For about a decade now, Delta Air Lines (NYSE: DAL) has stood as the No. 1 U.S. airlines in terms of financial performance and customer service.
Its advanced strategy for premium seating throughout its cabin, its strong loyalty program for flyers (Sky Miles) and having its own fuel refinery set it apart from competitors. Delta shares reaped the rewards, especially recently, producing an annualized total return of 26% for the last year and 35% for the last three years.
But the past three months haven’t so kind to the stock, which has succumbed to soaring fuel prices, just like Delta’s competitors. Too be sure, they have fared worse Delta’s 8% stock drop during that period compares to an 13% fall for United Airlines (NASDAQ: UAL) and a19% plunge for American Airlines (NASDAQ: AAL).
As for jet fuel prices, they have skyrocketed 95% over the past year to $4.74 a gallon, thanks to the Iran war, which has sliced supply. That led Delta to cut its earnings estimates this month. It now forecasts full-year earnings per share of $5.10-$5.60, down from its previous projection of $6.50 to $7.50. And it sees free-cash flow totaling $2.5 billion, down from $3 billion-$4 billion.
Two numbers that starkly indicate what Delta is up against: it expects an increase of $6 billion in fuel costs this year, compared to pre-tax profit of $4.5 billion. Houston, we have a problem, as the old saying goes.
Wealthy flyers
Still, there are reasons why Delta’s stock is outperforming its competitors. For one thing, the wealthiest 40% of U.S. households make up the majority of Delta’s customer base, and higher prices aren’t stopping them from flying, says Delta CEO Ed Bastian. “That demand is evident across leisure and business travel and across all cabins.”
Delta’s revenue for premium passengers jumped 18% year-on-year in the third quarter, while main cabin sales climbed 12%. Overall revenue increased 16%, hitting a third-quarter record of $17.6 billion.
The airline also benefits from having its own refinery. This gives Delta some price certainty for its own fuel, and it sells some of the inventory to energy companies.
All that provided $2.6 billion in revenue for the third quarter (15% of Delta’s total), surging 76% from a year ago. Delta expects the refinery to save it 40 cents a gallon on fuel prices in the fourth quarter. That represents 8% of the current price. Fuel accounted for 23% of total operating expenses in the third quarter. So the savings would be a big deal.
Delta’s calling card
The focus on premium passengers has been Delta’s calling card over the past 15 years. “Delta’s five-cabin segmentation strategy sets it apart from peers,” Morningstar analyst Nicolas Owens wrote in a commentary.
“It gives customers more options to pay up for premium experiences (whether with miles, dollars, or their flyer status) and the airline more opportunity to monetize its capital investments.”
However, Delta’s competitors are starting to match the airlines premium options, which also include airport lounges. So the competitive advantage for Delta is likely to shrink.
Nevertheless its loyalty partnership with American Express is spitting out plenty of cash for Delta. It expects payments from Amex to exceed $9 billion this year, up 10% from 2025.
Delta may not be headed for the moon, but it’s unlikely to crash either.
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