Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: Apr 4; 4Q12 and 2012 Earnings Update
Brokers’ Recommendations: Positive: 77.8% (7 firms); Neutral: 11.1% (1); Negative: 11.1% (1) Prev. Ed.: 10; 1; 1
Brokers’ Target Price: $18.50 (↑$0.80 from the last report; 8 firms) Brokers’ Avg. Expected Return: -1.1%
Note: A Flash Update was done on Jun 4, 2013: Delta to Leave Memphis Hub
A Flash Update was done on May 9, 2013: DAL to Buyback Shares
A Flash Update was done on Apr 23, 2013: 1Q13 Earnings Release
Note: We did not have access to the report from the broker having the Sell recommendation on the stock.
Portfolio Manager Executive Summary
Delta Air Lines Inc. (DAL) provides scheduled air transportation for passengers and cargo throughout the United States, and around the world.
Of the 9 firms covering the stock, 7 provided positive ratings, while one firm each assigned a neutral and negative rating. The price targets range from $13.00 to $23.00, with the average being $18.50.
The following is a summarized opinion of the diverse brokerage viewpoints:
Bullish: Buy or equivalent outlook (7/9 firms): These firms believe the company remains committed to its long-term major deleveraging program that will likely result in significant equity appreciation. Delta continues to make efforts to reduce its operating expenses including fuel and non-fuel costs. Delta launched its new Fly Delta application for iPad users. The offering, labeled Glass Bottom Jet, allows iPad users to access maps and social networking while flying on Delta’s Wi-Fi connected aircraft. One attractive offering from the company – flat-bed seat installation – will be completed for 85% of its international fleet by the end of 2013. Delta is investing more than $3 billion through 2013 on improved products, services and airport facilities in the air and on the ground. Additionally, Delta is expanding its footprint in both domestic and international markets, thereby strengthening its competitive position. The firms believe that the company’s new service and product offerings underline its efforts to woo customers and promote BusinessElite, which is a strong revenue driver.
Furthermore, the firms believe that the acquisition of British carrier Virgin Atlantic will help Delta to gain more control over one of the hottest air routes across the globe – New York to London. With this deal, Delta will not only spread its wings to the Heathrow airport but will also get the elite passengers of Virgin Atlantic.
Cautious: Neutral or equivalent outlook (1/12 firms): While the company has made significant improvements, the firm is concerned that both fuel and non-fuel expenses would rise in the near-term, thereby restricting profits.
The firms believe the following additional factors should also be taken into consideration for investing in the stock:
A) Since the acquisition of Northwest Airlines in October 2008, Delta became the largest airline in the U.S. However, after the merger of Continental Airlines with United Airlines, Delta was relegated to second largest position among U.S. airlines.
B) Delta’s fleet is efficient compared to other network carriers, but falls behind the younger fleets of the low-cost carriers.
C) The company competes with United Continental Holdings, Lufthansa German Airlines, Air Canada, American Airlines, British Airways, and Qantas.
D) Delta has made significant operational improvements in the past few years from which it is likely to benefit in the foreseeable future.
E) The company is taking significant efforts to reduce fuel and non-fuel cost including fleet restructuring, optimizing networks and oil refinery purchase.
F) Delta Air Lines is strengthening its balance sheet through debt reduction. The company lowered its net debt to $11.0 billion in 1Q13, trimming debt by over $6 billion (out of $7 billion debt reduction target) since 2009.
G) Further, management is set to restart its quarterly dividend and has authorized a share repurchase program, over a period of three years. The company will buy back $500 million of shares and pay a quarterly dividend of $0.06 per share. Together, the dividend and stock buyback program will return $1 billion to shareholders of Delta.
General Outlook
Going forward, Delta targets to improve its operating efficiencies and take customer experience to new heights. The company is working on increasing revenue through fare hikes and offering expanded products and services. Coupled with capacity reductions and lower non-fuel cost, Delta Air lines will be able to achieve its operating margin goal. Further, the company will generate solid profits going forward on strong air travel demand, new and improved ancillary revenues as well as hedging strategies.
