From Inside The Cabin: Why Delta's Stock Has Great Potential

| About: Delta Air (DAL)


Delta is investing $770 million in cabin upgrades on narrow-body airplanes.

The company offers a highly competitive cabin product compared to other major U.S. carriers.

A high passenger acceptance of the airline's product both in the domestic and international markets may generate additional profitable flights.

Delta's Seattle expansion might turn out to be profitable in light of a strongly growing Transpacific market.

Since late 2012, Delta's (NYSE:DAL) stock began to soar rapidly. Investors usually talk about the great performance of the company since then, about its great success and its small profit in the last quarter (Q1), which is traditionally the weakest for U.S. carriers. And they are right: Since December 2013 the stock rose from $27 to $37, the company's profits in 2013 were $2.7 billion. Chances are that this sum will even be surpassed at the end of this year. The oil refinery, which gives the airline more control over its fuel costs, didn't generate a profit in 2013 -- but it is said to generate a small one by the end of 2014. So everything looks good, right? Nothing more to worry about?

A major factor that many investors seem to overlook is the passenger's point of view. Of course, the past performance of a business is a relevant factor for future expectations, but it is just as important as what the company has to offer to its customers. Delta plays a major role in the domestic market as well as in the international market. So let's focus on the domestic site first. To be honest, U.S. carriers don't have the best reputation for their relatively high fees (check in baggage, priority boarding, etc.). But when you compare them, Delta seems to offer one of the best cabin products. The airline offers its customers in-seat entertainment and snacks, even on its domestic routes. Admittedly, passengers using the in-seat screen have to pay for a movie with their credit card, but they can still access the moving map and track their flight.

Having a great part of its domestic fleet equipped with the in-seat entertainment gives Delta another plus in comparison to the rest. And although the snacks usually consist of one or two bags of brezels, cookies or peanuts, you do get something to chew. Other U.S. carriers don't even offer snacks anymore. This might be just a small difference, but it is those small things that make a difference.

Customers who like to enjoy additional legroom on a flight from Atlanta to Los Angeles may book the economy comfort class, as many airplanes are equipped with this hybrid class between economy and business. This hybrid class is something that the new American Airlines still needs to implement on its planes, as many planes being equipped with a U.S. Airways or an (old) American interior do not offer a comparable class to their passengers.

Furthermore, Delta is going to invest an additional amount of $770 million in its domestic fleet to upgrade even more narrow bodies (single-aisle aircraft) to grant a great flight experience to an even greater number of customers. This major upgrade includes in-seat videos, electric power for almost every passenger, and Wi-Fi. Airplanes to be upgraded are the B757, B737, A319 and A320 fleets. Such measures do not only guarantee that the airline offers one of the best cabin products for domestic flights in the U.S., it can also lead to an eventually increasing number of passengers (currently 165 million p.a., according to the company).

This brings us directly to the international market. The company invested heavily in Seattle-Tacoma Intl. in order to transform this airport into a second hub to Asia (after Detroit Metropolitan). The Asian market is one of the strongest growing markets for the airline business, therefore this step as well as partnering with Virgin Atlantic on a Transatlantic scale might very well generate an additional number of international passengers, which will in turn generate highly profitable long-haul flights.

On the vast majority of its international routes Delta does not charge its customers for the first bag, while offering a top notch cabin product including economy comfort and a customer service that led to the award of "World's Best Airline" earlier this year. That often went to Arabic and Asian airlines the last couple of years.

Why does this matter to investors? It does matter as Delta is not only performing well as a transportation company, it is also an airline passengers want to fly. An airline needs to excite the passengers' interest for being successful. So, the product Delta has to offer does matter in respect of its future growth. Who would like to invest in an airline that performed well during the last three quarters but does not offer a top notch and innovative product? With a revenue that is likely to increase this year, with an increasing number of passengers and a cabin product that is constantly being optimized, investors do have reason to believe that Delta's stocks keep on soaring.

On the other hand, there is no such thing as a bulletproof stock. As soon as Delta gets rid of its accumulated debts, which were the reason for the Chapter 11 reorganization, it has to pay income taxes again. If the company performs as predicted, that will likely has to be the case beginning Q1 or Q2 next year. However, some analysts do not see the company paying income taxes in the next two years.

Of course, future political conflicts can and will hit the entire airline sector. But a growing crisis at the Krim peninsula is not very likely to affect the airline's route map much, although Delta is partnering with the Russian Aeroflot with both companies being part of the SkyTeam. A more severe conflict, however, between the United States and Europe on the one side and the Russian Federation on the other side would definitely have the potential of decreasing the demand for air tickets. Whereas Delta as a transatlantic, domestic, and transpacific based company wouldn't be hit in the first place, its transatlantic partners (AirFrance-KLM, Virgin Atlantic) definitely would.

But, considering both the past performance and things to come (cabin upgrades, profitable crude oil refinery, and newer airplanes), Delta seems to have a smooth flight ahead.

Disclosure: I am long DAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.