Book a Ticket on This Growing Airline

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Delta Air Lines (NYSE: DAL), founded in 1924, provides air transportation for passengers and cargo in the United States and internationally. As of April, the company headquartered in Atlanta had a fleet of approximately 700 aircraft.

The airlines have witnessed very rough times in the last decade or so. Since 2003, Delta posted six annual losses, went through bankruptcy, and then acquired Northwest Airlines and reduced its debt by almost half.

For Delta, shares are up 57% year-to-date (as of June 27) outperforming rivals like United Continental (NYSE: UAL) (34%) and U.S. Airways (NYSE: LCC) (21%). Shares are also well ahead of Dow Jones industrial average.

Strong earnings

Delta's first-quarter results were good, with the company's chief executive officer Richard Anderson describing the “strongest March quarter financial and operational performance in over a decade.”

At a time when Delta reported its strongest March quarter results, rival United Continental did not post a profit, though it did manage to narrow its loss. The airline has been working hard to win back the customers who turned to rivals after technology glitches while the airline was handling problems like the grounding of Boeing's 787 Dreamliner.

However, United Continental is expected to post notable improvements in the operating results. In the first quarter, the company reported an on-time percentage of 81%, which is very impressive considering mid-60% range experienced in 2012. The company also showed improvements in customer satisfaction scores. Massive capacity cuts help the airline to improve the passenger revenue per available seat mile by 5.9%.

U.S. Airways earned $44 million, or $0.26 cents per share, for the first quarter. As per the CEO, Doug Parker, the numbers looked promising as the airline plans to merge with American Airlines, resulting in the biggest airline in the world. In terms of market share, American holds a fifth spot on the East Coast and fourth in the Midwest and the West Coast. US Airways holds third position in the East Coast and fifth and sixth spot in the Midwest and the West Coast markets, respectively.

After the merger, the new entity will have the biggest market share on the East Coast and in the Midwest and the third spot in the West Coast markets.

Growth Drivers

Delta Airlines is close to acquiring a minority stake in Virgin Atlantic and launch an extensive trans-Atlantic joint venture with the U.K.-based carrier. The move will help the company to cement its place as the biggest airline on trans-Atlantic routes.

The Department of Transportation is planning to open or extend airline routes to Brazil from Los Angeles, Atlanta, Detroit and Charlotte, N.C.. The proposed routes will go to American Airlines, Delta Air Lines and US Airways, opening further opportunities

Delta Air Lines recently unveiled a new $1.4 billion terminal at New York's JFK International Airport. With the new state of the art terminal, Delta plans to win more premium clients especially those who need last minute bookings.

Delta plans to reduce the adjusted debt to $7 billion from $10 billion previously and $17 billion about four years ago. The cut in debt will reduce the interest expense by almost half, to around $500 million annually. Also, the company plans to reinvest more than $2 billion annually to improve the company's fleet, facilities, and technology.

Analyst ‘bullish’

In a note issued on June 7, Zacks reiterated its “neutral” rating on Delta, with a price target of $18. Analysts at Standpoint Research downgraded Delta’s shares from a “buy” rating to a “hold” rating, in a note issued on May 23. Also, analysts at Deutsche Bank reiterated a “buy” rating with a price target of $20.00, in a report issued on May 9. Analysts at Cowen Securities, in a report issued on May 9, have an “outperform” rating with a price target of $23.00.

Overall, Delta Air Lines has a consensus rating of “Buy” with an average price target of $20.85.

Hedge Funds, also ‘bullish’

A total of 68 hedge funds were long in Delta Airlines stock at the end of the first quarter, up from 62 in the previous quarter.

Some of the hedge funds that have valuable position in the airline company are Lansdowne Partners, managed by Paul Ruddock and Steve Heinz, Wayzata Investment Partners, managed by Patrick Halloran, Crispin Odey's Odey Asset Management Group, Paul Reeder and Edward Shapiro's PAR Capital Management and Thomas E. Claugus's GMT Capital.

Short interest rising

The short interest is a very good indicator of the expectations regarding the price of a stock. For Delta, short interest was up 18% to 17.3 million shares. An important point to note here is that, last month the short interest gained 26%. The increase in a short position reflects that traders and analysts expect the stock price to come down.

Making investors happy

After a decade-long break, Delta Air Lines plans to return $1 billion to investors in the form of share repurchase and dividend. The company last paid a dividend in 2003 and hasn’t repurchased stock since 2000.

Half of the amount will be returned in the form of buyback over the next three years while the remaining will be paid via quarterly dividend of $0.06 a share. Delta is the only full-service U.S. carrier with either a buyback program or dividend.

Opinion

Delta Airlines looks well poised owing to a number of strategic initiatives including route launches, improving airport terminals and fleet structures, and intelligent acquisitions. A new five-year plan is expected to work well for the company, enhancing revenue and at the same time keeping investors happy with dividends and a share buyback. Also, while some hedge funds and analyst are bullish on the stock, an increase in short interest does raise a slight concern.

All these factors do make the stock an attractive investment; however, investors must consider the risks including fuel, labor troubles, and the political and federal environment before initiating a position.

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Rahul Jaiswal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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