How Does Delta's Network Strategy Help The Stock?

Sep. 3.14 | About: Delta Air (DAL)

Summary

Delta has managed to increase profits from $593 million in 2010 to an impressive $2.7 billion last year.

Delta has managed to initiate some very effective cost cutbacks in non-fuel costs of the company.

Delta is protected from surges in fuel prices, owing to the fact that it has its own refinery in Pennsylvania.

Delta Air Lines (NYSE:DAL) is one of the most prominent names in the airline industry. Being a player in a highly competitive industry, it has had to ensure that it continuously improves its operations in order to be able to retain its customers as well as to attract new customers. Competing with giants like American Airlines (NASDAQ:AAL) and Southwest Airlines (NYSE:LUV), Delta has had to ensure innovation, quality, and high levels of customer satisfaction. With recent developments at both Southwest and American Airlines, it comes as no surprise that Delta Air Lines has plans of its own that are going to help the company become more attractive not only for its customers, but also for its investors.

The company has already managed to increase profits from $593 million in 2010 to an impressive $2.7 billion last year. Most of this success has been due to the company's new network strategy, which has multiple different elements present within it that have allowed for improvement within the company at a number of different levels.

There have been massive cost cutbacks in the non-fuel costs of the company.

Over the years, Delta Air Lines has managed to initiate some very effective cost cutbacks in non fuel costs of the company. Non-fuel costs per available seat mile (non-fuel CASM) is a common way for airlines to evaluate the efficiency of their operations and their cost structure. The exclusion of fuel costs allows the airline to evaluate its internal strengths and weaknesses in terms of cost management without including the effect of external factors. Delta Air Lines has managed to reduce costs by a number of different measures including the reduction of the employee headcount, the enhancement of productivity via the use of technology, and the restructuring of its domestic fleet. With these steps taken, the company's profitability will continue to rise, which will make the company's stock more attractive than it already is. Investors can expect higher returns in the future and the stock prices can also be expected to go up. This, therefore, is beneficial for investors as well as for the customers.

Delta is making several network investments as well.

Delta has been actively working on expanding its presence on LaGuardia and John F. Kennedy (JFK) airports in New York, which are two highly important airports. Furthermore, one of its biggest ventures is with Virgin Atlantic -- Delta invested $390 million in Virgin Atlantic for a 49% stake in the company. Moreover, virgin Atlantic and Delta have collaborated in a joint venture in order to cover flights to the U.K and North America. This joint venture has been of critical importance to Delta because it has improved the airline's presence at Heathrow, which is a very important airport for international business travel. Not only does this venture help the company with this, but it also allows both companies to coordinate on ticket pricing.

Delta is also trying to work on develop an international gateway to Asia in Seattle. From 38 daily departures from Seattle initially to a current 95 daily departures, the company has managed to significantly grow its presence in the city. At the same time, there has been a significant increase in the traffic of passengers to Asia from Seattle, which has further encouraged the company to take this step. This will result in higher revenues being generated for the company, which -- combined with the company's efforts to maintain low costs -- will automatically lead to an increase in the overall profitability of the company, thus proving to be a beneficial move for the investors.

Furthermore, Delta is protected from surges in fuel prices owing to the fact that it has its own refinery in Pennsylvania. Moreover, the company is actively involved in fuel hedging and works to manage fuel prices. That is something its competitor American Airlines no longer does.

However, no venture comes without its fair share of risks. Delta Air Lines faces risk as a result of its new network strategies. There is no denying the fact that the risk is small considering the fact that the environment favors Delta Air Lines' strategy. It is true that the company has the potential to make its rival Alaska Air (NYSE:ALK) lose out in Seattle; however, Alaska Air also plans on improving its efficiency by investing in larger aircraft. This means that Delta's plans to create an international gateway to Asia from Seattle will be met with competition from Alaska Air.

So, what will the overall impact on the stock be?

Delta Air Lines will continue improving its presence at a number of important, and very busy, airports that will directly lead to an increase in the company's revenues. At the same time, it will continue working on its cost cutback policies and, as a result, the overall profitability of the firm will continue increasing and returns made to investors will also increase. At the same time, the company's stock will become more attractive and will appreciate in value.

The company's venture with Virgin Atlantic has a plethora of opportunities waiting to be explored by the company. This will result in a number of different positive developments in the future, and as a result the company's stock isn't only going to perform well in the short run, but can also be expected to do fairly well in the long run. Overall, these network strategies of the company are definitely going to add to the value of the company's stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.