S—P thinks the airline can leverage cost savings from its merger with Northwest and ranks the shares strong buy

By Jim Corridore From Standard & Poor’s Equity Research

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We view Delta Air Lines (DAL: recent price, 9) for example the beyond all others positioned U.S. airline to convey advantage of the industry environment entering 2009. Overall, we think the toil as a whole is likely to benefit from a sharp pullback in the excellence of oil and the resulting decline in jet fuel costs since late July 2008. We also believe the industry has already moved to pull down domestic seat containing power, which should grant supply and demand to remain in remainder. despite the expected decline in air travel demand that we see resulting from the global relating to housekeeping recession.

On summit of the positive trends, we anticipate pathetic the overall industry in 2009, we think Delta should be able to leverage its recently closed merger with Northwest Airlines to achieve require to be paid and revenue synergies, allowing it to outperform U.S. industry peers financially to boot the next few years.

Investors clearly have been spooked by the overall stock market woes, worries about the economy, and concerns in various places the pack together of both on the outlook for air travel demand. Year to date from one side Nov. 28, the S—P Airline subindustry index declined 29.1%, vs. a 39.0% decline in the S—P 500 over that same period. Year to date through Nov. 28, Delta shares were down about 41%.

In our scan, investors initially pushed airline stocks down on worries related to oil prices, which closed at a high of $147.27 a barrel on July 11, 2008. Since then, oil has dropped about 64%, to $53, but airline stocks have not seen the benefit. Instead, we believe investors moved on to new worries in all parts of the U.S. and global management, the housing, pecuniary, and stock-market meltdown as not amiss as the potential impact of those issues on open air travel.

We think investors are discounting a worse impact on air travel question than we expect and are not properly factoring in the lower-cost environment we care for from the wide and rapid drop in the recompense of oil. Specific to Delta, we believe investors are not in a strict sense appreciating the in posse benefits of the Northwest merger. In our view, the shares, ranked 5 STARS (strong buy), provide a compelling chance; fit for potential capital appreciation over the next 12 months.

COMPANY OVERVIEW

On Oct. 29, 2008, hours after receiving final approval from U.S. regulators, Delta Air Lines reshaped the U.S. airline industry by the agency of completing its merger through Northwest Airlines. This merger created the largest airline in the world, through an estimated $32 billion in annual revenues as a starting base. Internationally, the deal merges a carrier with a major presence in trans-Pacific flights (Northwest) by another that is healthy on trans-Atlantic routes (Delta). The combined operation, operating from hubs in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis, New York, Salt Lake City, and Tokyo, serves 375 destinations in 66 countries throughout the world and carries more than 170 the masses passengers annually. The combined operation will endure to operate for that which is less than the Delta brand name.

We expect the combined essence to have strong liquidity and end 2008 with total cash of about $6 billion, what one. we see as more than adequate to fund operations and pay debt obligations and interest charge from one side to the other the next two years.

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