On Tuesday, UBS initiated coverage on Delta Air Lines (NYSE:DAL), issuing a Buy rating with an optimistic price target of $59.00. The firm projects a favorable outlook for the airline, anticipating an increase in fiscal year 2024 and 2025 margins due to a rise in unit revenues and a reduction in cost pressures starting in the second half of 2024.
The firm's forecast for Delta's pre-tax margin is approximately 9.9% for fiscal year 2024, which is a slight increase of around 30 basis points year-over-year, compared to a consensus of 9.5%. For fiscal year 2025, the expectation is even higher at 10.9%, against a consensus of 10.6%. UBS suggests that Delta Air Lines' revenue per seat mile (RASM) growth will exceed market expectations in the latter half of 2024 as domestic RASM increases and Atlantic RASMs remain consistent.
The positive trajectory is expected to continue into 2025, supported by the assumption of continued supply discipline. UBS also predicts that Delta will benefit from improved employee productivity, decreased maintenance expenses, and a slowdown in pilot wage increases to approximately 4% from about 7% in 2024. These factors are anticipated to contribute to a significant acceleration in the airline's margins in fiscal year 2025.
UBS recommends purchasing Delta Air Lines shares now, ahead of the forecasted multi-quarter period of margin expansion that is expected to commence in the second half of this year. This optimistic stance reflects the firm's confidence in the airline's financial performance and potential for growth in the near future.
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