VALUATION HIGHLIGHTS

1. Passenger constitutes 48% of the Trefis price estimate for Delta Air Lines's stock.
2. Other Businesses constitute 47% of the Trefis price estimate for Delta Air Lines's stock.

WHAT HAS CHANGED?

DAL Stock Performance

DAL stock has shown gains of 25% from levels of $40 in early January 2021 to around $50 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period.

However, the increase in DAL stock has been far from consistent. Returns for the stock were -3% in 2021, -16% in 2022, and 22% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DAL underperformed the S&P in 2021 and 2023.

Q1'24 Earnings

Delta reported revenue of $13.7 billion in Q1, up 8% y-o-y. Adjusted fuel costs decreased 5% to $2.6 billion, boosting the bottom-line growth. Its earnings of $0.45 on a per-share and adjusted basis compares with $0.25 in the prior-year quarter. The company has guided for 7% to 7% ASM growth for the June 2024 quarter and adjusted earnings to be in the range of $2.20 and $2.50.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Delta Air Lines value that present opportunities for upside or downside to the current Trefis price estimate.

Delta - US

Fuel Expense % Passenger Revenue: Fuel expense is the largest operating expense incurred by an airline. For Delta, it has increased from 16.7% in 2016 to 28.5% in 2022.

Since the outlook for oil prices is strong, we don't expect fuel costs to decline meaningfully in the near term. If crude oil prices jump further and fuel expenses rise to 30% instead of the current forecast of 26% by the end of the Trefis forecast period, then there could be a potential downside of around 25% to the Trefis price estimate for Delta's stock.

Passenger Yield: Delta's Passenger Yield increased from $0.17 in 2016 to $0.21 in 2022. If the carrier's passenger yield rises more than anticipated to grow to $0.21 by the end of our forecast period, then there could be a potential upside of more than 10% to the Trefis price estimate of Delta's stock.

BUSINESS SUMMARY

Delta Air Lines is one of the largest passenger airlines in the world, operating an extensive domestic and international network that spans the Americas, Europe, Asia-Pacific, Africa, the Middle East, the Caribbean, and Australia. Delta and its subsidiaries operate over 15,000 flights every day. The carrier is headquartered in Atlanta.

Delta's route network is centered around the hub system it operates at airports in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis (St. Paul), New York (JFK), Paris (Charles de Gaulle), Salt Lake City, and Tokyo (Narita). Each hub operation includes flights that gather and distribute traffic from markets in the hub's geographic region to domestic and international cities and to other hubs. Delta's network is supported by a fleet of aircraft that is varied in terms of size and capabilities, giving it the flexibility to meet corporate demands for travel.

It also has alliances with other domestic and foreign airlines to aid its network. These alliances include code sharing, reciprocal frequent flier program benefits, joint promotions, and common use of airport gates. Delta is also a part of SkyTeam, one of the three major global airline alliances.

SOURCES OF VALUE

Extensive service network

Delta has one of the largest service networks among other U.S. airlines. A large service network enables the carrier to attract corporate travelers to its loyalty program, which supports higher yields as many corporate travelers opt for first-class travel.

International equity investments

Delta has made equity investments in Virgin Australia, Virgin Atlantic, Aeromexico, GOL, and China Eastern. These investments increase the carrier's presence in important international air travel markets, boosting its passenger traffic and revenues.

KEY TRENDS

Oil prices significantly impact bottom line

Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. To reduce vulnerability to fuel price volatility, Delta engages in fuel price hedging.

Demand for flights is related to global economic growth

Demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth, or recession, reduces demand for flights, impacting passenger traffic for airlines. On the other hand, steady growth in the global and U.S. economy grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.

Focus on ancillary revenue

Many airlines, including Delta, are figuring out ways to grow their top lines through ancillary heads such as baggage fees, access to onboard WiFi/food/drinks, etc. Accordingly, airlines are investing in enhancing their product offerings, including in-flight WiFi and other entertainment options, improved lounge facilities, and extra-legroom seats.

According to an Amadeus/IdeaWorks study, North American airlines collectively produce one of the largest streams of ancillary revenues compared to other regions. Most of the increase is attributable to stronger merchandising efforts by the carriers and the addition of more à la carte services for sale.

Growing preference for low-cost carrier model

During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we believe that these low-cost carriers will likely continue to grow their market share as their lower fares attract passenger traffic.

Consolidation in the industry has helped raise the profits of all airlines

The U.S. airline industry has seen many mergers and acquisitions in the last decade, including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.

A more consolidated industry has worked to improve the profits of all airlines. Fewer players in the market have made it easier for the remaining airlines to add capacity with restraint. Before this consolidation in the airline industry, individual airlines were adding capacity at higher rates to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing the margin and profits of all carriers.

Going forward, we believe that the industry should remain profitable as long as airlines add capacity with discipline.