Delta Air Lines, Inc. (DAL) is a primary international airline that provides service to every major domestic and international market, suggests Joe Laszewski, CFA, CPA and senior portfolio manager at Stack Financial Management.
Although they are one of the world’s largest airlines as measured by traffic, revenue from the U.S. accounts for roughly 70% of total revenue and is growing by more than 7% year-over-year. From a branding standpoint, DAL has done an outstanding job of positioning themselves as a premium airline and shifting their focus towards experience, brand loyalty, reliability, and service.
Delta is viewed as a premium brand within the industry and is considered by many to be the best run airline. DAL’s focus is on margin improvement through operating efficiency and long-term cost management.
Specifically, Delta is improving margins and lowering per unit fuel costs by retiring low-seat aircrafts in order to simplify their fleet and increase traffic on larger narrow-body aircrafts. DAL has also been able to improve efficiency and grow revenue by shifting their pricing mix to focus on more premium cabin seating options.
The company’s ability to improve operating efficiency is evident through the notable increase in two key industry metrics — Passenger Revenue per Available Seat Mile (PRASM), and Average fare per passenger mile (Yield).
While the airline industry has its share of risks, valuation metrics provide ample upside opportunity. Highlighting its best of breed nature, DAL produces above average margins when compared to peers.
While this comes at a price, the relative valuation premium to peers is small considering their consistently superior profitability and premium brand. Trading at a trailing P/E of 8.4 and a dividend yield of approximately 2.7%, DAL presents a unique value opportunity today.
At Stack Financial Management, we analyze stocks using four key factors: Value, Growth, Quality, and Technical. Utilizing these four components, we create a proprietary score which ranks stocks on a relative basis. Delta Airlines ranks high today primarily due to its attractive value characteristics, while still offering strong scores for both quality and growth.
Fleet modernization, fare segmentation, and cost control give us confidence that DAL can continue to grow earnings even if global economic growth rates remain soft. (Note: Clients and individuals associated with Stack Financial Management hold positions in and may, from time to time, make purchases or sales of this security.)
