Latin America Growth, Partnerships Boost Delta’s Outlook

Delta Air Lines (NYSE:DAL) reported net income of $549 million for Q3 2011 versus $366 million same period last year. Higher earnings were a result of capacity cuts and the airline raising its fares in an environment of rising fuel cost while its passenger traffic was more or less flat. ^[1] Delta continued to see higher growth in its international operations, particularly in Latin America, given the demand for business travel. We estimate Delta’s international business constitutes around 17% of its stock price. Growing partnerships with international airlines such as Aeromexico and proposed joint venture with Virgin Blue will boost its international market share in the future. Delta’s close competitors are American Airlines (NYSE:AMR), Southwest Airlines(NYSE:LUV) and US Airways (NYSE:LCC).

See our complete analysis for Delta Air Lines’s stock

Latin America Drives International Growth

Delta’s revenues from its international business has been growing at a rapid pace. For Q3 2011, Delta’s passenger revenues from Pacific and Latin America operations rose 22% and 14%, respectively, compared to 10% for domestic operations. ^[1] In terms of traffic, Latin America saw the highest traffic growth in September 2011 with a 13.7% increase compared to September 2010, while the traffic growth for its other international operations remained sluggish. ^[2] Though Delta’s Latin America business is small, it has been growing at a good pace compared with other regions.

Delta Extends International Partnerships

We expect Delta’s international business to grow as demand for corporate travel remains strong. The company was voted “Best Airlines – Travel” by Recommend Magazine and topped Fortune’s “World Most Admired Companies” in the airlines industry in 2011. ^[1]

Delta is also looking to boost its international flights by entering into partnerships with airlines. It recently entered into an alliance with Aeromexico, where Delta will be investing $65 million in Aeromexico and will be benefiting from Aeromexico’s vast passenger network. ^[3]

Another anticipated partnership is between Delta and Virgin Blue. Both the airlines had applied with the US Department of Transportation (DOT) for antitrust immunity for a proposed joint venture that will expand the reach of Delta and Virgin Blue carriers between the U.S. and Australia and South Pacific. While the DOT tentatively denied this application last year, Delta and Virgin Blue have reapplied with additional information about their partnership.  If the deal goes through, it is expected to boost Delta’s market share internationally.

While we expect Delta’s international market share will decrease from 13.5% in 2012 to 13% by the end of our forecast period, Trefis members expect an increase from 14% to 15% during the same period. The member estimates imply an upside of 12% to the Trefis price estimate for Delta Air Lines’s stock.

We currently have a Trefis price estimate of $9 for Delta Air Lines’s stock, just ahead of the current market price.

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1. Delta Air Lines Announces September Quarter Profit, Press Release, Oct 25, 2011 [↩] [↩] [↩]
2. Delta Air Lines Reports September Traffic, Press Release, Oct 5, 2011 [↩]
3. Delta and Aeromexico Create Enhanced Commercial Alliance, Press Release, Aug 10, 2011 [↩]