Photographer: Andrew Harrer/Bloomberg

Delta Air Loses Investor-Darling Status as Rivals Seize Momentum

  • Holders shrug off Aug. 8 computer crash but not weak revenue
  • American, United grab headlines with deals, executive changes

Shares of Delta Air Lines Inc., darling of the industry for its on-time flights and robust profit margins, suddenly seem stuck at the gate.

The carrier’s stock is down by 27 percent this year, compared with a 17 percent drop in a Bloomberg index of U.S. airlines. While Delta’s rivals were seizing momentum this summer by announcing a rich credit-card deal and new C-suite executives, the Atlanta-based airline was coping with a computer meltdown that forced the cancellation of 2,300 flights.

Delta has also consistently failed to boost a key industry benchmark known as unit revenue, despite pledging to do so. To regain credibility with investors, the company needs to produce better revenue numbers by year-end, said analyst Paul Lambert at Tocqueville Asset Management LP, which holds more than 570,000 shares of the airline.

The U.S. airline industry has been rebounding from a recent low on June 27, following the U.K.’s vote to pull out of the European Union, but Delta hasn’t benefited as much as its rivals. American Airlines Group Inc. has risen by 44 percent, while United Continental Holdings Inc. is up more than 35 percent. Delta has gained only 11 percent.

“You’ve just had positive news flow out of American and out of United that you haven’t had out of Delta the last three months,” said Jack Atkins, an analyst at Stephens Inc. “On top of this, you had the IT issue.”

Delta’s recent fall into disfavor comes after years of surpassing its peers in stock returns and operations. Its market capitalization of $27.8 billion tops American’s $19.3 billion and United’s $16.4 billion, and its 19 percent operating profit margin last year handily beat its closest peers. Billboards around Atlanta boast of Delta being the “On-time Machine” because of its perch at or near the top of monthly reliability ratings.

The performance rewarded Delta shareholders. The stock jumped more than sixfold from the beginning of 2012 -- about when the U.S. airlines began a steady climb -- through last year. Meanwhile, the overall U.S. industry quadrupled, according to a Bloomberg index. Most airlines are down so far this year because of weak pricing in the U.S. and abroad.

“Rather than focus on short-term swings in share price, Delta is committed to our long-term performance as the No. 1 airline for our owners, customers and employees,” Delta spokesman Trebor Banstetter said, adding that the company has an investment-grade credit rating, unlike its peers.

Many analysts still favor Delta in the long term, because of its credit rating and its ability to find new revenue. It was the first major airline, for example, to roll out a bare-bones fare to compete with deeply discounted tickets from Spirit Airlines Inc. and Frontier Airlines Holdings Inc., which Delta calls Basic Economy.

More Pumped

In the short term, though, investors are more pumped about United and American.

United shares surged almost 9 percent on Aug. 30, a day after it shocked investors by hiring former American President Scott Kirby as its own president. Kirby is seen as one of the industry’s sharpest minds. American jumped 11 percent on July 12, when it said it reached new credit-card deals with Citigroup Inc. and Barclays Plc that will boost pretax income by $1.55 billion over two-and-a-half years.

Some of Delta’s stock woes may be self-inflicted. Investors largely shrugged off its Aug. 8 computer crash, but they’ve been less forgiving of its persistently weak revenue.

Airlines are enjoying record profits from cheap fuel, but most carriers have struggled to turn around unit revenue, which has fallen for the past 18 months. The benchmark, which is closely linked to fares, is a measure of how much revenue an airline takes in for each seat flown one mile.

Too many available seats on flights crossing the Atlantic and Pacific -- combined with too much competition in the U.S. -- have hurt fares. That has caused unit revenue to sag. Delta has told analysts for the past year that it would get the measurement rising again but hasn’t been able to do so, said Cowen & Co. analyst Helane Becker.

“The others just have not said as much about it as they wait to see what happens,” Becker said.

Appaloosa Sells

Unit revenue in the current quarter will probably fall 7 percent compared with a year earlier, Delta said earlier this month. But even when revenue starts increasing again, some investors see more upside potential at United and American, said Atkins, the Stephens analyst. Delta can command higher ticket prices, so some investors see more room for rivals to eventually raise their own fares, Atkins said, although he still favors Delta.

Some firms have already unloaded the shares. Hedge fund Appaloosa Management LP sold its entire stake of 8.6 million Delta shares by the end of the second quarter, according to a regulatory filing. Lambert of Tocqueville said he’s holding onto his shares for now because of the potential for revenue to improve.

But he wants the airline to fulfill its promise to cut seating capacity, which should help boost unit revenue.

“If management fails to deliver this data, in spite of capacity cuts, most analysts will conclude that the fundamentals have deteriorated,” he said.

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