Thoughts on an Airline

Stock: Delta Air Lines (DAL)

Industry: The airline industry is intensely price competitive and highly cyclical. The last decade has seen a major cyclical downturn in the global airline industry with particularly large shocks coming from the 9/11 attacks in 2001 the 2008 oil bubble. The industry has seen several major bankruptcies, substantial consolidation and major cost-cutting initiatives. Airlines are particularly vulnerable to outside shocks because of their high operating and financial leverage conducting business with a very small margin for error. Yet, when a cyclical turnaround occurs, airlines see out-sized profits because of their inherent leverage. Air travel will pick up again as the economy improves increasing demand. Yet, the capacity reductions and the large backlogs for new planes at Boeing and Airbus will both restrict supply. Significant bottoms in industries are typically marked by bankruptcy and consolidation and the airlines seem to be emerging from just such a bottom.

Company: In 2008, Delta merged with Northwest to become America's largest airline. DAL has had a miserable decade claiming Chapter 11 bankruptcy in 2005 and losing shareholders over $60 per share in 2004 and 2005. Major airlines lost nearly $60 billion from 2001 to 2005 yet more recently saw profits of $1.6 billion in 2006. Incremental improvements in earnings per share have been seen QoQ for the past year (ex Q408 merger). DAL should return in profitability in 2010 providing excellent YoY comparisons and fueling the turnaround story. A LTD to capitalization of nearly 90% makes DAL a great leveraged candidate to profit well in the future. The bankruptcy allowed DAL to restructure much of its debt further helping the company return to profitability next year.

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