What’s Happening With Delta Air Lines Stock?

Delta Air Lines stock (NYSE: DAL) currently trades at $42 per share, which is 15% below its pre-inflation highs of $51 seen in April 2021. Its peer United Airlines stock (NASDAQ:UAL) has fared just as poorly, with its stock shedding 22% over this period. Most U.S. airline stocks have been weighed down as they cut their outlook for 2024 early this year amid higher costs and pricing woes. Delta Air Lines saw its stock trading at around $29 in June 2022 just before the Fed started increasing rates, and has recovered 45% from that level. This broadly aligns with the rally in the S&P 500 index, up 46% over this period.

The annual returns for DAL stock were less volatile than the S&P 500 in the last three years. Returns for the stock were -3% in 2021, -16% in 2022, and 23% in 2023. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is also less volatile than the S&P 500. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and tense geopolitical conditions, could DAL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? Returning to the pre-inflation shock level of $51 implies that DAL stock will have to gain around 20% from here, and we think it will materialize over time. We estimate Delta’s Valuation to be $54 per share, reflecting over 25% upside from its current levels of $42. Our forecast is based P/E multiple of a little over 8x for DAL and expected earnings of $6.43 on a per-share and adjusted basis for the full year 2024.

Our detailed analysis of Delta Air Lines’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how DAL stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

DAL and S&P 500 Performance During 2007-08 Crisis

DAL stock declined from $16 in September 2007 (pre-crisis peak) to around $4 in March 2009 (as the markets bottomed out), implying DAL stock lost over 70% of its pre-crisis value. It recovered after the 2008 crisis to levels of around $10 in early 2010, rising over 2x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

DAL Fundamentals Over Recent Years

Delta Air Lines’ revenues grew from $29.9 billion in 2021 to $60.1 billion in the last twelve months. Airlines at large have seen a strong rebound in air travel demand after the pandemic. Delta has seen its capacity expand, and occupancy and yield improve in recent years. Not only did the company see its sales rise, but it also saw its operating margin expand from 7.8% to 9.9% over the same period. Higher revenues and margin expansion resulted in reported earnings surging to $6.97 over the last twelve months, versus $0.44 in 2021.

However, the airlines in the U.S. at large have had a tough start to 2024. Looking at the previous quarter, Delta Air Lines’ revenue of $15.45 billion (adjusted) in Q2 was up 5% y-o-y, driven by an 8% rise in the total available seat miles. The passenger revenue per available seat mile was down 3% due to lower yield and a 100 bps decline in the load factor to 87%. The company saw its adjusted operating margin contract to 14.7% from 17.1% in the prior-year quarter. This can be attributed to higher fuel expenses, which surged 12% y-o-y to $2.8 billion. This weighed on the company’s bottom line, which stood at $2.36 on an adjusted basis, versus $2.68 in the prior-year quarter.

Does DAL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Delta Air Line’s total debt decreased from $34.7 billion in 2021 to $24.8 billion now, while its total cash decreased from $11.3 billion to $4.2 billion over the same period. The company also garnered $6.5 billion in cash flows from operations in the last twelve months. The company’s debt-to-equity ratio of 100% is on the higher side. The high debt burden is a near-term risk that the company faces.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Delta Air Lines (DAL) stock has the potential for gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet, and the impact of rising costs on the company’s profitability lately, remains a significant risk factor to realizing these gains.

While Delta Air Lines stock has the potential for strong gains, check out how other Delta Air Lines Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/6/2024
[2] Cumulative total returns since the end of 2016

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