Everyone recognizes Delta Air Lines(NYSE: DAL) as a global transportation giant, ferrying millions of passengers worldwide. While this is true, there's another perspective to consider: Delta is a "plutonomy stock." This term refers to a stock that stands to gain from the growing trend toward wealth imbalances, where the affluent continue to amass wealth.
I'm not advocating for this trend, but I am suggesting that Delta could be a lucrative investment if you believe this trend will persist. Here's why.
Three reasons why Delta is a plutonomy stock
First, as Delta's management pointed out during its Investor Day presentation in 2023, "75% of the revenue in our industry is generated from households that have a household income of $100,000 or more, which is the top 40% of consumers in our country."
Given that Delta is not a budget airline and strategically focuses on the premium end, it stands to reason that it will consistently generate revenue from high-end customers, providing a stable investment opportunity.
Second, Delta is growing, and intends to grow, its higher-margin Premium and Loyalty & Other revenue more than its Main cabin revenue. The chart shows that, despite the distortion created by the lockdowns, Delta is growing its higher-margin revenue much more than its Main cabin revenue.
Delta Revenue | 2014 | 2019 | 2023 | CAGR 2014-2023 | CAGR 2019-2023 |
|---|---|---|---|---|---|
Loyalty & Other | $8 billion | $10.1 billion | $14.5 billion | 6.8% | 9.4% |
Premium | $9.6 billion | $15 billion | $19.1 billion | 7.9% | 6.2% |
Main Cabin | $22.4 billion | $22 billion | $24.5 billion | 1% | 2.7% |
Total | $40 billion | $47.1 billion | $58.1 billion | 4.2% | 5.4% |
Data source: Delta Air Lines SEC filings. CAGR=compound annual growth rate. Table by author.
Third, Delta's highly successful SkyMiles program allows members to earn miles by traveling on Delta flights or spending on partner services, including co-branded credit cards with American Express. As management notes, partnership with American Express has led to spending through the Delta American Express credit cards to equate to almost 1% of U.S. GDP. As such, the relationship with American Express has turned into a significant income generator for Delta, as remuneration from American Express has grown significantly.
Management sees it hitting $10 billion over the long term.
Data source: Delta Air Lines presentations.
Delta Air Lines' secret weapon
The three points come together to create Delta's secret weapon. If wealth inequality increases, more spending will likely be concentrated in the higher percentile of income earners. That's good news for companies that have captured customers in those higher income brackets, and that's arguably what Delta's SkyMiles program has done.
On Investor Day last June, management said it had 25 million active members of the SkyMiles program, 30% of whom had a co-branded credit card.
Delta's senior vice president of Customer Engagement & Loyalty, Dwight James, noted, "Our portfolio is becoming more and more premium. The more premium my portfolio, the higher the average spend and the higher the remuneration from American Express." Moreover, Delta is driving SkyMiles' adoption among "younger, more engaged, and more premium" customers by offering free Wi-Fi and partnerships with companies like Starbucks.
Image source: Getty Images.
That resulted in a lowering of the average age of new members from 44 in 2017 to 39 in 2022 and a shift in premium revenue from SkyMiles from 15% in 2017 to 29% in 2022.
In short, Delta is winning younger, more affluent SkyMiles members, resulting in a shift in revenue from the (fast-growing) program to the higher-margin premium services.
Risks to Delta's growth strategy
Aside from the headline risk of a slowdown in the economy and air travel, Delta could face risks from increased regulation in the credit card industry. In addition, customer dissatisfaction with loyalty programs may grow. After all, customers are spending money to build up miles, but the airline still decides what they can use those miles for. If customers don't see the benefit of raking up miles, the program and co-branded credit card usage could be under pressure.
Image source: Getty Images.
A stock to buy?
Delta is not only enjoying the fruits of the aerospace recovery; it's also increasingly focusing its business on its premium customers and revenue generated from its loyalty programs. That makes it an attractive stock for investors, and it also looks like an excellent value when trading on slightly less than 7 times the estimated earnings for 2024.
Should you invest $1,000 in Delta Air Lines right now?
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
