Delta Air Lines Is On Cloud Nine
Delta Air Lines (NYSE:DAL) is on the cusp of bouncing back from the challenges posed by the pandemic. The company recently posted another stellar quarterly report, and despite investor jitters surrounding inflation rates and the global economy, Delta stands out due to robust demand, effective cost control and an incredible balance sheet. Based on its strong fundamentals, Delta could soon regain pre-pandemic profits and valuations.
Delta has made impressive strides by balancing travel demand and capacity despite the current economic downturn. Focused on providing a premium travel experience for all its customers, Delta was successful in significantly increasing unit revenues even in this difficult period.
The company's stock has moved sluggishly in the past year, declining more than 10% in the past six months. It trades at a forward price-sales ratio of just 0.4 , which is more than a 60% discount to sector averages. This is dirt cheap when we consider the superb fundamentals and future outlook.
Robust premium cabinet sales
Delta Air Lines is one of the leaders in the airline industry and has been for more than a decade. Its fantastic reputation for quality has enabled Delta to become a major premium player in the sector.
Nowadays, most of its revenue comes from business travel and leisure travel, which is a significant competitive advantage in the current economic climate. Its primary customer base has effectively increased its travel spending without being hampered by high inflation and slowing economic growth due to the fact that its average customers are wealthier than those of its main competitors.
Moreover, the carrier is flying high despite operating at a lower capacity, outperforming its competition and delivering tremendous customer service. Last quarter saw the company deliver record sales with an impressive showing in its premium cabin niche. Sales from premium cabins shot up a handsome 8% compared to the same period in 2019. Delta estimates that sales from its premium cabin could jump 40% by 2024.
Based on its solid results in recent quarters, Delta has offered solid guidance for its top and bottom lines over the next few years. It has set a target of generating more than $7 in adjusted earnings and $4 billion in free cash flows by 2024, in line with its pre-pandemic results. If it can meet those goals, the stock looks dramatically undervalued.
Furthermore, Delta has just struck a strategic deal to boost its revenue stream with American Express (NYSE:AXP). Delta expects to generate $5.5 billion from American Express this year alone and reach $7 billion by 2024.
Cost control is improving
Despite posting record revenues in its third quarter, Delta's net income dropped by a hefty amount due to an increase in fuel prices and additional operating expenses with lower capacity. However, Delta's cost pressure is expected to lessen in the quarters ahead as the company regains capacity and overcomes its inefficiencies.
A lot has to do with Delta Air Lines' proactive approach toward asset management during the pandemic. In response to the extraordinary challenges that the airline industry faced, Delta stepped up to the plate and overcame many of its difficulties through a masterful display of proactive asset management. Delta's innovative capital-raising efforts included over $9 billion in debt capitalization, its robust SkyMiles loyalty program and sale-and-leaseback measures for its fleet.
The airline is confident its cost trajectory will improve substantially in the fourth quarter. Despite operating at 8% to 9% less capacity than three years prior, Delta expects to reduce non-fuel unit cost growth relative to 2019. The improved efficiency will become even more pronounced when Delta (hopefully) returns to pre-pandemic capacity levels next summer, unlocking massive potential savings opportunities for the airline.
With over 300 new aircraft on order, Delta is making long-term investments in both future customer experience and fuel efficiency. With these new planes, it can cut costs by replacing more than a third of its fleet in the next five to six years. Delta is working towards building one of the industry's most energy-efficient fleets. Therefore, the future looks bright for this carrier as it successfully weathers one of the most trying points in recent history.
Takeaway
Investors are worried about inflation and interest rates crippling the economy. However, not all companies are created equal. Delta's recent results have been spectacular, with its cost trajectory improving substantially. Moreover, demand remains robust and is expected to improve in the upcoming quarters.
The last few years were difficult for the airline industry, as the pandemic caused a sharp decline in travel demand. However, Delta has fared relatively well compared to its competitors and is now well-positioned to continue growing in the years to come. The company has made progress to position itself as a premium brand, which is starting to pay off as customers are willing to pay more for a Delta ticket. In addition, Delta has made significant investments in its domestic network, which will help it to better compete against its rivals.
This article first appeared on GuruFocus.
