Long-Term MRO Partnership And Cost Management Will Secure Future Success

Key Takeaways

• Delta's strategy includes maintaining flat capacity growth and aligning supply with demand, positively impacting net margins through cost management.
  
• Emphasizing premium services and strategic partnerships supports revenue resilience and growth, enhancing market differentiation and customer loyalty.
  
• Economic uncertainty and competitive pressures threaten Delta's revenue growth and margins, with potential tariffs and stagnant corporate travel exacerbating challenges.

Catalysts

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

• Delta Air Lines is focusing on protecting margins and free cash flow by maintaining flat capacity growth and aligning supply with demand, which is likely to positively impact net margins through cost management.
  
• Delta is capitalizing on resilient revenue streams such as premium, loyalty, and international segments, which are expected to continue growing and thus bolster overall revenue.
  
• The company has signed a 10-year agreement with UPS for its maintenance, repair, and overhaul (MRO) business, supporting long-term revenue diversification and growth.
  
• Delta is placing significant emphasis on delivering world-class customer service and reliability, which is a core part of its strategy to differentiate and protect market share, potentially improving earnings through customer loyalty and premium pricing.
  
• The reduction of growth and accelerated aircraft retirements are expected to lead to maintenance cost savings, contributing to improved net margins and earnings in the financials.

Delta Air Lines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delta Air Lines's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.2% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $4.6 billion (and earnings per share of $7.39) by about September 2028, up from $4.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.3 billion in earnings, and the most bearish expecting $3.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Airlines industry at 10.5x.
• 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 9.44%, as per the Simply Wall St company report.

Delta Air Lines Future Earnings Per Share Growth

Risks

• Economic uncertainty and stalled growth, particularly in domestic and main cabin travel, pose risks to Delta's revenue growth and net margins as demand softens.
  
• Reducing capacity in response to decreased demand may limit Delta's ability to increase revenue and negatively impact its operating margins.
  
• The potential imposition of tariffs on aircraft purchases could increase Delta's capital expenditures and affect profitability if unresolved.
  
• Challenges in the corporate travel sector, which is currently flat, might worsen with prolonged economic uncertainty, impacting revenue from a typically lucrative segment.
  
• The strength of competitor low-cost carriers can pressure Delta's pricing, particularly in weaker main cabin and off-peak segments, which may squeeze margins and decrease revenues.

Valuation

• The analysts have a consensus price target of $67.81 for Delta Air Lines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $68.4 billion, earnings will come to $4.6 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $60.68, the analyst price target of $67.81 is 10.5% 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.