Saturday, December 14, 2013

Delta Air Lines: Please Sir, Can I Have Some More?

Delta Air Lines (DAL) has gained 133% so far this year, but that hasn’t stopped the folks at Barclays from putting it “at the top of [its] airlines list for 2014.”

Bloomberg News

Sure that gain is huge, both on its own terms and relative to its competitors. Delta has outgained nearly all its peers, as Southwest Airlines (LUV) has gained 82% in 2013, Alaska Air (ALK) has risen 68% and United Continental (UAL) is up 61%. Spirit Airlines (SAVE), with a 144% rise, was one of the few airlines to trump Delta.

So why is Barclays still bullish? David Fintzen and team explain why they left Delta’s investor meeting yesterday feeling optimistic:

The focus was rightfully on the 'sustainability' question that we think remains central to the long-term upside in DAL shares. Specifically, a long-term operating margin target of 10-12% was encouraging, but also strikes us as realistic given the initiatives (re-fleeting, etc) underway. Secondly, we were encouraged by comments that margin improvement can still come from the 'core' of the network, not just the outliers. It's hard for us to quantify, but setting a high threshold (i.e. not simply accepting an 8% margin) in a route/city/hub strikes us as a seemingly simple mindset change that matters (and needs to become engrained in the industry). On the cost side, similarly, multiple comments around 'restoring balance to the supply chain' strike us as similarly hard to quantify, but indicative of an expectation to push margins higher.

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Delta has gained 1.9% to $28.19 today at 1:48 p.m., while United Continental has risen 3.4% to $37.83, Spirit Airlines has advanced 2.2% to $43.32, and Southwest, which was upgraded by Merrill Lynch today, has jumped 3.6% to $18.62. Alaska Air has dropped 1.3% to $72.49.

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