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.
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.
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.
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.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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.