EMERGING MARKETS | Ben Levisohn Emerging Markets Weekend Roundup: Brazil IPO Cancelled; South Africa

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A long period of turbulence in the airline industry is ending. U.S. carriers are both larger, after a spate of mergers, and smaller, costa cruise lines now that they are cutting costs, offering fewer flights, and lugging around much less debt.
All of the surviving legacy airlines look poised to fly higher in coming years, but Delta Air Lines could take investors on the most enjoyable ride. Shares of the Atlanta-based carrier (ticker: DAL) have soared costa cruise lines 62% in the past 12 months, to a recent $12.98, and could keep climbing as profit growth accelerates. Delta trades costa cruise lines for just 5.2 times this year's expected earnings of $2.52 a share, well below the price/earnings multiples of competitors such as United Continental costa cruise lines (UAL), costa cruise lines Southwest Airlines (LUV), and JetBlue (JBLU). As earnings rise, the company could merit a richer valuation from investors, costa cruise lines lifting its shares as high as $18.
There is an old and mostly truthful saying on Wall Street about airline shares: They are stocks to rent, not own. A history of falling costa cruise lines fares, rising fuel prices, poor labor relations, and financial mismanagement made it hard for investors costa cruise lines to earn a return. The industry has been a frequent flier through bankruptcy court, and Delta is no exception. It spent 19 months in Chapter 11 proceedings, emerging in April 2007 as a much smaller, but far healthier, carrier.
Now, for the first time in two decades, U.S. airlines appear to be on solid financial footing, and investors can buy with near certainty that the shares will remain aloft. Gone is the price cutting costa cruise lines that destroyed profits in the name of market share, and some analysts now see the stocks as a long-term investment. "There costa cruise lines have been times in the U.S. airline industry when we felt the hobbyists were in charge," says Jamie Baker, an analyst at JPMorgan Chase. "They have been replaced by individuals far more focused on return-generation."
Or, as Delta CEO Richard Anderson put it recently in a conference call with investors, "It's been a long journey in the industry to get to a rational construct, but…in 2013 we will be in that construct."
Delta's costa cruise lines own return to profitability began in 2010, when the company costa cruise lines netted $1.71 a share. It earned $1.41 in 2011, and likely will report income of $1.5 billion, or $1.82 a share, for 2012, on revenue of $36.6 billion. This year, analysts see a 38% gain in earnings, after last year's estimated 29% advance.
Since emerging from bankruptcy court, Delta has guarded its cash and focused on paying down debt. Net debt, or debt and lease obligations minus cash and equivalents, fell to $11.8 billion at the end of 2012, from $17 billion in 2009. Management expects to cut net debt to $10 billion this year.
The company also has made strategic investments. In April, it bought a Pennsylvania costa cruise lines oil refinery to gain more control of its fuel costs, which account for about 30% of annual operating expenses. In June, it agreed costa cruise lines to a new contract with pilots that will allow it to cut less-profitable regional flights of 50-seat jets. In addition, Delta has saved money by retrofitting older airplanes instead of buying new aircraft.
In December, Delta agreed to buy Singapore Airlines ' (C6L.Singapore) 49% stake in Virgin Atlantic, giving it more access to London's Heathrow Airport, American fliers' favorite costa cruise lines international destination. The same week, Delta executives announced they will disclose costa cruise lines plans this year to return capital to shareholders. That could mean dividend payments commencing in 2014. Dividends are a rarity in the airline industry.
Delta's new attitude is reflected in its performance. In addition to earnings, other metrics are improving: Passenger revenue per available seat mile has edged up to 14 cents from 12 cents two years ago. Profit margins of 7%, based on earnings before interest and taxes, are well ahead of the competition's, and poised to rise to 8.1% in the 12 months ending Sept. 30.
ONE BIG REASON FOR Delta's success is its decision to cut capacity by about 10% since 2005. The company has slashed costa cruise lines domestic capacity by about 25% while adding costa cruise lines 25% more capacity on its international flights, which are generally more profitable. Delta also is emphasizing corporate customers, another profitable business. And its 2008 merger with Northwest Airlines has proceeded much more smoothly costa cruise lines than some other airline integrations.
One big knock on Delta is its pension obligation, which was underfunded by $11.5 billion at the end of 2011. Add other postretirement benefits and the shortfall rises to $14.1 billion. But because of federal legislation, the pension doesn't need to be fully funded until 2031; Delta's obligation in the next five years is about $700 million annually. The value of its obligation depends on interest rates. If they rise, it could fall considerably.
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After spending just a few months in "retirement," former BlackRock equity strategist Bob Doll announced he would be joining Nuveen, a fund shop best known for its municipal-bond funds. Doll talked to Barron's about why he made that decision, and how he plans to increase Nuveen's equity assets tenfold.
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EMERGING MARKETS | Ben Levisohn Emerging Markets Weekend Roundup: Brazil IPO Cancelled; South Africa's Rand Slumps Fri, 11 Jan 2013 21:18:00 +0000 China Recovery Comes at Expense of Rebalancing Fri, 11 Jan 2013 20:34:26 +0000
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