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Morningstar | Delta Extends Loyalty Program Relationship with American Express Through 2029; Raising FVE

We plan to raise our fair value estimate for Delta airlines by about 7% after it renewed its agreement with American Express for its SkyMiles frequent flyer program under favorable terms. The updated agreement extends Delta’s relationship with American Express through 2029 and doubles AMEX’s contribution to Delta through 2023. The carrier now expects contributions worth $7 billion toward the end of our five-year stage 1 period compared with the $3.5 billion it received in 2018. Today’s investor update also delivered decent news for the March quarter. Management expects strong operational performance will bring year-over-year unit cost (excluding fuel and profit sharing) inflation below its guided range of 1%-2%. We think the market fully appreciates the value of Delta's extension with American Express and shares appear fairly valued after today's 6% rally.

We estimate the updated frequent flyer agreement will deliver over $3 billion dollars in cash for shareholders or about $4 per share. This translates to about $500 million in incremental cash flow over our previous estimate through the agreement’s 2029 end date. Our updated model suggests Delta’s SkyMiles program will continue generating operating margins close to 60% and occupy over 40% of Delta’s operating income through our 2023 midcycle year. We find today’s announcement encouraging because it suggests the market for airline miles remains resilient despite emerging demand risks and mileage devaluations.

For the quarter, management expects solid corporate demand will help drive unit revenue inflation and counter choppy leisure demand. Delta’s impressive operational performance is also expected to flatten non-fuel unit costs and help it approach its full-year inflation estimate of 1%.

Save for the loyalty program extension, we maintained our 2019 estimates after observing Delta’s new first-quarter guidance. Against the final three quarters in 2018, we model year-over-year capacity growth of 3%, leaving full-year capacity growth close to 3.5%. We expect Delta’s upgauging efforts will support unit revenue growth but sliding load factors will pressure yields and drive system-wide TRASM (total revenue per available seat mile) growth slightly below 2%.