Becoming the most reliable airline and offering higher-quality service has been a top priority for Delta Air Lines (NYSE:DAL) over the past decade. The carrier has dramatically reduced the frequency of delays and cancellations, improved its baggage handling performance, and nearly eliminated the need to involuntarily bump passengers from flights.
These moves have driven steady improvements in Deltas ranking in the Airline Quality Rating report, compiled annually by researchers from Embry-Riddle Aeronautical University and Wichita State University. And in the recently released 2019 Airline Quality Rating report — which covers the 2018 calendar year — Delta finally reached the top spot, overtaking Alaska Air (NYSE:ALK).
In recent years, Delta Air Lines has invested heavily in initiatives to improve its reliability and serve customers better. For example, Delta invested $50 million to roll out an RFID luggage tag system in 2016. The new RFID system is more reliable than the typical bar-code setup used by most airlines, and sensors on Deltas belt loaders can automatically warn the ground crew (with a red light) if a bag is about to be loaded onto the wrong plane.
Meanwhile, Delta reduced the number of maintenance-related mainline flight cancellations by 98% between 2010 and 2017, from more than 5,000 to fewer than 100. This allowed the carrier to improve its completion factor — the percentage of flights that are completed, as opposed to being canceled — from 98% in 2010 to 99.6% in 2018.
Deltas reliability has improved so much that at times, it has been able to go a whole month with no mainline flight cancellations. Even including its regional airline operations (which are more prone to cancellations), it achieved a record 143 days with no canceled flights in 2018.
In recent years, Delta has also dramatically cut down on the number of passengers involuntarily bumped from oversold flights. It now offers incentives that can be worth several thousand dollars in some cases to attract volunteers to give up their seats, even when it would be cheaper to bump someone and pay the federally mandated compensation. As a result, in the first nine months of 2018, Delta Air Lines bumped just 22 of its 104 million mainline passengers.
The annual Airline Quality Rating study measures airlines based on four objective factors: on-time performance, the rate of mishandled baggage, the number of passengers bumped from their flights, and the frequency of official complaints to the U.S. Department of Transportation. Delta has made big strides in all four categories over the past decade or so.
Indeed, as recently as 2010, Deltas AQR score was slightly worse than the industry average. But the airline moved into the upper echelon of the industry in 2012, and has continued to make slow but steady progress since then.
In 2016 and 2017, Delta placed second in the annual rankings, trailing No. 1 Alaska Airlines by the slightest of margins. A lower rate of official complaints to the DOT was the main reason why Alaska was able to hang on to the top spot despite stiff competition. However, by the end of 2017, Delta was routinely posting better monthly AQR scores than Alaska Airlines.
Delta finally took the top spot in 2018. The company proudly noted that it was the only airline to improve year over year on each of the four factors measured. Moreover, its score of negative 0.36 gave it a substantial lead over No. 2 JetBlue Airways, which scored negative 0.48. (Scores closer to zero represent better performance.) Alaska Airlines took a big step backward, falling into fourth place, as its score deteriorated to negative 0.63 in 2018 from negative 0.44 in 2017.
Delta Air Lines efforts to improve its reliability and customer service have helped it earn a consistent revenue premium in recent years. After all, high-paying business travelers care a great deal about arriving on time (along with their bags). This has translated to solid unit revenue growth and strong profit margins for Delta.
As long as Delta continues to hold its spot at the top of the industry in the annual Airline Quality Rating study, it is likely to remain a preferred airline for business travelers. This should enable it to routinely achieve above-average profit margins for the foreseeable future.
I am not a fan of writing about downside potential, but there is temporary risk to Delta Air Lines (NYSE:DAL) stock up here. Before you label me a hater, today’s write up is not a diss about the company itself or its prospects. This is merely a call for caution that is more technically based than fundamental.
Yesterday, DAL stock reported a strong earnings report and the stock appropriately rallied on the headline. The stock so far is trading in lock step with the S&P 500 as it nears its all-time highs from November. Year-to-date, DAL stock is up a respectable 17%.
Fundamentally, the company seems to be doing great, and they promised even better things to come as they raised their forward guidance for 2019. Yet, the stock is cheap, as it only sells at a 8x forward price to earnings ratio. And it also pays a 2.4% dividend to sweeten the pot.
So why am I cautious about the stock up here? There are some worrisome technical aspects to consider.
Although it ended yesterday up, the 3% spike faded in spite of the awesome report. Their management media appearance sounded super confident yet it couldn’t retain its highs of the day. This by itself is not a deal killer, but there is more.
Recently, Delta stock broke out from $52 per share in a big way. So the fast rise in the stock left big open gaps below that could become magnets for short-term trading. While not every gap on a chart gets filled, most of them do. This one is prominent enough that it will attract attention from short sellers.
If DAL loses $56.50 per share, it could invite momentum sellers to try and target $53 per share. While this is not a forecast, it is a scenario prospective buyers of the stock should know.
Wall Street analysts who cover the stock are almost unanimous in rating DAL stock a buy. This leaves no room for improvement and increases the odds of a surprise downgrade. I get uncomfortable when everyone agrees on the same thing because this is when change usually comes. Again, this is not an imminent threat, but it’s looming. In fact, just this week, Credit Suisse raised its price target on Delta — and it probably won’t be the only one to do so.
We also have outside factors meddling with the airline stocks. This time, it’s about Boeing (NYSE:BA). The grounding of the 737 Max and its production halt has a big impact on airlines. Delta has none of those, so it won’t benefit from a relief pop once that situation is resolved. So DAL stock could lose bids to other airlines who are currently under pressure from BA’s woes.
In summary, although I like what the Delta team is doing and how strong the stock it, this is not an obvious time to initiate a new long position. Long term, this is not a worry, so those long it already with profits can stay in them and manage those positions according to their parameters.
After all, when management tells us that demand for Delta’s products has never been stronger, we believe them. This is the ultimate statement of confidence that they are executing well on their plans. Otherwise they’d be offering excuses to explain away what’s not working.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.