Delta's Eyeing Margin Takeoff
The airliner looks poised to reignite margin expansion heading into 2019.
We are maintaining our $63 fair value estimate for no-moat Delta Air Lines (DAL) after its Dec. 13 investor day. The carrier released new guidance for 2019, reinforced long-term projections for EPS, called for ROICs of around 15% going forward, and reiterated its re-fleeting plans through 2023. Amid Brent’s fall from $85 at the start of the fourth quarter, to $60 today, Delta looks poised to re-ignite margin expansion heading into 2019. Management pulled down Brent oil price assumptions but maintained its 2019 capacity growth near 3%. Moreover, the carrier guided for oil prices between $65 and $70 for 2019, allowing the carrier to guide to fuel cost savings of roughly $300 million. While we also envision low fuel prices in 2019, we're a bit more aggressive than management and forecast Delta erasing close to $400 million in fuel costs. Our fuel cost assumptions rest on Brent oil prices gradually receding to our $60 midcycle price through our 2022 normalized year.
For the coming year, Delta expects to achieve pretax margin expansion of more than 100 basis points and adjusted EPS between $6 and $7, which lines up with the 200-basis-point margin expansion and adjusted EPS of $6.40 in our valuation model. We were encouraged by the carrier’s ability to stymie non-fuel costs per available seat mile, or CASM. Management set out to limit non-fuel CASM to less than 2% in 2018, which it accomplished. And now it expects to replicate its success, keeping non-fuel CASM growth to a range of flat to up 2%. Our model incorporates non-fuel CASM growth around 2% over 2018. Combined with growing loyalty program contributions and increased exposure to high revenue cabin configurations, we project that Delta's 2022 pretax margins land 200 basis points above the 12% pretax margins we forecast for 2019. Our midcycle adjusted 14% pretax margins translate to a 15% operating margin, short of management’s long-term guidance calling for margins of around 17%.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Danny Goode does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.