Delta Air Lines (DAL) Poised on Strong Demand, Strategic JVs - Analyst Blog

On Aug 6, 2014, we issued an updated research report on Delta Air Lines Inc. ( DAL ). The carrier reported impressive second-quarter 2014 results beating the Zacks Consensus Estimate on both lines owing to strength in corporate and domestic revenues. The Atlanta-based carrier currently carries a Zacks Rank #2 (Buy).

Delta remains committed to improve operational performance, improve margins and make balanced capital deployment to increase shareholder returns. We believe Delta will perform impressively this year on a strong domestic market, capacity discipline, corporate revenue gains and synergies from revenue initiatives.

These trends are expected to result in single-digit year-over-year improvement in unit revenues on 2-4% capacity expansion, leading to 15% to 17% margin expansion in the third quarter. Meanwhile, the carrier's new long-term targets include 11-14% operating margin, 10-15% EPS growth, free cash flow of $3 billion and a return on invested capital of 15%.

The carrier's joint ventures have also proved rather profitable on being operated as an integrated business, which represents around 30% of the industry capacity in the trans-Atlantic route. Delta's joint venture with Virgin Atlantic is getting positive response from corporate customers availing the U.S.-Heathrow travel route. Delta expects trans-Atlantic revenues to grow 5-6% on capacity growth of 3%.

Delta is progressing well on improving ancillary revenues and plans to invest $2.0-$3.0 billion per year to enhance its fleet structure, amenities, products and technological base. Further, the carrier has upgraded its Economy Comfort seating in all transcontinental flights operating from New York's J.F. Kennedy Airport to Los Angeles, San Francisco and Seattle.

However, Delta's international operations might be impacted by geo-political turmoil across certain nations. Devaluation of Yen continues to affect Delta's performance in the Pacific as well. Further, the company's RASM (revenue per available seat miles) will likely be impacted by 3-4 points owing to currency control issues in Venezuela, which forced Delta to pull out from the country. Moreover, Southwest Airline Co.'s ( LUV ) debut in the Caribbean skies will also increase competition for Delta, which recently declared plans to resume its operations in Barbados after a gap of 3 years.

Key Picks from the Sector

Other well-placed stocks worth considering within this sector include Republic Airways Holdings Inc. ( RJET ) and Spirit Airlines Inc. ( SAVE ). Both the stocks currently sport a Zacks Rank #1 (Strong Buy).

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

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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