DAL - Delta Airlines

[shalab]

DAL looks like a buy at these prices. Berkshire owns 53 million shares.

 

Morningstar says ...

 

"Delta remains one of the best-managed airlines, with the highest operating margins among U.S. network carriers, a clean balance sheet, and a commitment to returning 70% of its free cash flow to investors. Thanks to significant industry consolidation, Delta’s operating margins should remain positive across the full cycle; this signals a clear break with much of the industry’s history, which featured boom-bust cycles."

 

In addition, the shares outstanding have decreased from 850 million to 707 million in the past five years with six million bought back in the last three months alone.

 

The company also operates its own gas refinery which gives it some advantages.

 

Although 2017 was a down year compared to 2016, 2018 is looking up.  Tax cuts are also helping as more money will go to the bottom line.

[Snorky]

Do i see it right that Buffett bought nearly 5 mio shares and exceeded the 10% mark, although he said he don’t want it on airlines because of the regulatory issues?

 

 

https://www.sec.gov/Archives/edgar/data/27904/000120919119018303/xslF345X03/doc4.xml

 

 

 

[gfp]

That's right - he went over 10% on Delta.  He's apparently willing to deal with the reporting requirements (filing within a few days when he goes to sell his first share).  It's not like the Bank holding company rules, its a self imposed limit so he can buy and sell without notifying the world immediately.

[gfp]

The author of this weekend's Barron's article on Delta must feel pretty vindicated.

[SwedishValue]

I believe this topic needs some more love. Especially considering Buffett owns big stakes in all four airlines, just purchased enough shares to put him above the self-imposed 10% limit, and considering the significantly different economic outcome for all the airliners during the past couple of years.

 

I'm looking through earnings transcripts and other material, if anyone has some special insight to share or discuss I would be happy to be suggested more reading material :)

[Spekulatius]

The fact that he holds stake in many airlines means that he is unlikely to complete take over one, I think. I agree this topic should get more love.

[SwedishValue]

One thing I remember from a CNBC interview, is Buffett saying he wouldn’t rule out owning an airline. There have been calls for further consolidation as well, I don’t know if another big merger would be possible from a regulation perspective, but if Buffett wanted to he could finance such a merger. Maybe it’s even the elephant that got away?

 

I agree with you however, that the prospects for an outright acquisition of an airline has decreased materially since Buffett filed for his increased delta stake.

[gfp]

Delta certainly seems underpriced on an earnings basis and has been aggressive in repurchasing shares.  Recently, Warren seems to be buying any time the share price dips to 50 or below.  We'll see very soon if he resumed his share purchases on this recent dip below 50.  Delta, of course, doesn't have any of the Boeing 737 Max variants.

 

https://www.sec.gov/cgi-bin/own-disp?action=getissuer&CIK=0000027904

 

[gfp]

https://s2.q4cdn.com/181345880/files/doc_financials/quarterly_results/2019/q2/Delta-Air-Lines-Announces-June-Quarter-Profit.pdf

 

I own a fair bit of this one.  People are always lamenting how high the "market" is priced but you have plenty of pockets like Delta that just do not seem overpriced to me. 

 

Increases full year earnings guidance to $6.75 to $7.25 per share

Board of Directors approves 15% increase to company’s quarterly dividend

 

 

The fact that he holds stake in many airlines means that he is unlikely to complete take over one, I think. I agree this topic should get more love.

Remember how the railroad basket worked out.  Not sure any of the airlines would be 'for sale' in their entirety at anywhere close to these prices, but I don't think it's all that unlikely that Buffett would buy one up whole.

 

I agree with you however, that the prospects for an outright acquisition of an airline has decreased materially since Buffett filed for his increased delta stake.

The rise above 10% was supposedly accidental, but the only thing it really changes is that it will be harder for Berkshire to sell DAL, as the market will be notified within 3 days of the first share sale.  If selling it is less palatable, might as well make an offer for the other 89%

[bizaro86]

Would WEB buy DAL, where the credit card feal with Amex is probably maximized, or buy UA, where there is probably lots of upside to their deal with JPM? Seems like he might like the one with the future lever to pull.

 

OTOH, DAL probably has the best customer service reputation among the big 3 legacy carriers.

[gfp]

hey what happened to that value investor turned technical analyst?  can we get a tea reading?

