As aviation companies jockey for position, the battle between Alaska Air (NYSE: ALK) and Delta Air (NYSE: DAL) has caught the attention of investors. While both stocks are neck and neck trading at a similar valuation of 0.5x revenues, Delta has demonstrated better revenue growth and profitability. In this analysis, we dissect why we expect ALK to outperform DAL in the coming years. A thorough comparison of historical revenue growth, stock returns, and valuation in an interactive dashboard analysis of Delta Air vs. Alaska Air: Which Stock Is A Better Bet? provides further insight.

Although both stocks have seen minimal shifts in value—DAL stock hovering around $40 since early 2021 and ALK stock dropping 20% from $50 to around $40 during the same period—neither has been able to keep pace with the S&P 500, which has surged approximately 25% in the past three years.

Regrettably, both DAL and ALK have presented dismal performance, with a slide in stock value over the last three years. The S&P 500, in contrast, has outperformed these stocks, raising the question of whether individual stocks can ever triumph over the benchmark index. The tug of war to outshine the S&P 500 has proven arduous, even for stalwarts such as BA, CAT, and UNP in the Industrials sector, not to mention megacap giants like GOOG, TSLA, and MSFT. A stark contrast is apparent in the Trefis High Quality (HQ) Portfolio, which has consistently outperformed the S&P 500 each year over the same period, providing superior returns with less risk. The intriguing question is: Why is that?

Amid the current volatile macroeconomic climate characterized by soaring oil prices and a surge in interest rates, a pertinent question arises: Could DAL and ALK see a repeat of their underperformance against the S&P 500 in 2021 and 2023, or will they experience a substantial upturn? While we anticipate a revival for both stocks in the next three years, ALK is poised to emerge as the stronger contender.

Delta Air’s Revenue Growth Is Slightly Better

• Delta Air has posted a marginally stronger revenue growth, with an average annual growth rate of 27% over the last three years, in contrast to Alaska Air’s 23%.
• The resurgence in air travel demand has been a significant factor propelling the revenue growth for both airlines, evidenced by a substantial increase in passenger traffic and ticket yield in recent years.
• For example, while Delta Air experienced a 30% decline in available seat miles (ASM) between 2019 and 2021, there was a remarkable 20% surge in 2022. Likewise, passenger revenue per available seat mile (PRASM) plummeted 25% between 2019 and 2021, only to soar by 49% year over year in 2022.
• Conversely, Alaska Air witnessed a 21% decline in ASM between 2019 and 2021, followed by a 16% upswing in 2022. Similarly, PRASM dropped 11% between 2019 and 2021, then shot up by 35% year over year in 2022.
• In the past twelve months, Delta Air boasted a 23% surge in sales, outpacing Alaska Air’s 14%.

• Despite the promising outlook for air travel demand in the near future, there are indications of a cooling average yield and an expansion in overall capacity.
• For instance, Delta’s revenue of $14.6 billion (adjusted) in Q3’23 was fueled by a 16% increase in total available seat miles, partially offset by a 1% dip in passenger revenue per available seat mile. Similarly, Alaska Air reported revenue of $2.8 billion in Q3’23, remaining stagnant year over year. Although the company observed a 14% surge in available seat miles, the load factor dwindled by 190 basis points, and yield diminished by 10%, impeding overall top-line growth.

Delta Air Is More Profitable

• Delta Air demonstrated resilience in its operating margin, which nosedived from 13% in 2019 to a low of -91%6% in 2022. On the other hand, Alaska Air’s operating margin plummeted from 12% in 2019 to a low of -50%1% in 2022.
• In the last twelve-month period, Delta Air boasted an operating margin of 8%3%.

Both Airlines Have High Debt Levels

• Both stocks present financial risk, with Delta Air’s 79% debt as a percentage of equity lower than Alaska Air’s 137%, but the latter boasts a higher 16% cash as a percentage of assets, providing a better debt position and a more substantial cash cushion.
• These airlines grapple with significantly higher debt levels compared to their market capitalizations ($26 billion for DAL and $5 billion for ALK).
• Delta Air’s total debt surged from $11 billion in 2019 to $23 billion in 2022, while its total cash remained around $3 billion during the same period. Meanwhile, Alaska Air’s total debt rose from $3.2 billion in 2019 to $4.1 billion presently, alongside an increase in total cash from approximately $3 billion to $6 billion over the same period.

The Net of It All

• Delta Air boasts superior revenue growth and profitability, while Alaska Air holds a more substantial cash cushion.
• Considering the outlook, based on P/S as a benchmark due to high fluctuations in P/E and P/EBIT, we anticipate Alaska Air to deliver better returns over the next three years, primarily propelled by its anticipated revenue growth.

Comparing Valuation Multiples of Delta Air and Alaska Air

When we gauge the current valuation multiples vs. historical averages, Alaska Air (ALK) presents itself as a more robust contender. Delta stock is currently trading at 0.5x sales, a notable decrease from its five-year average of 0.8x. Similarly, Alaska Air’s stock is exchanging hands at 0.5x revenues, contrasting sharply with its last five-year average of 1.1x. The apparent discrepancy pulls a favorable spotlight towards ALK on this front.

Delta Air’s Valuation Ratios Comparison

Alaska Air’s Valuation Ratios Comparison

The table below encapsulates our revenue and return projections for both companies over the upcoming three years. It projects an anticipated 19% return for Delta Air and an impressive 39% return for Alaska Air during this period, a testament derived from a Trefis Machine Learning analysis pitting Delta Air vs. Alaska Air. The details of this comparison offer a deeper understanding of the rationale behind these figures.

While it appears that ALK may outperform DAL in the next three years, it’s prudent to explore how Delta Air’s peers are faring on crucial metrics. Explore other insightful comparisons for companies across various industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 1/3/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.