Delta Air Lines: Eliminating Disaster Discount

seekingalpha.com
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Delta Air Lines entered the crisis already trading at a disaster discount. The airlines are quickly approaching load factors where average flights are break-eve
Delta Air Lines (NYSE:DAL) continues to rebound from the Buffett lows as airline traffic rises off the April lows. One of the most crucial metrics for valuing the airlines going forward is the load factor. My investment thesis is highly bullish on the airlines even with this recent rally in the stock as the load factors are rising and the potential for eliminating the disaster discount coming out of this down cycle improves the long-term potential of Delta.

Image Source: Delta Air Lines website

Crucial Load Factor

According to data from FloridaPanhandle.com, Delta Air Lines leads the legacy sector with the ability to turn flights profitable with a load factor of only 74.2%. In companion, American Airlines (NASDAQ:AAL) is up at 78.9% and United Airlines (NASDAQ:UAL) is in the middle at 75.6%.

Source: FloridaPanhandle.com

The load factor measures the percentage of passengers on a flight in comparison to the available seats. Airlines typically target load factors in the 80% to 90% range.

The FloridaPanhandle.com data is based on an approximate cost of operating a 216 passenger flight on a 1,000 mile route. The airlines offer numerous varying routes with airplanes offering different seat arrangements so these estimates can't be assigned to every flight for these airlines.

This signals that Delta has to sell tickets to fewer passengers in order to at least break-even on a flight. The airline does a better job of generating more revenue per passenger while having lower costs.

The big key here is the load factor due to the fixed costs of the plane, pilots, flight attendants, maintenance, and even fuel to an extent. The costs of the flight aren't very variable so what matters is the ability to generate matching revenues per flight. Per the analysis, Delta loses $10K on a flight with a 50% load factor and naturally the amount doubles to $20K when the load factor dips to just 25%.

Source: FloridaPanhandle.com

The actual loss could even be higher on the lower load…
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