On Nov 20, 2013, we maintained our Neutral recommendation on Delta Airlines Inc. (DAL) based on various strategic measures like route launches, introduction of ancillary products, strong customer service and revamping of fleet structure. However, slow economic recovery, a weak cargo business and competitive threats rising out of industry consolidation remain our concerns. The passenger airline holds a Zacks Rank #2 (Buy).
Why Kept at Neutral?
We expect Delta to generate higher revenues on better service offering, capacity discipline, cost control measures and customer-focused initiatives. Good customer service and operational efficiency are expected to fuel corporate customer growth as business travelers seek quality service.
Delta will benefit from its recent strategic tie-up with Virgin Atlantic, which will start its journey from the summer of 2014. The Delta-Virgin Atlantic alliance will give additional frequent quality travel options to trans-Atlantic flyers and will promote competition in the U.S. and U.K. markets.
Delta continues to add ancillary products and services, and has introduced full flatbed seats on long haul flights as well as Wi-Fi across its fleet to attract corporate customers. The company also continues to expand its operational base through the introduction of services connecting various domestic and international destinations.
Nevertheless, the global airline industry continues to face challenges from the effects of a worldwide economic slowdown that is expected to persist in the balance of 2013. Additionally, yen depreciation and weak freight demand continue to affect the cargo revenues.
Competition remains a serious threat to Delta’s growth and will only increase once US Airways Group Inc. (LCC) and American Airlines Inc, a subsidiary of AMR Corporation merge. Recently, they got the approval to merge and the combined entity will have more pricing power and control over a larger number of slots, thus creating a bigger rival for Delta.
Other stocks that are worth considering within this sector are Spirit Airline Inc. (SAVE) and Alaska Air Group Inc. (ALK). SAVE currently holds a Zacks Rank #1 (Strong Buy), while ALK carries a Zacks Rank #2.