Delta's Eyeing Margin Takeoff

We are maintaining our $63 fair value estimate for no-moat

For the coming year, Delta expects to achieve pretax margin expansion of more than 100 basis points and adjusted EPS between $6 and $7, which lines up with the 200-basis-point margin expansion and adjusted EPS of $6.40 in our valuation model. We were encouraged by the carrier’s ability to stymie non-fuel costs per available seat mile, or CASM. Management set out to limit non-fuel CASM to less than 2% in 2018, which it accomplished. And now it expects to replicate its success, keeping non-fuel CASM growth to a range of flat to up 2%. Our model incorporates non-fuel CASM growth around 2% over 2018. Combined with growing loyalty program contributions and increased exposure to high revenue cabin configurations, we project that Delta's 2022 pretax margins land 200 basis points above the 12% pretax margins we forecast for 2019. Our midcycle adjusted 14% pretax margins translate to a 15% operating margin, short of management’s long-term guidance calling for margins of around 17%.

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