Delta Air Lines (NYSE:DAL) posted very strong results for 2013. The carrier’s profits excluding special items soared to $2.7 billion for the year – more than double the profits of its nearest competitor.  For the second year in a row, Delta posted the highest profits amongst other carriers in a strengthening US airline industry.
Looking ahead, with expectations of higher global GDP growth in 2014, demand for air travel is expected to grow. According to figures cited by Delta in its 2013 investor day presentation, corporate spending on travel is estimated to grow by 7% annually in 2014.  Additionally, the domestic US airline industry is expected to continue to stabilize in 2014 as airline integrations including those of United-Continental, Southwest-AirTran and American-US Airways evolve.
Given this positive macro outlook, Delta with its ongoing revenue and cost initiatives will likely continue to post growth in its results in 2014. In our opinion, the carrier’s passenger traffic will rise this year, from the last year, driven by capacity expansion. The implementation of its Virgin Atlantic joint venture during the year will provide additional upside to its top line. On the cost front, the carrier’s annual unit cost growth in 2014 is expected to remain under 2%, tempered by benefits from its structural cost reduction measures.  Based on these factors, we figure Delta’s margins and profits will likely expand in 2014 from their 2013 levels.
We currently have a stock price estimate of $32.40 for Delta, around 5% ahead of its current market price.
Capacity Expansion & Roll Out Of Virgin Atlantic JV Will Grow Delta’s Top Line
Delta plans to raise its flying capacity by 0-2% annually in 2014.  However, the carrier ascertains that it will add capacity in the domestic US market, the trans-Atlantic market to Europe and the trans-Pacific market to Asia, at rates that will be below the respective regional GDP growth rates as excess capacity could impact occupancy rates. Delta says that it will especially focus on expanding its flying capacity in the Latin American international air travel market in 2014 due to the fast growing economies of that region. We figure this growth oriented capacity stance in 2014 will help Delta arrest the fall in its international market share.
Additionally, as Delta implements its joint venture with Virgin Atlantic this year in the North American-UK air travel market, its top line will rise significantly. This venture will enable Delta to occupy a significant share of the lucrative corporate travel market between New York and London through slots currently occupied by Virgin Atlantic at London’s busy Heathrow airport. Overall, 2014 will see Delta build a significant international presence in London, which will add to its presence in Paris and Amsterdam built through its Air France-KLM joint venture.
Cost Cutbacks & Discipline In Capacity Addition Will Aid Profits
On the margin front, Delta will likely post gains in 2014 driven by its structural cost reduction measures. In 2012, the carrier launched multiple measures that targeted to reduce its structural costs by $1 billion. These measures successfully stemmed the annual rate of growth in Delta’s non-fuel unit costs to 1.5% in the second half of 2013, from 5% in 2012.  The next phase of the cost reduction program through 2014 will maintain these gains and limit growth in Delta’s annual non-fuel unit costs to under 2%. We figure this low rate of growth in the carrier’s non-fuel unit costs will enable it to expand its margins in 2014.
On the competition front, the carrier will likely face greater competition from United (NYSE:UAL), which is essentially through with its integration of Continental and is now focused on raising its flying capacity. Nonetheless, in our opinion, as most airlines including Delta and United have shown much discipline in adding flying capacity to their networks, the total growth in demand for air travel from passengers will likely absorb this higher capacity. Accordingly, we figure Delta’s results will improve in 2014 despite capacity increases from United and other carriers.Notes: