In his presentation at Morgan Stanley's 10th annual Laguna Conference on Wednesday, Delta Air Lines (DAL) CEO Ed Bastian gave investors all the positive remarks they could wish for.
A powerful combination of forces is prompting high travel demand. The fading of Covid restrictions, including the end of the mask mandate on airplanes, has removed unpopular and cumbersome travel features. Plus, dollar strength is spearheading a robust rebound in transatlantic travel.
Delta management noted that international is now surpassing domestic in terms of unit revenue strength and is expected to continue into the fall. As an airline with one of the most international destinations, Delta is in a prime position to capitalize on the effects of the strong dollar.
Most surprisingly, Delta reports that business travel has seen a surge in bookings post Labor Day. While this is still only a couple of weeks of data, it could portend the beginning of an enormous trend reversal.
Delta already sees about 85% of corporate travel restored. Less surprisingly, Delta is seeing strong bookings for the holiday season. The softness in various parts of the economy, much of it caused by higher interest rates, hasn't emerged in travel, which Bastian reiterated.
But while the pent-up demand for travel is burgeoning, it is not fully reflected in many travel stocks, including Delta.
Earlier in the year, high oil prices suppressed airline earnings, but prices have since come off the boil. Although energy price volatility will persist, the worst of the oil surge may be over, helping airline cash flow. Airline capacity constraints due to pilot and staffing shortages have kept ticket prices firm, allowing Delta to expect accelerating margins in 2023.
Delta took on about $10 billion in net debt to cover pandemic-related losses. Delta's enterprise value still stands about 20% below pre-pandemic levels, where DAL can still rally almost 50% to regain EV parity from 2019.
Considering Delta is directing much of its free cash flow to pay down debt, the upside for the stock over the next few years is considerable if the business trajectory continues. The CEO reiterated that Delta retains earnings power of over $7/share in 2024.
Overall, Delta's CEO reinforced that the post-pandemic travel trade is alive and well. There continues to be an opportunity in travel-related stocks. Even in this choppy market, DAL is one of the better ways to participate in this trend with its reasonable valuation, improving balance sheet, and leading sector position.
With Delta still trading at a substantial discount to its pre-pandemic enterprise value, the stock is a buy in the low $30s for either a short-term trade into earnings or a longer-term holding.
The last time Delta management sounded this positive at a conference, the following earnings report and guidance proved solid enough to propel the stock significantly higher post-earnings. The runway is clear to own DAL into reported earnings mid-October and for regaining lost ground during the pandemic long-term.
