Delta Air Lines (DAL) stock soared 3% yesterday after the US carrier provided an optimistic earnings outlook for 2020. Investors also welcomed Delta’s commitment to return a substantial portion of its free cash next year. Delta updated its 2020 outlook yesterday in a press release ahead of an investor day presentation.
For the next year, Delta projects EPS of $6.75–$7.75. With a midpoint of $7.25, the 2020 earnings outlook is significantly higher than Wall Street analysts’ forecast of $7.06. Moreover, the updated guidance range reflects year-over-year growth of 3.7% from analysts’ fiscal 2019 EPS estimate of $6.99.
Delta anticipates its revenue growing 4%–6% in 2020, which is higher than analysts’ projection of a 3.7% increase. At analysts’ 2019 revenue forecast of $46.91 billion, Delta’s 2020 revenue growth reflects sales between $48.79 billion and $49.72 billion.
Delta’s 2020 revenue growth drivers
Delta pointed out several revenue growth drivers during its investor day presentation, according to CNBC. The US carrier believes its robust top-line growth will be mainly driven by strong passenger demand in the domestic market. Notably, the American market accounts for nearly 70% of Delta’s overall revenue. A healthy job market, a steady rise in wages, and improving GDP are driving air travel demand in the US.
During its presentation, Delta said its premium-class revenue is growing twice faster than the company’s overall revenue. According to CNBC, the US carrier anticipates the contribution from its premium-class revenue reaching $15 billion next year.
Delta also said that its credit card partnership with American Express (AXP) would continue to bring incremental revenue. The company projects the collaboration will bring $4 billion in additional revenue this year and $4.4 billion in 2020.
In April, the airline extended its 23-year long partnership with American Express for another 11 years. Last year, the association contributed about $3.4 billion of Delta’s overall revenue. The company anticipates that the revenue contribution of this partnership will reach $7 billion annually by 2023.
In the international market, the company is expanding its reach and capacity through several investments. Delta’s most notable partnership of 2019 is the acquisition of a 20% stake in LATAM Airlines for $1.9 billion.
The company believes that the investment could be accretive to its EPS over the next two years. Moreover, Delta anticipates the transaction will bring in approximately $1 billion in incremental revenue over the next five years.
Commits to boosting shareholders’ wealth
During the investor presentation, Delta committed to maximizing shareholders’ wealth through share repurchases and dividend payments. The company said it would return 70% of its free cash flow in 2020. Delta projects to generate approximately $4 billion in free cash flow next year. From January to September 2019, the company generated operating and free cash flow of $7.5 billion and $4 billion, respectively.
Delta is known for its aggressive shareholder-friendly initiatives. Since initiating its first share buyback program in 2013, the company has repurchased 11 billion in stock. From January to September 2019, it purchased approximately $1.5 billion in common stock.
Furthermore, Delta’s dividend rate has been among the fastest-growing dividend rates in the airline industry. From 2013 to 2018, the carrier’s dividend grew over 42% compoinded annually. During its second-quarter earnings release, Delta raised its dividend rate by 15% to $0.4025 per share.
Moreover, with a dividend yield of 2.9%, Delta has the highest dividend yield among its top peers. Its biggest competitors, Southwest Airlines (LUV) and American Airlines (AAL), have dividend yields of 1.3% and 1.5%, respectively. Major peer United Airlines (UAL) doesn’t pay dividends to its shareholders.
Is the return of the Boeing 737 MAX a concern?
According to CNBC, Delta CEO Ed Bastian doesn’t see material effects on the company’s financials once Boeing’s (BA) grounded 737 MAX returns to the skies. The aircraft has faced a global flying ban since mid-March following two fatal crashes within five months.
Three major US carriers—Southwest, American, and United—together own 72 Boeing MAX planes. The flying ban on the MAX has caused over 60,000 flight cancellations and millions of lost seats for these airlines.
Therefore, industry experts believe that the return of the Boeing MAX could increase industry capacity massively, thereby putting pricing pressure on airlines. The reduction in overall seating capacity has provided airlines with the advantage of raising ticket fares this year. Almost every US carrier has raised their ticket prices this year.
Nonetheless, Delta’s CEO noted yesterday that the Boeing MAX’s return would not impact its business. Bastian also denied any “material benefit” to the company’s financials due to the Boeing 737 MAX grounding. Delta doesn’t own any Boeing 737 MAX planes.
Delta partnered with Wheels Up
Apart from discussing the 2020 outlook, Delta also revealed a significant partnership in its private jet category business during the presentation. The company announced that it had bought a minority stake in private jet operator Wheels Up. Delta believes that the move could help establish it as one of the world’s largest operators of private jets.
According to a CNBC report, the combined operation will have a fleet of 190 private planes, and over 8,000 customers. Delta anticipates the transaction completing in early 2020.
In a statement, Delta CEO Bastian said that the partnership “is the latest step in Delta’s ongoing effort to build partnerships that extend Delta’s brand beyond its core business,” CNBC reported. He also said, “This groundbreaking partnership will democratize private aviation — making the convenience of private jet travel accessible to more consumers.”