International Premium Markets And UPS Agreement Will Secure Future Stability

Key Takeaways

• Delta Air Lines' focus on premium segments and strategic partnerships is set to drive revenue resilience and improve margins amidst domestic market challenges.
  
• Initiatives in capacity management and financial stability aim to optimize profitability and ensure long-term growth despite a challenging demand environment.
  
• Economic uncertainty and main cabin demand fluctuations could pressure Delta's revenues and margins, with potential tariff impacts further straining profitability.

Catalysts

Provides scheduled air transportation for passengers and cargo in the United States and internationally.

• Delta Air Lines' focus on premium and international markets is expected to drive resilience in revenue, particularly with increases in premium and loyalty revenue, and strong Transatlantic and Pacific growth, which should offset domestic softness. This focus on higher-margin segments can positively impact net margins and earnings.
  
• The introduction of a 10-year MRO (Maintenance, Repair, and Overhaul) agreement with UPS is anticipated to contribute to long-term revenue diversification and growth, enhancing Delta's revenue stability and potentially improving overall margins given the strategic focus on high-margin businesses.
  
• Delta's strategic capacity management, including reducing capacity growth to align supply with demand, is focused on protecting margins and cash flow. This careful balancing act aims to optimize operating margins and maintain solid profitability despite the challenging demand environment.
  
• Ongoing investments in customer experience, brand strength, and the expansion of the Delta SkyMiles and American Express co-brand program are expected to enhance customer loyalty and increase high-margin revenue streams, supporting steady revenue growth and improved net margins.
  
• Delta's commitment to fortifying its balance sheet by repaying debt and increasing unencumbered assets aims to enhance financial stability and reduce risk. This strategic focus is expected to generate durable cash flow, which supports ongoing profitability and provides a buffer against economic uncertainties.

Delta Air Lines Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Delta Air Lines compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Delta Air Lines's revenue will grow by 3.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.9% today to 8.6% in 3 years time.
• The bullish analysts expect earnings to reach $5.9 billion (and earnings per share of $9.15) by about April 2028, up from $3.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 7.2x today. This future PE is greater than the current PE for the US Airlines industry at 9.1x.
• Analysts expect the number of shares outstanding to grow by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Delta Air Lines Future Earnings Per Share Growth

Risks

• Delta Air Lines is facing a challenging macro environment with broad economic uncertainty impacting domestic main cabin demand, which could negatively affect future revenues.
  
• Delta anticipates revenue fluctuations due to demand softness in domestic main cabin and is not immune to changes in the international market, which could further strain operating margins.
  
• Main cabin demand softness, particularly in off-peak times, may continue to pressure earnings from Delta’s core U.S. market.
  
• The potential imposition of tariffs on new aircraft deliveries could increase costs, thereby impacting net margins and cash flow.
  
• The company's caution about not providing an updated full-year outlook due to uncertainty suggests potential volatility in expected earnings and cash flow.

Valuation

• The assumed bullish price target for Delta Air Lines is $67.17, which represents one standard deviation above the consensus price target of $56.6. This valuation is based on what can be assumed as the expectations of Delta Air Lines's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $88.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $69.2 billion, earnings will come to $5.9 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $40.88, the bullish analyst price target of $67.17 is 39.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.