The airline industry has experienced significant turbulence in the last two years, due to the ongoing pandemic. In the decade prior to COVID-19, airline stocks managed to deliver stellar gains to investors due to rapid economic expansion, low interest rates, depressed fuel prices, and rising GDP numbers.

Despite the reopening of economies, the emergence of new COVID-19 variants has delayed the recovery in the travel and tourism vertical. So, while the equity indices touched record highs in 2021, shares of Delta Air Lines (DAL - Get Rating) and United Airlines (UAL - Get Rating) are down about 30% and 50% down from all-time highs, respectively.

Today I’ll analyze and compare Delta and United to determine which stock is currently a better investment.

Delta Airlines

Delta Air Lines managed to eke out a small adjusted profit in Q4 of 2021. However, due to investment losses in other airline partners, its GAAP loss stood at $395 million and the company has projected another quarter in the red in Q1 of 2022. However, Delta’s management expects to report a meaningful profit in 2022.

Delta Airlines claimed passenger volumes continue to recover but several companies have delayed return-to-office plans negatively impacting demand for business travel. Further, an uptick in fuel prices has also increased costs.

Despite these headwinds, Delta posted adjusted profits in the last two quarters. But revenue in Q4 of 2021 was still down 26% compared to the same period in 2019.

There is also the possibility for the fourth wave to be the last one as the COVID-19 is likely to transition towards an endemic state in most parts of the globe. So, Delta is expecting a sharp recovery from the second quarter of 2022.

Delta expects adjusted earnings per share to touch $7 in 2024 while revenue is forecast at $50 billion that year. So, the stock is valued at a price to 2024 sales multiple of 0.6x and a price to earnings multiple of just 6x. Delta is optimistic to generate $4 billion in cash flow annually in 2024 allowing it to shore up its balance sheet in the next two years.

United Airlines

In Q4 of 2021, United Airlines reported revenue of $8.19 billion which was 25% lower than the same period in 2019. Its adjusted losses stood at $679 million. 

Similar to Delta, United Airlines also expects to report a loss in Q1 of 2022, as revenue is forecast to decline between 20% and 25% compared to Q1 of 2019 while capacity reduction is forecast between 16% and 18%. There is a good chance for UAL to report a loss of around $1.5 billion in Q1, given its forecasts.

UAL will also pump in close to $6 billion in 2022 in capital expenditures as demand normalizes. Analysts expect CAPEX to touch $8.5 billion next year before falling to $6 billion in 2024.

It will be difficult for United Airlines to cover its CAPEX this year from its operating cash flow given the company’s high debt balance.

The verdict

The airline space is cyclical and capital intensive making it challenging for long-term investors to consistently outpace the broader market. Both DAL and UAL are expected to remain unprofitable at least in Q1of this year driven by the spread of the Omicron variant coupled with a seasonally weak period.  Further, cost pressures arising out of high fuel costs, as well as lower capacity volumes will weigh heavily on both revenue and profits.

That being said, I believe Delta Air Lines is a better option given its stronger financials and comparatively lower losses.

DAL shares were trading at $43.86 per share on Wednesday afternoon, up $1.25 (+2.93%). Year-to-date, DAL has gained 12.23%, versus a -3.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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