year, Delta laid out five long-term financial goals: (1) 10%-12% annual operating margins; (2) 10%-15% annual EPS growth; (3) a 15% return on invested capital; (4) annual operating cash flow of at least $5 billion, with half reinvested in the business; and (5) investment-grade balance sheet metrics.

Delta Air Lines is on track to achieve all of its financial goals in 2014 and 2015. Photo: The Motley Fool

Based on Delta's Q1 performance and Q2 guidance, the company appears to be well on the way to meeting or exceeding all of these goals in 2014. Furthermore, the company has a good chance to improve its margins yet again in 2015. Most importantly, Delta will see an increasing benefit later this year and in 2015 from its initiatives to replace inefficient 50-seat regional jets with larger regional jets and small mainline aircraft.

Investors will be rewarded
Delta's strong performance puts the company on track to produce more than $3 billion of free cash flow this year and a similar amount next year. The company is targeting adjusted net debt of $7 billion by the end of 2015, compared to $9.1 billion at the end of last quarter, which will use up a little more than $2 billion.

Still, that leaves billions of dollars of free cash flow just within the next two years that will be available for higher dividends and share repurchases. Delta plans to update investors on its capital return plans later this quarter, and it's virtually inevitable that this will entail a significant increase in Delta's dividends, buybacks, or both.

Longer term, Delta's competitive positioning looks good, particularly in comparison to United Continental, which has been struggling mightily for the last two years. This should allow Delta to maintain a high profit margin and strong free cash flow for the foreseeable future.

Will this stock be your next 10-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (1) | Recommend This Article (3)

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 April 29, 2014, at 8:12 PM, FrankoJames wrote:

    I liked the picture that you posted of your campus. I know very little about the airline industry other than the fact that if Delta really wanted people to allow ATT phones to watch NFLX movies in the air, there would be NFLX phones in the air right now that could view NFLX movies. Good luck to GOGO vs, T.

Add your comment.

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: 2932602, ~/Articles/ArticleHandler.aspx, 8/22/2014 7:36:44 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...


Advertisement