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I provided my initial thoughts on Delta (NYSE:DAL) in late November, and since then, shares have outperformed the market. The company reported another strong quarterly result on Friday morning.
In spite of this, the stock traded down over 7% early in the trading day before paring its losses to end the day off 3.5%. This was likely due to what was perceived as a weak first-quarter outlook, with operating margins of only 4-6% and earnings of $0.15-0.40 per share, perhaps seen as a threat to Delta’s guidance last month of $5-6 of FY2023 EPS.
However, more importantly, the company reiterated its full-year outlook and continues to gain momentum towards achieving its targets for 2023-24. Delta’s premium revenue is consistently outpacing its main cabin as it strives to reach its goal for at least 60% of revenues from premium and other revenue by next year. The fourth quarter was another one of record revenues and unit revenue for the business while operations remained modestly below pre-pandemic levels. Delta also achieved its third consecutive quarter of double-digit margins, which they should be able to maintain into this year and beyond on a full-year basis. They indicate that capacity will be back to pre-pandemic levels by the summer.
I’ve updated my model and my revised forecast can be found below alongside Delta’s guidance. I struggle to get to their figures on free cash flow, only exceeding $2 billion in 2024 instead of 2023. This is constrained by the fact that I assume Delta will incur significant non-aircraft CapEx in addition to aircraft purchases over the next few years.
| Management guidance | GGC estimates | |
| 2023 EPS | $5.00 – $6.00 | $5.00 – $5.60 |
| 2024 EPS | $7.00+ | $6.00 – $6.60 |
| 2023 Free Cash Flow | $2.0+ billion | $1.0 – $1.5 billion |
| 2024 Free Cash Flow | $4.0 billion | $2.0 – $2.5 billion |
Some factors that may be holding back my forecast relative to the company’s are as follows:
- Fuel prices: I assume fuel prices remain at their elevated 2H 2022 levels for 2023 with further increases thereafter. I also assume a relatively small increase in ASMs/gallon despite significant fleet upgrades and the full restoration of international service.
- Air traffic liability: As revenue growth rebounds, this figure should grow over time, and perhaps it will grow by more than my forecast of 10% in 2023 and ~5% thereafter. This would add to operating cash flow and therefore to free cash flow as well.
- Loyalty program contribution: Management estimates $6.5 billion in 2023 and $7 billion in 2024. This will likely increase Delta’s “loyalty program deferred revenue”, and perhaps will do so by more than I forecast. Like the air traffic liability, this would also add to CFO and FCF.
Long story short, there wasn’t anything contained in the earnings which would change my view on the company. The future continues to look good and the airline trades at a low multiple of 2023 and 2024 earnings that they continue to progress towards. I reiterate my Buy rating and $50 price target.
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