 

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dal&insttype=&freq=2&show=&time=13

[Cigarbutt]

Yes, I think the co-brand card is a huge part of the DAL story that's not often mentioned. See the attached screenshot from a recent DAL investor presentation. Anyone have more insight into this program and what % of earnings / EV one might attribute to the card program? In my mind, the earnings stream from card issuers like AXP / the banks buying miles from the airlines is pretty damn sticky (should grow with RPMs at ~5%) and thus warrants a much higher multiple than the operating biz.

I follow airlines peripherally but have done dissecting work on their frequent flyer programs.

For valuation purposes, you have to decide if this is a mirage based on weak or false loyalty, if this is an enduring source of engagement and consistent cashflow generation or somewhere in the middle.

There is a couple in my extended family who keep re-applying for credit cards and cancelling them at the opportune time. Credit card issuers can be particularly generous upon activation of an account, especially American Express it seems. They are both middle class and retired and, on average, travel internationally about 2 to 3 months per year using their loyalty currency to pay for much or all or their airplane tickets. Some people are very savvy with this issue but I suspect most consumers are patsies and the scheme has been going on for quite some time and nothing on the horizon suggests that this will change.

Why would a bank or a credit card issuer pay the airline (loyalty unit) such a high price (huge margins versus cost of rewards) for the loyalty currency? Because these programs tend to attract and retain wealthier people who consume a lot, will use their card as a loan and who will tend to eventually pay with, overall, very low defaults. I assume the credit card issuers realize, on the average, a very high NPV per customer, despite the initial 'investment'.

To make a long story short, the net income and cashflow multiples have been typically higher for the loyalty units vs the airline itself. This is based on sentiment and tradition to some extent but an 8 to 10x EV/EBITDA multiple is often mentioned for the frequent flyer programs. There is an analyst named Joseph DeNardi who appears on various airline conference call transcripts and who tends to ask questions about the loyalty subs. Executives keep making general comments and avoid specific disclosures as their wish for the market value to reflect their underlying businesses seems to be tempered buy strategic reasons and, perhaps, by the unusually high profitability of those units. This analyst has suggested a PE of 22 for growing units and, in 2017, an extra 10$ per share value for Delta.

 

Here are some references to back the above:

http://docshare02.docshare.tips/files/28748/287484192.pdf

http://ffpinvestmentandadvisory.com/wp-content/uploads/2017/10/Loyaltytransformation.pdf

https://nilsonreport.com/upload/pdf/Airlines_Cash_In_on_Loyalty_Credit_Cards_-_WSJ.pdf

https://skift.com/2017/04/01/frequent-flyer-programs-profitablity/

[gfp]

There is a couple in my extended family who keep re-applying for credit cards and cancelling them at the opportune time. Credit card issuers can be particularly generous upon activation of an account, especially American Express it seems. They are both middle class and retired and, on average, travel internationally about 2 to 3 months per year using their loyalty currency to pay for much or all or their airplane tickets. Some people are very savvy with this issue but I suspect most consumers are patsies and the scheme has been going on for quite some time and nothing on the horizon suggests that this will change.

 

I've done my share of this as well, without the cancelling of the cards for the most part.  JPM has had very high 'customer acquisition costs' to get AXP's traditional customer base, but has gotten very wise to this trend and will not permit serial sign-up bonuses.  Their response is called the "5/24 Rule" - [ https://thepointsguy.com/guide/ultimate-guide-chase-5-24-rule/ ]

 

This did not stop us recently from receiving 80,000 ultimate rewards points sign-up bonus for a new Chase Ink account for an LLC, which surprised me since it is in my wife's name and I think she has received too many 'bonus points' on other Chase card products to pass the 5/24 test.  Maybe it's a loophole.

 

Either way, nobody in my family has paid for a flight with actual money in years.

 

I suspect AXP would behave similarly to JPM in time if they are not already addressing this.

[DooDiligence]

http://docshare02.docshare.tips/files/28748/287484192.pdf

 

Great writeup.

 

Who knew airlines generated float?

[bizaro86]

Airlines generate tons of float. The longer term way is by selling points way before they get used (and some never do).

 

The bigger way (but shorter term float) is with pre-payments. An airline ticket is one of the very few things consumers pay for well in advance, whereas generally airlines pay their expenses (employees, fuel, etc) with at least a small delay.

