3 Reasons Why Delta Airlines Is One Of My Top Picks For 2016

Dave Dierking, CFA profile picture
Dave Dierking, CFA


  • Continued low oil prices are expected to help Delta grow earnings 24% in 2016.
  • While revenue per passenger has declined year over year, the company is taking steps to limit capacity growth in order to improve PRASM and margin growth.
  • Delta trades at a forward P/E of 9 compared to peers like Southwest and JetBlue that trade at 11-12 times forward earnings.
  • Cuts in overseas markets should help boost margins in 2016.
  • Passenger load factors for Delta are some of the best in the industry.

Transportation stocks in general have had a rough year in 2015 with the Dow Jones Transport Index down over 15% as we prepare to close out the year. Airlines have performed modestly better as a whole, but it's been hit and miss. Stocks like JetBlue Airways (JBLU) and Alaska Air Group (ALK) are both up over 40% while laggards like United Continental (UAL) and American Airlines Group (AAL) are down double digits.

Delta Air Lines (NYSE:DAL) has had a decent year thus far in 2015 returning shareholder just over 5%. There are a number of factors in place, however, that suggest that Delta could be in for an even bigger year in 2016. Oil prices, revenues per passenger, foreign exchange rates and valuations will all factor into the stock's performance in the coming year but I like the way Delta is currently positioned to take advantage of some of these trends. For the reasons I'm about to discuss, I think Delta could be a top choice for 2016.

Continued low oil prices boosting the bottom line

Oil prices are near lows last seen in 2008 as OPEC countries continue to pledge that they'll maximize production in the face of crude oversupplies. With the Fed likely to raise interest rates at any moment, a lot of pressure will continue to weigh on crude prices likely keeping them in the mid $30 range until something - a pullback in production or an increase in oil demand or both - changes.

Low oil prices are damaging to energy companies but are welcome news for airlines. In the 3rd quarter of 2015, Delta reported net income of $1.3 billion versus $0.4 billion in the same quarter a year ago. At the same time, fuel expense fell to $1.1 billion from $1.8 billion year over year. I'd expect this trend to continue at least

This article was written by

Dave Dierking, CFA profile picture
Editor of ETF Focus on TheStreet.com. A top 5 Seeking Alpha contributor in ETFs. Speaker at events, such as MoneyShow Orlando 2018. To receive notifications of new articles and blog posts as soon as they're published, click on the orange Follow button and become a real-time follower.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DAL over the next 72 hours. 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.

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