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Is Delta Air Lines Stock Outperforming Southwest Airlines Stock? Rising Above the Clouds: Delta Air Lines Stock Outshines Southwest Airlines Stock

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Given its more promising future, we firmly believe that Delta Air Lines (NYSE: DAL) is a superior investment choice compared to its competitor, Southwest Airlines (NYSE: LUV). At present, LUV stock is trading at a marginally higher valuation multiple of 0.7x revenues, in contrast to 0.5x for DAL, partly due to its stronger financial standing. In this commentary, we scrutinize the reasons why we anticipate DAL to yield greater returns than LUV over the coming three years. Our analysis encompasses an array of factors such as historical revenue growth, stock returns, and valuation, as detailed in an interactive dashboard analysis of Southwest Airlines vs. Delta Air: Which Stock Is A Better Bet? The gist of this analysis is presented below.

Delta Stock Withstands the Storm Better

While LUV stock has sharply declined by 35% from about $45 in early January 2021 to approximately $30 currently, DAL stock has experienced minimal change, hovering around the $40 mark over the same period. This is compared to a 25% rise in the S&P 500 during this three-year duration.

Despite this, LUV stock’s descent has been anything but steady. Its returns were -8% in 2021, -21% in 2022, and -14% in 2023. In contrast, DAL stock’s performance relative to the index has been lackluster, with returns of -3% in 2021, -16% in 2022, and 22% in 2023. Comparatively, S&P 500 returns were 27% in 2021, -19% in 2022, and 24% in 2023 – signifying that DAL underperformed the S&P in 2021 and 2023, while LUV underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently outperforming the S&P 500 in favorable and challenging times has been a formidable feat for individual stocks in recent years, including industry heavyweights like CAT, UNP, and GE, and even for megacap stars GOOG, TSLA, and MSFT.

Conversely, the Trefis High Quality (HQ) Portfolio, featuring 30 stocks, has managed to outshine the S&P 500 each year during the same period. What is the secret behind this? Collectively, the HQ Portfolio stocks have delivered superior returns with lower risk compared to the benchmark index, offering a less turbulent journey, evident in the HQ Portfolio’s performance metrics.

In the current volatile macroeconomic landscape featuring steep oil prices and heightened interest rates, could LUV and DAL face a situation akin to 2021 and 2023, resulting in them underperforming the S&P over the next 12 months? Or are they poised for a recovery? While we anticipate a resurgence in both stocks over the next three years, it is likely that DAL will fare better between the two.

Delta’s Revenue Growth Maintains an Edge

  • Delta Air’s revenue growth has been marginally higher, boasting an average annual growth rate of 27% over the past three years, compared to 22% for Southwest.
  • The uptick in revenues for both airlines in recent years is attributable to a revival in air travel demand, accompanied by meaningful increases in passenger traffic and ticket yields.
  • For instance, Southwest’s available seat miles (ASM) dwindled by 16% between 2019 and 2021, only to surge by 12% in 2022. Similarly, its passenger revenue per available seat mile (PRASM) plummeted by 19% between 2019 and 2021, before skyrocketing by 44% year-on-year in 2022.
  • In comparison, Delta’s ASM contracted by 30% between 2019 and 2021, only to soar by 20% in 2022, while its PRASM declined by 25% between 2019 and 2021, before rising by 49% year-on-year in 2022.
  • Looking at the last twelve months, Delta’s 23% sales growth has surpassed Southwest’s 12%.
  • The demand for air travel is poised to remain robust in the near term, boding well for both stocks. However, the average yield has cooled recently, even as overall capacity has expanded.
  • For example, Delta’s revenue of $14.6 billion (adjusted) in Q3’23 was fueled by a 16% surge in total available seat miles, partly offset by a 1% dip in passenger revenue per available seat mile. In a similar vein, Southwest’s Q3’23 revenue of $6.5 billion was up by 5% year-on-year, despite a 12.5% rise in available seat miles, a 470 basis point decrease in load factor, and a 6% drop in PRASM, exerting pressure on its overall top-line growth.
  • Our Southwest Airlines Revenue Comparison and Delta Air’s Revenue Comparison dashboards offer deeper insights into the companies’ sales performance.
  • Looking ahead, we expect Delta to witness slightly superior revenue growth compared to Southwest.
  • It is noteworthy that Delta and Southwest do not operate Boeing’s 737 Max 9 aircraft, which has recently been grounded by the FAA due to safety concerns following incidents related to loose bolts and Alaska Air’s cabin side panel blowout.

Delta Air: A More Profitable Proposition

Southwest’s reported operating margin dwindled from 13% in 2019 to -46% in 2020, before staging a recovery to 2% in 2022. In contrast, Delta’s operating margin plummeted from 13% in 2019 to a low of -91% in 2020, before rebounding to 6% in 2022.

Considering the last twelve-month period, Delta’s operating margin of 8% has outperformed Southwest’s <1%.

More detailed information can be found in our Southwest Airlines Operating Income Comparison and Delta Air Operating Income Comparison dashboards.

Southwest’s Robust Financial Standing

  • From a financial risk perspective, Southwest stock seems to be the safer bet. Delta’s debt as a percentage of equity stands at 142%, higher than Southwest’s 54%. Furthermore, Delta’s cash as a percentage of assets is 7%, lower than Southwest’s 32%, indicating that Southwest boasts a stronger debt position and more cash reserves.
  • The higher debt-to-equity figures for Delta can be ascribed to significantly higher debt levels of $31 billion compared to its market capitalization of $27 billion.
  • Delta’s total debt expanded from $11 billion in 2019 to $23 billion in 2022, while its total cash remained around $3 billion over the same period. However, the upswing in the cash balance is partly due to additional debt raised, stemming from the $4 billion negative operating cash flows in 2020.
  • In comparison, Southwest Airlines’ total debt rose from $2.7 billion in 2019 to $8.1 billion in 2022, while its total cash burgeoned from about $4.1 billion to $12.3 billion during the same period.

The Bottom Line

  • It is clear that Delta Air has showcased superior revenue growth and is more profitable. Conversely, Southwest boasts a stronger financial position.
  • Considering future prospects, using P/S as a yardstick, we believe Delta is likely to yield better returns over the next three years, primarily due to its slightly stronger (anticipated) sales growth and profitability. However, when we compare the current valuation multiples to historical averages, LUV holds the upper hand. Delta stock trades at 0.5x sales in contrast to its five-year average of 0.8x, and

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