1 Airline Stock to Shelter Investors from Boeing's Woes

This is set to be a record-breaking year for global air travel. Some 4.7 billion people are expected to take to the skies in 2024, according to the International Air Transport Association (IATA). That is 200 million more than the pre-pandemic high set in 2019.

Global airline industry revenues are expected to reach an historic high of $964 billion in 2024. An inventory of 40.1 million flights is expected to be available in 2024, exceeding the 2019 level of 38.9 million and up from the 36.8 million flights in 2023.

Here in the U.S., passenger traffic is estimated to reach an all-time high this year, according to trade group Airlines for America (A4A). The trade group projects that U.S. airlines will carry a record-setting 167.1 million travelers during the 2024 spring travel period alone (March 1 – April 30). This new record will mark a 6% increase over the 2023 spring travel season, when 157.4 million travelers took to the skies.

A recovery in business travel is underpinning demand. But so is consumers’ desire to make up for missed vacations. This should be good news for airlines.

Unfortunately, safety issues at Boeing (BA) mean that not every air carrier will benefit from the boom in air travel. Some airlines will literally not have enough planes to meet demand for the peak summer travel season. United Airlines Holdings (UAL) is asking its pilots to take unpaid time off due to the plane shortage.

However, there is one airline that is the least affected by Boeing’s woes.

Delta Stock Is Flying

Delta Air Lines (DAL) is the top-performing U.S. airline stock over the past year, up 43%. It does not operate any Boeing 737 Max jets. Its order of new 737 Max 10 jets were scheduled to be delivered in 2025, but will be delayed by a year or two. Delta says that deliveries from Airbus (EADSY) will fill the gap.

It's easy to see that Delta is flying high just by looking at its results. In fact, on April 10, Delta said it expects the highest second-quarter revenue in its history! That's thanks to buoyant demand for travel and what CEO Ed Bastian called the "most constructive backdrop" for the airline industry he's seen in his career.

The forecast strong profit in the current quarter ($2.20 to $2.50 per share) comes after Delta reported better-than-expected earnings in the first quarter. The company’s adjusted first-quarter profit was 45 cents a share, topping the 36-cent average of Wall Street estimates. Revenue (excluding refinery operations) was $12.56 billion.

In the second quarter, Delta plans to expand its flying capacity by 6% to 7%, as it reaps the benefit of a focus on international travel and the push to sell more premium seats. Delta expects to post an operating margin of 14% to 15%, with a 5% to 7% year-on-year increase in second-quarter revenue.

Delta Bets On Premium Travel

Demand is particularly strong for premium travel, benefiting Delta. The company is actively trying to attract travelers who are willing to pay for something more than just a seat.

Premium seats offer more comfort and upgraded services at airports and in flight. But in some cases, these seats are double the price of standard economy fares and are obviously much more profitable for airlines.

Bastian said that Delta will have premium seats on every plane it flies starting this summer. The company will offer 15,000 more premium seats a day across its network in 2024 than in the pre-pandemic period. By 2025, premium seats will account for 30% of all seats on Delta flights.

At Delta, the share of overall passenger revenue from premium seats is up to 38%, up from 35% before the pandemic. Bastian said the airline would increase that by one or two percentage points per year.

Another reason why Delta is emphasizing premium seats is that the demand for them has been sticky. More than two-thirds of customers showed an interest in repurchasing premium seats, according to Delta’s data.

This is opening up avenues for the carrier to grow revenue through non-ticket sources, such as loyalty credit card fees, checked bags and extra legroom. The company has a long-standing credit card deal with American Express (AXP), which is a lucrative business for Delta, generating $6.8 billion in revenue last year.

Delta also has the largest frequent-flier program of the U.S.-based network carriers. These frequent-flier programs bring in high-margin revenue from banks to fund credit card rewards.

The airline says it’s on track to generate more than 60% of its revenue from upscale seats and non-ticket sources in 2025 - up from 53% before the pandemic.

Buy Delta Stock

In addition to all of this, Delta is outperforming its peers in one other important way. The company - based on data gathered by consultancies OAG and Cirium - was the most on-time U.S. airline last year. That’s a huge selling point for consumers!

Another plus is that pent-up international travel demand is only just beginning to be unleashed around the world.

In addition, Delta’s free cash flow potential is being severely underestimated by Wall Street. The company entered the pandemic with one of the industry’s most conservative balance sheets and among its highest margins.

Not surprisingly, Delta saw significant free cash flow growth in 2023, vastly different from many of its peers that consistently burn cash due to combinations of high leverage, inefficient operations, and overly aggressive plane purchase commitments.

Finally, unlike some peers, Delta has already reinstated a regular dividend as of the third quarter of 2023.

DAL stock is a buy at $50 or below.

www.barchart.com

On the date of publication, Tony Daltorio did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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