Delta Airline Shareholders Receive Positive Updates
Delta Air Lines (DAL), currently in the green with a -0.54% dip, isn't just banking on the travel industry's recovery. The airline's strategic focus on the premium travel market, coupled with its thriving credit card rewards program and loyalty system, is a game-changer.
The good news for Delta enthusiasts is the resurgence of solid premium air travel, which is a boon for Delta's ambitions.
Delta's premium focus
Delta's devotion to premium travel is yielding impressive results. Premium ticket revenue skyrocketed by 10% during the first quarter, surpassing main cabin ticket revenue's modest 4% increase. Premium travelers aren't just valuable passengers, boasting higher revenue per passenger-kilometer and margin compared to main cabin travelers.
This trend isn't a fleeting fancy. Delta's premium revenue swelled from $10 billion in 2014 to a staggering $19 billion in 2023, accounting for 35% of their total revenue. This significant revenue boost doesn't just expand its premium cabin earnings but also strengthens its SkyMiles loyalty program and American Express credit card partnership.
According to Delta's management, premium revenue is set to contribute a whopping 37% to their sales over the long haul, while loyalty/other and main cabin revenue will account for 23% and 40%, respectively. This dramatic shift indicates a shift in the airline's priority, departing from the 56% main cabin contribution in 2014 and the mere 20% allocated for loyalty/other services.
Delta's strategy to win over premium travelers will give a substantial boost to American Express's remuneration through its co-branded credit cards, currently contributing about 1% to the U.S. Gross Domestic Product.
The first quarter saw a 12% spike in loyalty revenue driven by the strength of the American Express co-branded portfolio. That quarter also witnessed record quarterly remuneration of $1.7 billion and a record premium passenger count, as Delta president Glen Hauenstein reported on the earnings call.
A promising outlook
The International Air Transport Association (IATA) publishes data on the airline industry, and its latest data verifies the return of premium travel across the industry, signaling a promising future for Delta's growth plans.
As suggested by IATA, airlines across all regions reported a rebound in premium revenue year over year in the first quarter, despite the same capacity allocation for this segment. North American carriers like Delta even boosted their revenue share from premium cabins by a significant 9.4 ppt, compared to 1 ppt in premium RPK increase.
From this industrial trend, Delta is well-positioned to dominate the summer traveling season, riding on the resurgence of the premium traveler.
Delta's medium-term ambitions
Delta's management envisions earnings per share (EPS) of $6 to $7 in 2024 and a free cash flow (FCF) ranging from $3 to $4 billion. With Delta's stock currently trading at less than 8 times the midpoint of management's earnings guidance and less than 10 times the midpoint of its FCF guidance, its stock appears undervalued.
The earnings and FCF will play a crucial role in reducing the debt burden that accumulated during the pandemic, with the airline aiming to lower their adjusted debt-to-EBITDAR ratio to a safe range of 2 to 3 times.
These debt-to-earnings multiples will position Delta's debt as investment-grade, bolstering its stock's investment case, and confirming that its focus on premium travelers will pay off in 2024. If IATA's data holds true, Delta is well on its way to achieving its objectives in 2024.
Investors who are interested in finance and seeking potential investment opportunities might find Delta Air Lines appealing due to its focus on premium travel. This strategy has resulted in a significant increase in premium revenue, which is expected to contribute 37% to Delta's sales in the future.
Investing in Delta's stock could be an attractive option as it currently trades at less than 8 times the midpoint of the airline's earnings guidance and less than 10 times the midpoint of its free cash flow guidance. This undervaluation, coupled with Delta's ambition to reduce debt and achieve investment-grade status, makes it a compelling investment option for those interested in the airline industry and finance.
