Will Delta Air Lines Continue Flying?

Delta Air Lines (DAL) announced fourth quarter ended December 31, 2015 total operating revenue of $9.5 billion, down 2 percent year-over-year from $9.6 billion during the same period last year. Going forward, the key airlines estimate first quarter of 2016 passenger unit revenue to decline in the range of 2.5% to 4.5%.

Delta Airlines declared fourth quarter of 2015 adjusted net income of $926 million or $1.18 per diluted share, an increase of 43 percent year-over-year from $649 million or $0.78 per diluted share in fourth quarter of 2014.

The key airlines operator reported a continued year-over-year decline in its top line primarily due to unfavorable $160 million of foreign currency translations.
Further, the company estimates unit revenue for the March quarter to fall in the range of 2.5% to 4.5%.

Delta is continuing to witness a year-over-year decline in its top line growth mainly due to unfavorable foreign currency translations. The quarter-over-quarter operating margins of Delta which were growing continuously since the first quarter of 2015 has currently witnessed a sharp decline owing to lesser air traffic recorded in the recent quarter.

The airlines service provider is keenly focused on optimizing its financial position by minimizing its total debt while growing the cash flows to profitably sustain its daily operations and offer attractive shareholder returns.

All the major global airlines including, Delta Air Lines, Southwest Airlines, Alaska Airlines, United Airlines and American Airlines have continued to benefit from the currently ongoing weaker global fuel pricing environment and thus sharing notable cash savings with their key stakeholders through strategic share repurchases and offering attractive dividends.

Impressive financials

Delta has a forward EV-to-EBITDA ratio of 4.18x and the market is believing EBITDA expansion of 10% during the next year. The above chart depicts DAL stock to be closely trading with the industry’s average.

The airlines company is significantly expanding its new investments for extremely bright growth prospects of Mexico. Going forward, Delta targets on enhancing its ownership stake in Grupo Aeromexico to about 49% by employing a cash tender agreement. Delta along with Aeromexico together are believed to capture nearly 26% of the total transborder market share.

Delta’s valuation seems logical and closely following the industry’s average valuation along with continued and sustainable long-term company growth. Further, the growing presence of Delta in Mexico through a strategic partnership with Grupo Aeromexico is projected to continue over the longer term and thus, deliver enhanced transborder market share.

More reasons to buy

Delta is continuously employing a disciplined capital efficient investment strategy that drives sustainable long-term company growth while delivering attractive shareholder returns. The company targets on spending $3 billion on major growth efforts during 2016 that also includes the strategic capital investments made in Delta Material Services (DMS). In addition, Delta expects to further invest approximately $750 million in Mexican partnership with Grupo Aeromexico during 2016 and thus, grow its proprietorship stake in the key Mexican partner to nearly 49%.

Investors are believed to have solid long-term investment opportunity by investing in Delta Air Lines which is trading at much cheaper than other comparable stocks while delivering superior growth and attractive shareholder returns in the form of dividends and planned share repurchases.


Overall, the investors are advised to “Buy” equity in Delta Air Lines, Inc. considering the company’s notable long-term growth prospects and extremely logical valuation somewhat better than the industry’s average valuation. The PEG ratio of 0.33 signifies healthy company growth and slightly better than the industry’s growth average of 0.17. The profit margin of 11.12% seems attractive as well. However, Delta needs to optimize its debt-burdened balance sheet with significant total debt of $8.56 billion against weaker total cash position of $3.44 billion only, restricting the company to make future growth investments.
Published on Apr 14, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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