We are maintaining our Neutral recommendation on Delta Air Lines (DAL - Analyst Report) – one of the biggest airline companies in U.S. The company is a part of the Skyteam alliance, which includes Air France, Aeroflot, Aeromexico, Alitalia, China Southern Airlines Co. Ltd. (ZNH), and KLM.
We believe that Delta Air Lines is progressing well on improving ancillary revenues by adding new features to its services as well as launching new products to improve passenger satisfaction and experience. The company aims to invest more than $2 billion through 2013 on improved products, services and airport facilities in the air and on the ground.
Delta Air Lines – which has a strong foothold in Latin America – entered into a number of deals with China Eastern Airlines Corp. Ltd. (CEA) and China Southern and the deals are paying off. We believe that the company’s global network and its hub structure, and alliances with other airlines enable it to offer customers an improved global reach compared with other domestic and international airlines.
Of late, Delta has introduced a number of initiatives to expand its service offerings. The company, along with Alaska Airlines, has agreed to increase international service and customer enhancements in Seattle, West Coast. This move will take the airline services closer to serving the key markets in Asia as well as benefiting the flyers in the Pacific Northwest circuit. Delta also targets to enhance its services at Charles de Gaulle Airport in Paris in mid 2013 by bringing in more flights from 11 destinations in the United States
Additionally, the company is taking several initiatives to reduce costs and is targeting $1 billion of cost savings over the next few years. Delta Air Lines, apart from slashing its non-fuel costs, is involved in fuel hedging strategies, which provide a cushion to the rising fuel prices.
However, Delta Air Lines failed to perform as per our expectation in the third quarter 2012 with both earnings and revenue missing the Zacks Consensus Estimate.
Delta Air Lines operates in a capital and labor intensive industry where most of the employees, including pilots, flight attendants and other personnel are unionized. Thus, union disputes, employee strikes or slowdowns, and other labor-related disruptions, as well as the integration of the Northwest workforces may delay the expected merger synergies and increase labor costs or additional labor disputes, hurting the profitability of the company.
Additionally, fuel price volatility, federal rules and regulations, timely investments in new and advanced technologies and competitive threats act as major roadblocks for the company.
Hence, we see limited upside potential of the stock and expect it to trade in line with other industry players.