Author Topic: DAL - Delta Airlines  (Read 5877 times)

Own The Rails

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Re: DAL - Delta Airlines
« Reply #10 on: July 12, 2019, 05:50:29 PM »
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.


gfp

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Re: DAL - Delta Airlines
« Reply #11 on: July 12, 2019, 06:12:53 PM »
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

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Re: DAL - Delta Airlines
« Reply #12 on: July 13, 2019, 05:03:13 AM »
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

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Re: DAL - Delta Airlines
« Reply #13 on: July 13, 2019, 05:50:55 AM »
Quote
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

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Re: DAL - Delta Airlines
« Reply #14 on: July 13, 2019, 07:12:28 AM »
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Retail 1.8% - ULTA

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bizaro86

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Re: DAL - Delta Airlines
« Reply #15 on: July 13, 2019, 07:47:42 AM »
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

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Re: DAL - Delta Airlines
« Reply #16 on: July 13, 2019, 08:50:38 AM »
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.
Healthcare 21.7% - EW NVO // BRK.B - 24.2% // Auto's & Oil 14.9% - CLB GPC VDE

Banking 9.4% - WFC // Entertainment 4.7% - DIS // Drinkers & Smokers 7.6% - MO

Retail 1.8% - ULTA

---

%'s held @ MV 1/16/2020 minus 15.8% investable cash

i trumpet my ignorance

https://twitter.com/tunawish

vince

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Re: DAL - Delta Airlines
« Reply #17 on: July 13, 2019, 10:27:08 AM »
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

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Re: DAL - Delta Airlines
« Reply #18 on: July 13, 2019, 11:26:36 AM »
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 ].
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Spekulatius

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Re: DAL - Delta Airlines
« Reply #19 on: July 13, 2019, 05:30:55 PM »
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 canít 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 donít think it can, which makes the whole point moot. Itís 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.
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