Delta Stock May Perform Well, but It's Still an Airline

Malcolm Berko
Tue, 19 Feb 2019 21:00:00 -0800
Lifestyle

Dear Mr. Berko: I just sold 100 shares of Procter & Gamble, which I bought at $91 in 2017. They're still $91 each. I'd like to buy 200 shares of Delta Air Lines because my UBS stockbroker recommends it. — PR, Kankakee, Ill.

Dear PR: If only you had waited a few weeks. P&G is now $99. And your UBS broker is a bonehead. I'd never own an airline stock.
Updated: Wed Feb 20, 2019

Dear Mr. Berko: I just sold 100 shares of Procter & Gamble, which I bought at $91 in 2017. They're still $91 each. I'd like to buy 200 shares of Delta Air Lines because my UBS stockbroker recommends it. — PR, Kankakee, Ill.

Dear PR: If only you had waited a few weeks. P&G is now $99. And your UBS broker is a bonehead. I'd never own an airline stock.

It began some 20 years ago, when Northwest Airlines reckoned it could save $500,000 a year by cutting its limes into 16 pieces rather than eight. Then Northwest lost its mojo in 2005 and was forced to merge with Delta (DAL-$52) in 2007. American Airlines followed, removing one olive from each salad in first class, saving the carrier $40,000 each year. Lamentably, Eastern Air Lines, Pan Am, Braniff, TWA, United, US Airways and others didn't cut their limes and expunge their olives. Airline stocks are usually among the worst-performing long-term investments man can make. Since 1979, over 80 passenger carriers have declared bankruptcy. Some years ago, Warren Buffett, an unhappy airline investor, told CNBC's "Squawk Box" that he calls an 800 number every time he gets an urge to buy an airline stock and that the person on the other end talks him out of it.

DAL's executives realized that the more uncomfortable passengers are the more money DAL earns. I was 6 feet, 6 inches tall before back surgery, weighing 240 pounds. For me, fitting into a Delta bathroom is like jamming my size 13 feet into size 10 shoes. DAL now employs chiropractors on flights. If you're having trouble fitting in a Delta bathroom, don't assume you're putting on weight. On Delta's 737-800s, bathrooms measure 39 inches by 24 1/2 inches by 77 inches. Narrow as an arrow! The bathrooms shrank by more than 10 inches from the sink to the opposite wall and shortened by 2 to 3 inches from the back of the toilet to the door. The smaller bathrooms, combined with a smaller galley and trimmer seats, allow DAL to install an extra row of seats. Based on average fares and usage, DAL figures it'll generate an extra $400,000 a year for each seat it adds to a plane. DAL says that adding these seats to its Boeing 737-800s and its Airbus A321s could improve revenues by $500 million a year. Avoid Delta!

Other airlines are also prospering as healthy economic conditions, strong travel demand and lower fuel prices improve revenues and profits. Moreover, secondary revenues from such services as Wi-Fi, special seating, movies and snacks, as well as baggage fees, added $6.1 billion to DAL's $44 billion in revenues in 2017, resulting in an extra $580 million in profits. That ain't chopped liver (though it certainly annoys the passengers). Resultantly, Thomson Reuters, Standard & Poor's, Argus Research, Credit Suisse, Morningstar, Value Line, Bank of America Merrill Lynch, UBS and others recommend the purchase of DAL, with four-year forward price projections between $97 and $128.

Since 2012, DAL has prospered — reducing its debt by over 50 percent, improving net profit margins by 80 percent and growing its passenger load factor to 85 percent, the highest ever. Revenues for 2019 may come in at $47.1 billion, and with the second-highest net profit margins in the industry, 9.8 percent, DAL could earn $6.60 a share, versus $5.60 last year. Improving net profit margins should allow DAL to increase its dividend to $1.50. It was $1.30 last year.

Going out two years, the fundamentals at most of the large carriers appear fairly strong. However, it's gross stupidity to think those improvements will remain or continue to improve. Something always happens. My 60 years of experience tell me I'm right not to own airline stocks. Airlines are super sensitive to high labor costs, high equipment costs, high borrowing costs, volatile fuel costs, poor labor relations and economic downturns. Don't buy DAL!