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Why Delta Shares Are Poised to Fly Higher

Tickers in this article: DAL

NEW YORK ( TheStreet) -- Shares of Delta Air Lines tripled in just two years. As Wednesday's earnings  show, Delta continues to fire on all cylinders; its shares are poised to rise even further.

Over the years, Delta has managed to grow its revenue, while improving efficiency. For example, passenger revenue per available seat mile, or unit revenue, increased at an impressive 5.7% year over year in the second quarter. What's more, its five-year CAGR is approximately 6.5% -- another improvement.

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Passenger load factor -- which measures how efficiently an airline fills seats and generates fare revenue -- increased to 86.3% from 84.8% in the first quarter of 2013. That compares well with the roughly 79% industry average calculated by the International Air Transport Association  reported earlier this month.

Delta reported an operating margin of 14.9% during the most recent quarter compared to 9.4% over the same time last year. This is not just a one-off event, as the company has improved its operating margins in each of the last three years, growing from just 5.6% in 2011 to 9.0% in 2013. In its upcoming quarter, Delta expects to increase operating margin to 15%-17%.

These results are likely achievable considering Delta should see increasing demand in the coming months, as the June and September quarters typically see higher demand as vacation air-travel during these months increase.

Delta keeps looking toward the future through its partnerships with other airlines such as Virgin America and AeroMexico, which are expected to provide access to high-growth markets.

Delta's 2012 investment in a refinery has also borne fruits, given the decreasing amount of money the company spends on fuel. Although the number of gallons of fuel consumed has increased, the cost of this fuel had decreased. As a result, the percentage of operating expenses related to fuel has decreased to 33% from 36% in 2013. Furthermore, the company reported that its Trainer oil refinery in Delaware County posted a $13 million profit in the second quarter.

Last but not least, Delta continues to grow its free cash flow, paying some debt and contributing to the defined benefit pension plan. The airline reduced its net debt to below $8 billion, while adding approximately $900 million to its pension plan. Moreover, Delta continues to return money to its shareholders through dividends and share repurchases.

Ultimately, Delta's management team has proven to be not only capable, but shareholder-friendly.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.