Delta Air Lines, Inc. (NYSE:DAL)

JakilaTheHun (99.93) Submitted: 3/13/2011 7:14:06 AM : Start Price: $11.11 DAL Score: +11.88

You know, I really like making contrarian calls, and this seems to be the ultimate contrarian call here on CAPS. People don't like the airlines because there's a belief that the industry has never been long-term profitable and that putting money into airlines is a giant sinkhole. There's been a lot of truth to that in the past, but we're in the present now.

The airline industry privatized several decades ago and many thought it move to profitability after that. They were wrong. Rather, the industry continued to destroy capital at an alarming rate. So why didn't privatization fix the problems?

Well ... my belief is that it might have. People just tend to forget the nature of the industry. Airline companies make very long-term fixed asset purchases. A company doesn't buy a plane and then dump it a few years later. Many of these planes are used for about 20+ years. So what people might have missed is that this an industry based on heavy fixed asset purchasing, which tends to give it longer cycles than many other industries.

Now, we have another trend: consolidation. As the airlines consolidate, they find they suddenly have a bit more pricing power and are able to become profitable for the first time in decades.

While many might believe the Southwest-AirTran merger hurts Delta, it actually probably helps them by turning Southwest into 'just another bulky giant airline.' Southwest's advantage was its slimmer business model. It now lacks that model.

Assuming a little bit of revenue growth and 5%-6% profit margins at some point, Delta could start churning out earnings in the $2 to $3 range. While the company does have some significant long-term liabilities that weight it down, I do believe if investors see it's able to hit those sorts of earnings numbers, that the stock price will go up to the $20 - $30 range.

There's another thing here: oil prices have recently spiked and that's the best time to buy airlines. The airlines are inversely correlated with oil, so if you believe oil will fall from here, this is the ideal time to buy.

Overall, I like DAL right now and own some long-dated calls in real life. The biggest worries to me would be the long-term liabilities, which are no laughing matter. All the airlines have too much debt in their capital structures.

How confident am I in this pick? Not overwhelmingly so. I think the thesis makes a lot of sense, but I've not ever seen the airlines ever do all that well historically, so there is obviously a lot of doubt in my mind. I green thumb it anyway.