Delta Looks Set To Build On Its Momentum In 2015

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Delta Air Lines

Delta Air Lines (NYSE:DAL) is set to complete another successful year, in which it will likely report around 7% growth in its top line with 4 points of margin expansion. [1] In 2014, Delta has benefited from strong demand for air travel and lower jet fuel prices. In addition, specific initiatives such as expansion in Seattle and London, and domestic re-fleeting have boosted Delta’s growth. In 2015, we anticipate the carrier to continue to grow its results as the macro environment is expected to further improve. Demand for air travel is expected to remain strong based on sustained growth in the U.S. economy, and fuel prices are expected to be lower in 2015, compared to 2014, due to the recent fall in global crude oil prices. Gains from specific initiatives that Delta has taken in the last few years will add to this growth from the macro improvement. All in all, Delta looks set to build on its growth momentum in 2015.

We currently have a price estimate of $45 for Delta, which is slightly below its current market price.

See our complete analysis of Delta here

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Better Macro Environment Will Enable Delta To Grow Top Line In 2015

Solid demand for air travel in the domestic market and in certain international markets including Latin America and the trans-Pacific market to Asia will enable Delta to grow its top line in 2015. The strong demand environment will allow Delta to expand capacity and raise fares, resulting in top line growth. The carrier has said that it will expand capacity by about 2% next year – by 3% in the domestic market and by under 1% in the international market. [1] We figure this capacity addition is disciplined, which is necessary for the airline industry to remain profitable as a whole  (see Airline Industry Will Have To Maintain Capacity Discipline To Remain Profitable). There was a fear that with lower crude oil prices in 2015, airlines could resort to aggressive capacity addition in pursuit of market share. This strategy would have increased supply of seats, exerting pressure on the fares and profits of all airlines. However, this reaffirmation from Delta – the third largest network carrier – that it would add to capacity by just 2% in 2015 gives confidence that airlines will likely not be enticed by lower fuel prices to add excess capacity.

Fall In Crude Oil Prices Will Lift Delta’s Profit In 2015

Delta’s profit will likely also rise in 2015 as gains from its top line growth will be enhanced by lower fuel costs, which constitute nearly a third of its total operating costs. Delta anticipates that it will spend about $2.40-2.50 per gallon on jet fuel in 2015, compared to around $3.08 per gallon that it spent in the nine months ended September 30, 2014. [1] [2] This significant decline in fuel prices driven by the fall in global crude oil prices will expand Delta’s operating margin and profit in 2015. The chart below captures the decline in Delta’s fuel cost as a percentage of its passenger revenue.

Cost Cutbacks Will Limit Delta’s Non-Fuel Costs

Delta’s non-fuel costs are also expected to grow modestly in 2015, remaining below 2%, on a year-over-year basis. [1] Delta has been able to limit growth in its non-fuel costs by initiating several cost-cutting measures such as domestic re-fleeting and employee productivity enhancement. Under re-fleeting, Delta is replacing the smaller, older aircraft in its fleet with larger, new aircraft. This has improved the carrier’s operating cost per aircraft seat, and as this re-fleeting remains underway, we figure growth in Delta’s non-fuel costs will remain suppressed in 2015, boosting its margins and profit.

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Notes:
  1. Delta’s 2014 annual investor presentation, December 11 2014, www.delta.com [] [] [] []
  2. Delta’s 2014 Q3 earnings form 8-K, October 16 2014, www.delta.com []