Jun 13, 2013
Overview
Based in Atlanta, Georgia, Delta Air Lines is the second largest U.S. airline and provides scheduled air transportation for passengers and cargo throughout the country, and around the world. The company’s route network is centered on the hub system that it operates at airports in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Paris-Charles de Gaulle, Amsterdam, and Tokyo-Narita. The hub operations include flights and the network is supported by a fleet of aircraft, which is varied in terms of size and capabilities. Internationally, Delta is the largest transatlantic carrier and has more Tokyo departures than any other non-Japanese airline. Delta has also established a large Latin American presence. Delta is a part of the Skyteam alliance, which includes Air France, Aeroflot, Aeromexico, Alitalia, China Southern, Korean, and KLM. On Dec 31, 2008, the company completed the merger with Northwest Airlines, Inc.
The firms identified the following factors for evaluating the investment merits of DAL:
Key Positive Arguments
/Key Negative Arguments
· Global Reach: The company’s global network, hub structure and alliances with other airlines enable it to offer an improved global reach compared with other domestic and international airlines.· Strong Cash Flows: Debt reduction is the first priority for the company. Delta generates enough free cash flow, which will be used to pay down debts in the coming years.
· Innovative Services: Delta is consistently brining in more new and attractive services and products for passengers in an attempt to provide them a comfortable flying experience.
· New Boeing Aircraft: The addition of Boeing 717-200 into the company’s fleet in 2013 would enhance operational efficiency and improve its profitability through an annual reduction of non-fuel costs. / · Fuel Prices: Delta Air Lines is highly vulnerable to high fuel costs, which account for roughly 30% of total operating expenses.
· High Debt: The company is over-loaded with debt. Given its high debt level, it will be difficult for the company to borrow or buy planes and thus, it may need to finance its growth through leasing, which could become significantly expensive if interest rates rise.
· Competition: Delta faces significant competition with respect to routes, services, and fares as well as at its hub airports. In addition, it competes with foreign carriers for U.S. passengers traveling to international destinations, as well as between foreign points.
· Regulatory Issues: The airlines industry is highly regulated, in particular by the federal government. All companies, including Delta, are bound to comply with the regulations and rules laid by the authority. These, at times, might not work in favor of the company.
Further information on the company is available at its website: www.delta.com.
NOTE: The company’s fiscal references coincide with the calendar year.
Jun 13, 2013
Long-Term Growth
The firms expect Delta to remain profitable as it continues to reap benefits from the investments made to improve operating efficiencies and customer experience. The company is expected to generate higher revenues based on better service offering, capacity discipline and customer-focused initiatives.
Delta Air Lines is progressing well on improving ancillary revenues by adding new features to its services as well as expanding new products to improve passenger satisfaction and experience. In an attempt to enhance its fleet structure, amenities, products and technological base, Delta aims to invest $2.0–$2.5 billion annually, over the next five years. The company launched Economy Comfort, made arrangements to provide better personal on-demand entertainment systems, renovated the Terminal 4 at New York's John F. Kennedy International Airport, started a new international terminal at Atlanta as well as unveiled the new Delta website.
Delta is in constant endeavors to expand its operational base through the introduction of new services connecting various domestic and international destinations. The company is on track to speed up the number of flights at U.S. film city – Los Angeles’ international airport with daily year-round and seasonal services. The company also announced new seasonal non-stop flights every Saturday from December this year between Minneapolis and San Jose; Los Angeles and Belize City; and New York and Guatemala City.
In the overseas market, Delta remains focused on fortifying its foothold in Latin America, in particular Brazil and Mexico. The company is reportedly seeking approval from U.S. Department of Transportation (DoT) for non-stop flights from New York and Atlanta to Sao Paulo. Delta’s decision to further raise the number of flights operating between the U.S. and Brazil emphasizes the growing market demand between these routes.
