Sarah Brady
Updated on: October 12, 2024 3:25 am GMT
As the airline industry grapples with rising costs and changing consumer behavior, investors may find themselves at a crossroads: should they invest in Delta Air Lines or Air Canada? Both companies, while facing external pressures, exhibit unique financial profiles that could sway investment decisions.
Airline Sector Challenges Post-Pandemic
The airline industry has significantly underperformed the broader market since the COVID-19 pandemic began. This downturn can largely be attributed to the capital-intensive nature of the industry, which resulted in many airlines increasing their debt levels to sustain operations during prolonged global lockdowns. Although travel demand saw a resurgence by the end of 2021, airlines faced persistent macroeconomic challenges, including:
- Inflation
- Rising fuel prices
- Higher interest rates
- Sluggish consumer spending
In this challenging environment, investors are keen to identify which airline stocks could provide value moving forward.
Delta Air Lines: Strong Revenue but Missed Estimates
Delta Air Lines (NYSE:DAL), with a market cap of approximately US$29 billion, has seen its stock drop about 30% from its historical highs. In the second quarter of 2024, Delta reported adjusted revenue of US$15.4 billion, alongside earnings of US$2.36 per share. While these figures met profitability estimates, Delta fell short of its revenue forecasts, which had been set at US$15.45 billion.
However, the company remains optimistic regarding future performance. During its earnings call, Delta projected record revenue for the third quarter, driven by strong summer travel demand. Notably, factors impacting pricing include:
- A 5.1% year-over-year drop in airfare for June.
- A 5.7% decrease in fares from the previous month.
This price reduction is primarily attributed to fluctuating inflation rates. Additionally, Delta reported a 10% increase in ticket revenue for Q2, totaling US$5.6 billion, and a significant $1.9 billion from its credit card partnership with American Express, marking a 9% rise from the previous year.
Looking ahead, Delta anticipated earnings between US$6 and US$7 per share for 2024, complemented by a forecast of US$4 billion in free cash flow. Given its current pricing at seven times free cash flow, DAL shares appear relatively undervalued, trading at a 30% discount to consensus price targets.
Air Canada: High Debt vs. Revenue Growth
Meanwhile, Air Canada (TSX:AC) presents a different financial landscape. The stock is down more than 50% from its peak, prompting interest from value investors. In its latest earnings report, Air Canada posted revenue of $5.5 billion for the June quarter, a modest rise of 2% year-over-year. However, its operating income fell from $466 million to $336 million over the same period.
A challenge for Air Canada is its substantial balance sheet debt of approximately $12.5 billion, contrasting with its market capitalization of $5.5 billion. Over the last 12 months, the airline faced total interest expenses of $839 million, although it managed to generate a free cash flow of about $2.3 billion. This suggests that despite its high debt levels, Air Canada is producing sufficient cash flow to meet its financial obligations.
Air Canada’s stock trades at less than three times trailing free cash flow and is currently priced at a 40% discount to analysts’ consensus price targets.
Investment Outlook: Delta vs. Air Canada
Both Delta Air Lines and Air Canada continue to navigate a challenging environment yet demonstrate significant cash flow generation. However, financial health could rapidly decline if recession fears materialize.
Here are key points to consider when weighing potential investments:
Delta Air Lines:
- Market Capitalization: ~$29 billion
- Q2 Revenue: $15.4 billion
- Projected Earnings for 2024: $6-$7 per share
- Free Cash Flow: $4 billion
- Current Stock Discount: 30%
Air Canada:
- Market Capitalization: ~$5.5 billion
- Q2 Revenue: $5.5 billion
- Operating Income Decline: From $466 million to $336 million
- Total Debt: ~$12.5 billion
- Current Stock Discount: 40%
However, given its larger fleet and broader international footprint, many analysts may prefer Delta Air Lines over Air Canada for potential investment.
Both Delta and Air Canada look like good options for investors, but the best choice depends on a few important things. These include how much risk you are comfortable with, the state of the market, and how much the companies might grow in the future. As the airline industry gets more stable, it’s important for investors to pay attention to how well the companies are doing now and what their future looks like.
