Delta’s Stock Flies Airline Demand Soars

IndiGo, India’s discount airline, announced an order for 500 Airbus jets worth $50 billion at last week’s Paris Airshow, the largest airline order in aviation history.

The backlog for Airbus and Boeing stretches years into the future as consumer airline travel closes in on pre-pandemic levels.

A combination of aging aircraft, carbon emissions goals, and supply chain constraints left airlines scrambling for new planes.

Not to lose out on the opportunity, airlines cut capacity and raised prices.

One of the big winners has been Delta Airlines (DAL), the second most searched airline stock amongst financial pros in the last month. Shares are up almost 20% in the last month, flying well ahead of the broader market.

Yet, the stock is still down almost 14% over the last five years.

So, is this stock ready for take-off, or has it popped out its landing gear?

Delta Airlines’ Business

We’re not going to bother pretending that you don’t know who Delta Airlines is and what they do.

So, let’s talk about what you don’t know.

Delta operates almost 1350 aircraft, a couple hundred behind United Airlines (UAL), the world’s largest.

Management pointed out that despite revenues rebounding, travel volume is still well below pre-pandemic levels.

Source: Delta Airlines Q1 2023 Presentation

Delta’s put together a 5-point plan to guide its next few years.

Source: Delta Airlines Q1 2023 Presentation

While they highlight customer loyalty and their brand, many industry analysts see loyalty programs eroding as airline lounges fill to capacity.

Yet, Delta’s apparently bucking the trend with premium revenues and non-ticket sales growing at a faster rate than main ticket sales.

Source: Delta Airlines Q1 2023 Presentation

Plus, Delta’s made significant strides in improving its operational efficiency.

Source: Delta Airlines Q1 2023 Presentation

Financials

Source: Stock Analysis

Like most airlines, Delta barely survived the pandemic. Revenues basically vanished. It wasn’t until 2022 they rebounded. Margins have been improving and will likely continue.

In fact, management’s outlook puts operating margin for 2023 between 10%-12% and 13%-15% by 2024, returning to where it was in 2019.

The company also plans to reduce its debt-to-EBITDA ratio from 5x in 2022 to 2x-3x by 2024, slightly higher than the 2x in 2019.

Source: Delta Airlines Q1 2023 Presentation

Considering the stock was trading at $60 before the pandemic, that leaves a lot of upside potential.

Valuation

Source: Seeking Alpha

All airlines trade at cheap multiples.

American Airlines (AAL) sits at a paltry 6.0x earnings and 2.5x cash. Only United is cheaper on the price-to-cash ratio at 2.2x. Delta’s twice as expensive at 4.0x.

Low-cost carriers like Southwest (LUV) and Spirit Airlines (SAVE) don’t trade at nearly as deep of a discount.

Growth

Source: Seeking Alpha

Delta’s revenue growth was substantial and is set to continue, though at a slower pace.

That’s the same story for all the carriers.

Profitability

Source: Seeking Alpha

Delta has the worst gross margins at the moment. However, its net income margin is in-line with others. And its forecast for improvements would put it well ahead of its peers.

Our Opinion 10/10

Airlines are a steal, right here, right now.

Delta’s got the best track record of meeting their forecasts, though United likely has the most upside at the moment.

Nonetheless, we expect Delta to adjust to changing conditions and creating a more sustainable future.

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