A small commercial spat involving Delta Airlines received front page media attention this past October 9 when Canadian Prime Minister Prime Minister Justin Trudeau visited the White House to begin another round of NAFTA negotiations.
A few weeks ago, a purchase order of 125 small jets by Delta from Canadian manufacturer Bombardier was slapped with a large tariff by the US government due to its determination that Bombardier had received excessive Canadian government subsidies in contravention of NAFTA rules. [See related story on this website.] Delta is contesting this tariff in legal proceedings that will stretch into 2018.
Delta was also in the news this past week on a more positive note, reporting earnings that featured stronger than expected top line growth. Similar reports of higher passenger revenue per available seat mile (PRASM) from American Airlines and United Continental Holdings sparked a rally in airline stocks, which had been slumping because of pessimistic earnings expectations due to disruptions caused by Hurricanes Harvey and Irma and fare wars.
Bottom line results for the major airlines were indeed lackluster. However, the uptick in top line growth was enough to lift airline stocks for two reasons. First, it is a trend that is expected to continue. Second, the major international airline companies have come to be viewed by Wall St. as oligopolies enjoying significant barriers to entry and very low marginal costs akin to railroads.
With such companies, the top line is paramount and explains the market being quick to push share prices lower when faced with temporary weather disruptions and just as quick to push share prices higher when contemplating increases in revenue of less than 2%.
The current status of major international airlines as oligopolies enjoying significant barriers to entry and low marginal costs helps explain why a high profile investor such as Warren Buffett, who for years had shunned airline stocks, now owns several. In 2016 Buffett’s Berkshire Hathaway announced that it held significant stakes in American Airlines, Delta, Southwest and United Continental Holdings.
In keeping with its status as a member of an elite oligopoly, Delta has recently taken to using its balance sheet to reward its shareholders as opposed to pursuing new avenues of growth. During the past quarter, Delta repurchased 1.6% of outstanding shares and paid dividends that equate to approximately a 2.3% annual return.
This website does not provide investment advice or recommendations. For more on Delta, the author encourages readers to review Jonathan Cooper’s October 13 article on Delta on the Seeking Alpha website. Delta’s stock chart below is courtesy of Google Finanace, Yahoo Finance and MSN Money.