 

An offsetting factor is the capital intensity of the business (often that float buys airplanes). Another depends on credit rating. Credit card banks have been burned badly by airline bankruptcies in the past, so they now require restricted cash to be held to offset some of their risk. How much restricted cash depends on the specific deal and credit rating of the airline.

 

I actually think this has the potential to be a small moat for the big carriers, as a new carrier won't get good terms on that, which makes it more expensive (working capital) to start a new competitor.

[DooDiligence]

Airlines generate tons of float. The longer term way is by selling points way before they get used (and some never do).

 

The bigger way (but shorter term float) is with pre-payments. An airline ticket is one of the very few things consumers pay for well in advance, whereas generally airlines pay their expenses (employees, fuel, etc) with at least a small delay.

 

An offsetting factor is the capital intensity of the business (often that float buys airplanes). Another depends on credit rating. Credit card banks have been burned badly by airline bankruptcies in the past, so they now require restricted cash to be held to offset some of their risk. How much restricted cash depends on the specific deal and credit rating of the airline.

 

I actually think this has the potential to be a small moat for the big carriers, as a new carrier won't get good terms on that, which makes it more expensive (working capital) to start a new competitor.

 

I'm thinking if the Wright brothers would have had a frequent flier program, WEB might not have made such disparaging remarks about them.

[vince]

Airlines generate tons of float. The longer term way is by selling points way before they get used (and some never do).

 

The bigger way (but shorter term float) is with pre-payments. An airline ticket is one of the very few things consumers pay for well in advance, whereas generally airlines pay their expenses (employees, fuel, etc) with at least a small delay.

 

An offsetting factor is the capital intensity of the business (often that float buys airplanes). Another depends on credit rating. Credit card banks have been burned badly by airline bankruptcies in the past, so they now require restricted cash to be held to offset some of their risk. How much restricted cash depends on the specific deal and credit rating of the airline.

 

I actually think this has the potential to be a small moat for the big carriers, as a new carrier won't get good terms on that, which makes it more expensive (working capital) to start a new competitor.

 

 

Based on my research the amex partnership has very high margins (north of 50%).  Revenue of 3+ billion currently growing to 6-7 billion in 5 years time.  I bought Delta at 30 billion confidently thinking that their loyalty program alone is worth the price I paid.

[John Hjorth]

I'm thinking if the Wright brothers would have had a frequent flier program, WEB might not have made such disparaging remarks about them.

 

Jeff, for my part, you're forgiven not posting this in the "Please tell me a joke ..." topic [ ; - D ].

[Spekulatius]

Airlines generate tons of float. The longer term way is by selling points way before they get used (and some never do).

 

The bigger way (but shorter term float) is with pre-payments. An airline ticket is one of the very few things consumers pay for well in advance, whereas generally airlines pay their expenses (employees, fuel, etc) with at least a small delay.

 

An offsetting factor is the capital intensity of the business (often that float buys airplanes). Another depends on credit rating. Credit card banks have been burned badly by airline bankruptcies in the past, so they now require restricted cash to be held to offset some of their risk. How much restricted cash depends on the specific deal and credit rating of the airline.

 

I actually think this has the potential to be a small moat for the big carriers, as a new carrier won't get good terms on that, which makes it more expensive (working capital) to start a new competitor.

 

 

Based on my research the amex partnership has very high margins (north of 50%).  Revenue of 3+ billion currently growing to 6-7 billion in 5 years time.  I bought Delta at 30 billion confidently thinking that their loyalty program alone is worth the price I paid.

 

Maybe I see this incorrectly, but the airline points business economics are already reflected in the financial statements we see for the airlines, so why does it matter that such a high margin business exists? It can’t be parceled out as I understand it.. I could understand that the Airline Card business could get a higher multiple, if it could be parceled out, but I don’t think it can, which makes the whole point moot. It’s just means that there a high margin business and an offsetting low margin business summing up to the economics that we gather from their earnings reports.

[DooDiligence]

I'm thinking if the Wright brothers would have had a frequent flier program, WEB might not have made such disparaging remarks about them.

 

Jeff, for my part, you're forgiven not posting this in the "Please tell me a joke ..." topic [ ; - D ].

 

Mea culpa.

 

Comic relief is my only useful function here.

[vince]

Airlines generate tons of float. The longer term way is by selling points way before they get used (and some never do).

 

The bigger way (but shorter term float) is with pre-payments. An airline ticket is one of the very few things consumers pay for well in advance, whereas generally airlines pay their expenses (employees, fuel, etc) with at least a small delay.

