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Bernstein maintains Delta Air Lines at Outperform on improving revenue trends

EditorRachael Rajan
Published 10/14/2024, 07:48 PM
© Reuters.
DAL
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On Monday, Bernstein SocGen Group maintained its Outperform rating on Delta Air Lines (NYSE: NYSE:DAL), with a steady price target of $65.00.

"Adjusted revenue came in at $14.6B, 80bps below consensus, and Delta reported improving unit revenue trends through the September quarter with both Premium and managed business revenue outgrowing the main cabin," noted analysts at Bernstein.

This outcome was anticipated if the potential impact of election-related headwinds had not been factored into the street's models. Delta's guidance for the fourth quarter indicates a disciplined approach to capacity, which is expected to be lower than initially scheduled. The company's strategy is in line with the broader industry trend towards capacity discipline.

According to Bernstein's analysis, other airlines are likely to adopt similar measures to Delta's. The firm highlighted that, in contrast to traditional methods where larger airlines reduce capacity through value destruction, smaller, lower-cost airlines are actively working to decrease capacity to enhance performance. This shift addresses the issue of excess basic capacity and the underutilization of premium revenue due to market segmentation, benefiting profitable airlines.

Delta also reported a 9% point growth in premium revenue over main cabin revenue. The airline, recognized as an industry leader in this area, continues to add premium offerings to its services. The discussion of earnings durability emerged as a significant topic during the earnings call and is anticipated to be a focal point during the upcoming investor day. Bernstein suggests that if Delta can maintain earnings around $6 in the face of challenges like capacity gluts, technical outages, and hurricanes, the potential range of future outcomes for the airline could be narrower, which might justify a higher valuation multiple.

Delta Air Lines reported $1.3 billion in pretax income for Q3 2024, and expects a 30% year-over-year earnings growth in Q4 2024. Delta also announced plans to repay $4 billion in debt for the year. Looking forward, the company is projecting a 2-4% total revenue increase for Q4 2024 and a 2 point operating margin expansion in 2025.

Delta's Q3 performance was bolstered by a 7% rise in corporate travel sales and the outperformance of premium offerings compared to the main cabin. The airline also saw growth in SkyMiles membership, particularly among younger consumers. Despite these positive developments, Delta is expecting a 1-point decline in system unit revenue in Q4 due to the election's impact on domestic travel.

Delta anticipates starting to pay cash taxes next year and is investing in AI applications for predictive modeling to enhance efficiency and revenue.

InvestingPro Insights

Delta Air Lines' strong market position and financial performance are further supported by recent InvestingPro data. The company's P/E ratio of 7.13 aligns with the InvestingPro Tip that Delta is "Trading at a low earnings multiple," potentially indicating an attractive valuation for investors. This low multiple is particularly noteworthy given the company's solid revenue of $60.31 billion over the last twelve months and a healthy gross profit margin of 22.59%.

The airline's focus on premium offerings, as mentioned in the article, is reflected in its financial metrics. Delta's operating income margin of 10.39% for the last twelve months suggests effective cost management and successful revenue generation strategies, including its premium segment growth.

InvestingPro Tips also highlight that Delta is a "Prominent player in the Passenger Airlines industry" and has shown "Strong return over the last three months," with a price total return of 18.43% in that period. This performance aligns with the positive unit revenue trends discussed in the article.

For investors seeking more comprehensive analysis, InvestingPro offers 10 additional tips for Delta Air Lines, providing a deeper understanding of the company's financial health and market position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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