Delta Finds Clearer Air

NEW YORK ( TheStreet) -- One of the first stories I wrote in Atlanta was about Delta Air Lines' ( DAL) founder, C.E. Woolman.

When current CEO Richard Anderson gave Woolman a shout-out at the start of the air safety video on a recent trip, I knew the company had changed for the better.

Anderson arrived in Atlanta in 2007, when the airline was in bankruptcy. He had previously run Northwest Airlines, which Delta finished buying in 2008. Woolman's legacy included respect for customers and calling all employees part of a team, in lieu of letting them join unions.

Anderson is old-fashioned and a little hokey, but his strategies have worked. Delta returned to the S&P 500 index today. It's now the healthiest U.S. carrier not named Southwest ( LUV), having grown the top line 50% since 2009 and made a small profit for the last three years.

Anderson has steadily paid down debt so it's now a little more than 25% of assets, and since the recession ended, the company has been a cash-flow machine, generating $9.5 billion in operating cash flow from 2009-2012, and more than $3 billion more in just the last two quarters.

Airlines are generally considered to be among the worst investments you can make. They're down there with auto companies. Since the start of the year Delta stock is up 83%, but even so, it has a price-to-earnings ratio of just 10.63, which is positively Ford ( F)-like. If its earnings were valued like Southwest's, which has a P/E of more than 25, this would be a $50 stock.

The Southwest-Delta battle now shapes up as one of the more interesting in American business, and Southwest retains some key advantages.

Airfleets.net said last year that Delta's fleet was almost five years older than Southwest's, which flies only 737s. Delta planes averaged nearly 17 years of age, with nine different types of planes from three different makers.

Southwest's back-and-forth route structure remains more economical than Delta's hub-and-spoke system. It has much better fuel efficiency, which Delta started addressing this month through an order of 40 new planes from Airbus.

But Delta's operations have taken on some of Southwest's humor in recent years, the employees all expect raises in 2014, according to AviationPros.com, its market cap is twice as large as Southwest's and its balance sheet is coming into line.

Delta also has a large network of profitable international routes; I recently flew on a full Delta plane from London. In the U.S. I've found Delta can generally match Southwest's prices on key routes without losing money.

Delta, in fact, now stands as the strongest survivor of the old hub-and-spoke system, bringing planes from a collection of places into one place at one time. This has driven nearly every company using it, including Delta, to the bankruptcy courts at one time or another.

American Airlines is still under bankruptcy protection, and its plan for reorganization is still before a judge, its move to merge with US Airways ( LCC) being fought by the Department of Justice.

United-Continental ( UAL), which also uses a hub-and-spoke system, combined three years ago into one money-loser, which has more revenue than Delta but far more problems, having just recalled the last of its pilots from furlough.

To Wall Street, airlines are like the tap-dancing elephant: They may not do it well, but it's amazing they do it at all. Anderson has Delta dancing again, he's made the stock look like a bargain again, and to this old Atlantan that's pretty amazing.

At the time of publication, the author owned no shares in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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