The company is taking several initiatives to lower costs and is targeting $1 billion of cost savings over the next few years. Delta is leading the industry in managing fuel cost through fare hikes and capacity management. Delta Air Lines is involved in fuel hedging strategies, which provide a cushion to the rising fuel prices. Along with these steps, the company is targeting to trim operations at unprofitable airports as well as replace older and smaller jets with new fuel-friendly airplanes. In this regard, the company plans to replace the older 50-seat regional inefficient aircraft with the new 110-seat Boeing 717-200 aircraft. The company has also entered into an agreement with SkyWest for 34 larger regional jets in exchange for 66 aircraft of 50 seats. This will enhance the company’s operational efficiency by trimming its non-fuel costs. In addition, Delta is expected to save $400 million from maintenance efficiencies.
However, some of the firms remain apprehensive about Delta’s prospects as the global airline industry continues to face challenges from the effects of the worldwide economic crisis. With activities spanning across the globe, Delta’s operations might be impacted by geo-political turmoil in many nations. These unpredictable hindrances could pull down the company’s revenue figure, ending up in lesser profits.
Jun 13, 2013
Target Price/Valuation
Provided below is a summary of target price/valuation:
Rating DistributionPositive / 77.8%↓
Neutral / 11.1%↑
Negative / 11.1%↑
Avg. Target Price / $18.50↑
Max. Target Price / $23.00↑
Min. Target Price / $13.00
No. of Analysts with Target Price/Total / 7/9
Risks to target price include fuel price volatility, prolonged economic weakness, competitive threats, government regulation and labor issues.
Recent Events
On Jun 6, 2013, Delta Air Lines announced traffic results for May 2013. The company’s airline traffic increased 1.4% year over year to 16.8 billion. Consolidated capacity for the month nudged up 0.7% from May 2012 to 19.8 billion.
The load factor or percentage of seats filled by passengers improved 70 basis points from the fifth month of 2012 to 84.8%. Passenger revenue per available seat mile (PRASM) improved 0.5% year over year, supported by higher unit revenue generated in the company’s New York airports. The company registered a completion factor of 99.9%, with nearly 86.2% of its flights on schedule.
On Jun 3, 2013, Delta Air Lines announced the start of new seasonal non-stop flights every Saturday from Dec 21, connecting various destinations. People interested in taking these services can book through the company’s website.
On May 8, 2013, Delta Airlines announced a share repurchase program, over a period of three years. The company has authorised share buyback of $500 million and will pay a quarterly dividend of $0.06 per share.
On Apr 23, 2013, Delta Air Lines reported 1Q13 adjusted earnings of $0.10, surpassing the Zacks Consensus Estimate of $0.07. The results also improved considerably from the year-ago adjusted loss of $0.05.
Revenues nudged up 1% year over year to $8.50 billion in the reported quarter but fell short of the Zacks Consensus Estimate of $8.51 billion.
Revenue
Delta’s total revenue increased 1.0% year over year to $8.50 billion in 1Q13. On an annualized basis, Passenger revenues also grew 1%, while Other revenues dropped 1% from 1Q12. Cargo revenues also dipped 2%.
For 1Q13, airlines traffic, measured in billions of revenue passenger miles, dropped 1% year over year to 43.1 billion. Capacity or available seat miles fell 3% to 53.0 billion, while load factor (percentage of seats filled with passengers) grew 150 basis points year over year to 81.2%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 4% year over year, backed by a 2% increase in yield.
Outlook
For 2Q13, Delta expects domestic flying to increase 1–2% year over year and international flying capacity to remain flat to down 1% year over year.
The company has launched a service between Minneapolis and San Jose utilizing The Boeing Company’s 180-seat 757-200 aircraft. This new itinerary will enhance Delta’s existing services between San Jose and Atlanta and Los Angeles. This service will make it convenient for customers of Costa Rica to access Delta’s global network as well as reach Central America.