Coverage Launch: $12.50 Trefis Price Estimate for Delta Air Lines (DAL)

Delta Air Lines (NYSE:DAL) is the largest passenger airline in the world by available seat miles operating under a single certificate. Delta Air Lines is headquartered in Atlanta and operates an extensive domestic and international network spanning North America, South America, Europe, Asia, Africa, the Middle East, the Caribbean and Australia. Delta and its subsidiary operate over 4,000 flights everyday. Delta Air Lines competes with American Airlines (NYSE:AMR), Southwest Airlines (NYSE:LUV), United Continental (NYSE:UAL), and U.S. Airways (NYSE:LCC).

Launch of Coverage on Delta Airlines ; $12.50 Price Estimate

We’ve broken down our analysis of Delta Air Lines into three main business segments:

1. Delta U.S.

2. Delta International

3. Regional Carriers

Airline Industry at a Glance

Delta U.S. is the biggest contributor to value of Delta Air Lines contributing almost 38%. Commercial aviation helps generate more than $730 billion in economic activity and supports almost 11 million U.S. jobs. As the U.S. and world economies continue recovering from the recent economic downturn, the aviation sector will make a strong contribution in revitalizing the job market. The U.S. airlines industry suffered a major setback in 2008 due to the recession that reduced both business and leisure air travel.

Since then, the U.S. economy has slowly recovered leading to an increase in demand for air travel in 2010 and consequently higher average fares. Traffic demand is highly correlated with economic growth and consumer spending accounts for nearly 70% of economic activity in the U.S. Goldman Sachs predicts that U.S. GDP will grow at about 2.7% in 2011 and 3.6% in 2012. Global GDP is estimated to have improved by 3.9% in 2010 and to increase by 3.3% and 3.6% during 2011 and 2012, respectively. This should lead to strong demand in airline travel.

Japanese Earthquake Impact

Tokyo is one of the major international hubs for Delta. About $2 billion (or 8%) of Delta’s total revenue “touches” Tokyo. It is a very lucrative route and gateway for travel to Asia. The earthquake that struck Japan in March 2011, and its repercussions related to aftershocks and radiation leaks from the nuclear power plants have greatly impacted airline travel. Delta suspended service to Tokyo’s Haneda airport and will continue to serve Narita, another airport in Tokyo.

According to a regulatory filing by Delta, Japan’s impact on the company could be anywhere between $250 million to $400 million lower revenues. Delta announced that it has cut capacity on Japan routes by as much as 20% through May 2011, joining other Asian carriers that have trimmed service. Initially at the start of year, Delta had planned to increase the Pacific sector capacity by 13%, which has been revised down to 5% now. Delta may be the most impacted of any U.S. airline from the Japanese earthquake as it has more flights to Japan than any other US airline.

See our full analysis for Delta Air Lines.