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.