 

An offsetting factor is the capital intensity of the business (often that float buys airplanes). Another depends on credit rating. Credit card banks have been burned badly by airline bankruptcies in the past, so they now require restricted cash to be held to offset some of their risk. How much restricted cash depends on the specific deal and credit rating of the airline.

 

I actually think this has the potential to be a small moat for the big carriers, as a new carrier won't get good terms on that, which makes it more expensive (working capital) to start a new competitor.

 

 

Based on my research the amex partnership has very high margins (north of 50%).  Revenue of 3+ billion currently growing to 6-7 billion in 5 years time.  I bought Delta at 30 billion confidently thinking that their loyalty program alone is worth the price I paid.

 

Maybe I see this incorrectly, but the airline points business economics are already reflected in the financial statements we see for the airlines, so why does it matter that such a high margin business exists? It can’t be parceled out as I understand it.. I could understand that the Airline Card business could get a higher multiple, if it could be parceled out, but I don’t think it can, which makes the whole point moot. It’s just means that there a high margin business and an offsetting low margin business summing up to the economics that we gather from their earnings reports.

 

I dont totally disagree with you but I will say this....there have been a few instances where the loyalty programs were separated out, so we know that it can, although the positives may be partially offset by some negatives.  In addition, as the loyalty business grows faster than the core business, overall margins and ROIC increase.  But what I was really trying to show is that if indeed the amex card really does bring in 7 billion in revenue with those kind of margins, then you have an income stream (just from the card business) that supports the current value of the whole business.  Remember, that business is way less cyclical as well.  When you are investing large sums, I think it's important to protect the downside as much as possible.  I think the low multiple in itself is the protection you need here, but in addition you have this rapidly growing high margin income stream.  So yes you may be right that parceling it out isn't going to happen, but it certainly does matter that this card business exists

[compoundinglife]

Been looking at they value line for DAL this week. Pre corona cash flow covers dividend 10 times, around 3B in cash plus they just raised another 1B so 4B. Interest expense is ~300M, 1.7B in uncapitalized leases. 

 

Other random thoughts:

Post 9/11 it took 4 years for airlines to recover to pre 9/11 loads. Thoughts on how to think about the worst case scenario for domestic airlines with Corona? My gut is less. It will be easier to ease the fear of travelers. I don't think Corona will burn the same amount of fear into the traveling public.

 

DAL has been steadily reducing shares and it seems definite that will be the first thing to get cut if air travel tanks for an extended period of time. Then the dividend.

 

Token position increase by Berkshire.

 

Seems like a likely candidate for a BRK Pref + Warrant deal if they are desperate.

 

At todays prices, a return to normalcy in 2 years would be 20% annualized not including any dividends.

 

Anyone thinking about buying or adding here? Any other thoughts?

[compoundinglife]

I see now there is some airline discussion going on in the SAVE thread. Will check that out.

[kab60]

What DAL has going for them, other than MRO and credit, is their profit share agreement with employees, so less operating leverage which is nice in a slump.

[Castanza]

Been looking at they value line for DAL this week. Pre corona cash flow covers dividend 10 times, around 3B in cash plus they just raised another 1B so 4B. Interest expense is ~300M, 1.7B in uncapitalized leases. 

 

Other random thoughts:

Post 9/11 it took 4 years for airlines to recover to pre 9/11 loads. Thoughts on how to think about the worst case scenario for domestic airlines with Corona? My gut is less. It will be easier to ease the fear of travelers. I don't think Corona will burn the same amount of fear into the traveling public.

 

DAL has been steadily reducing shares and it seems definite that will be the first thing to get cut if air travel tanks for an extended period of time. Then the dividend.

 

Token position increase by Berkshire.

 

Seems like a likely candidate for a BRK Pref + Warrant deal if they are desperate.

 

At todays prices, a return to normalcy in 2 years would be 20% annualized not including any dividends.

 

Anyone thinking about buying or adding here? Any other thoughts?

 

Corona isn't flying airplanes into buildings and we have a younger generation with an insatiable appetite for travel. If all we see is Corona, idk how this would take 4 years to recover. Throw in a recession and the story probably changes. The dynamics of travel and business have changed dramatically since 9/11 so I don't think this (9/11 comparison) is an overly useful lens in terms of airline travel.