Company Overview: Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo throughout the United States and across the world. The Company's segments include Airline and Refinery. The Company's route network is centered around a system of hub, international gateway and airports that the Company operates in Amsterdam, Atlanta, Boston, Detroit, London-Heathrow, Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York- John F Kennedy International Airport, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Each of these operations includes flights that gather and distribute traffic from markets in the geographic region surrounding the hub or gateway to domestic and international cities and to other hubs or gateways. The Company's route network includes its international joint ventures, its alliances with other foreign airlines, its membership in SkyTeam and agreements with multiple domestic regional carriers that operate as Delta Connection.


DAL Details

Delta Air Lines, Inc. (NYSE: DAL) seems to continue on its momentum with encouraging revenue environment based on diversification, higher EPS guidance, key drivers as branded fares and the American Express credit card agreement coupled with continued resilience in underlying PRASM (passenger revenue per available seat mile).
 

Branded Fares Revenue (Source: Company reports)
 
Benefit from the new tax reform: Delta Air Lines expects to benefit from the new US tax bill which might help it to reduce its cash tax burden, at the back of provisions that will allow the company to immediately deduct the cost of its aircraft purchases from its taxable income. DAL had earlier projected to start paying cash taxes in 2019, given the accumulated losses over previous years. However, the tax reform bill might help it defer the first cash tax payment to 2020. The group might also be able to purchase additional aircrafts and work on its fleet renewal strategy based on subsidization over the next few years.

Investing for future: The group has planned for investing more than $12 billion in facility projects over next decade including ATL, LGA, LAX, SEA and SLC, with the focus on improving customer experience. The company is building “Airport of the Future”, expecting the future trends and technology, with flexibility to change to meet the needs. Moreover, DAL is ordering 100 A321neo for delivery in 2020-23 with improved customer experience, higher gauge, and better fuel efficiency. Furthermore, DAL is taking delivery of 60 new aircrafts in 2018, which is the part of re-fleeting that would renew 30% of mainline fleet by 2020 and drive some of the greatest efficiency gains in Delta’s history. Additionally, through international partners, the group has cumulatively created a $2 billion asset through the company’s equity stakes. The company is building leading joint ventures in every entity and next phase is driving additional value through deeper integration with the partners. In addition, DAL is making necessary investment in reliability and disaster recovery with the successful stand-up of new data center. The company intends to focus its shift to digital transformation, which would unlock the ability to deliver personalized service, further strengthening brand and revenue premium. Furthermore, 100 A321neo aircrafts are expected to be delivered from 2020-2023, building on Delta’s large narrow body advantage well into the next decade. The new engine technology and larger gauge would lead to a 40% fuel savings over existing MD88s and the advantageous Pratt maintenance deal offers additional value. Moreover, DAL is on track for $2.7 billion in segmentation revenue by 2019; and out of this, about $400 million of incremental benefit would be witnessed in 2018.

November performance highlights: The group had set a ‘new No. 1 system and domestic revenue day’ during the Thanksgiving holiday travel period on Sunday, Nov. 26. They recorded zero system cancellations across Delta's global operation while carrying more than 2.35 million customers on nearly 23,000 flights with an on-time arrival rate of 92.7% during the Thanksgiving holiday period from Wednesday to Sunday. The group got approval by the U.S. Department of Transportation of the trans-Pacific joint venture with Korean Air, a significant milestone. The group’s airline has been ranked as the No. 1 U.S. airline by the corporate travel community in the Business Travel News Airline Survey for a historic seventh consecutive year, beating all 10 categories and achieving better scores in 2016. The group carried 14.9 million passengers across its broad global network during the month of November. RPM (Revenue passenger miles) rose 3.5% year on year (yoy) during the month while Available seat miles (ASMs) enhanced by 2.9% yoy.
 

November Month highlights (Source: Company reports)
 
ATL operations back to normal: Delta has informed that its normal operations have resumed in Atlanta, and the airline's largest hub is experiencing an on-time arrival rate of more than 90% the second day after a major power outage at the airport which had led to 1,400 flight cancellations. Since the busy holiday travel season has started, the customers traveling through Atlanta or who were affected by the outage have been offered to make a one-time change to their travel plans.

Outlook for FY18: In fiscal year of 2018, the group is expecting the earnings per share in the range of $5.35-$5.70, about 10-15% higher than 2017 (provided for the first time ever) on 4-6% top-line increase. The prudent capacity profile would have 2-3% system capacity growth. The non-fuel unit costs are expected to be up 0-2% ex. profit sharing. Moreover, DAL would benefit from their earlier investments in partnerships, technology and fleet, and is expecting $4-5 billion in free cash flow in FY18.

Outlook for December 2017 Quarter: For December 2017 quarter, the group expects operating margin of over 11% as strong unit revenue performance was offset by higher fuel prices during the quarter. In December quarter, DAL is producing strong revenue trends with positive unit revenues in all geographic entities and unit revenue guidance, and is on track to deliver the high end of initial guidance. The cargo and other revenue is expected to be over $1.65 billion. DAL expects the average fuel price per gallon to be in the range of $1.92 - $1.97. DAL expects the non-fuel unit costs including profit sharing to be up 5.0 – 5.5%, on the back of the ongoing investment in the people and product combined with accelerated depreciation of aircraft retirements. The profit sharing expense is expected to be around $250 million and non-operating expense is expected to be around $150 million in the December quarter. Further, the capacity in the December quarter is now expected to grow in the range of 2.5 – 3.0%.  DAL’s coverage of Virgin Atlantic flying in the trans-Atlantic is capacity neutral within the JV, but resulted in higher December quarter capacity at Delta. In addition, DAL has returned approximately $540 million to shareholders through dividends and share repurchases in the December quarter, for a total of $2.4 billion in 2017.

Capital Allocation: The group intends to maintain a balanced capital allocation in 2018. For this, DAL’s capital spending is targeted around 50% of operating cash flow and this allows for replacement of around 30% of Delta’s mainline fleet from 2017-2020. Moreover, DAL expects $500 million per year in voluntary pension funding through 2020. The company expects to return 70% of free cash flow to shareholders. The group has now returned $10 billion and repurchased ~16% of the outstanding shares of the company since 2013 while reducing debt. DAL’s long-term target is to return 20-25% of free cash flow to shareholders through dividend.

DAL’s proven strategy is upgauging: Delta’s network restructuring and product investments have already produced domestic margins and are among the best in the industry. The increase in scale will allow more efficient handling of flow traffic. The Hubs are sufficiently spread out to avoid overlap. DAL’s measured fleet investment has set up a unique opportunity to benefit from newer-generation aircraft and large narrow body aircraft to offer significant margin advantages. Upgauging has driven nearly $1 billion in expense savings over past four years from increased operational efficiency, and approximately $300 million savings are expected for 2018.
 

Upgauging Impact (Source: Company reports)
 
Stock Recommendation: The shares of DAL have risen about 11% in last one year and over 15% in the last four weeks (as at December 20, 2017) and we believe the bullish momentum would continue in the coming months. The group continues to work towards an 80% funded status by 2020. They are improving their brand value which can be seen through their net promoter score over the last few years. The year-to-date 2017 domestic net promoter score reached 41.5%. The group’s value-added services like free entertainment, upgraded snacks, free text messaging, and gate/boarding improvements would continue to contribute to the customer satisfaction. We give a “Buy” on this dividend player at the current price of $56.22


DAL Daily Chart (Source: Thomson Reuters)

 
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