Gaining 20% In 2023 Will Delta Continue To Outperform Southwest Stock?

Given its better prospects, we believe Delta Air Lines stock  (NYSE: DAL) is a better pick than its peer, Southwest Airlines stock (NYSE: LUV). LUV stock is trading at a slightly higher valuation multiple of 0.7x revenues, compared to 0.5x for DAL, partly due to its better financial position, as discussed below. In this note, we discuss why we believe that DAL will offer better returns than LUV in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Southwest Airlines vs. Delta Air: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Delta Stock Has Fared Better

• LUV stock has suffered a sharp decline of 35% from levels of $45 in early January 2021 to around $30 now, while DAL stock has seen little change and remained around levels of $40 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.
• However, the decrease in LUV stock has been far from consistent. Returns for the stock were -8% in 2021, -21% in 2022, and -14% in 2023.
• Similarly, the performance of DAL stock with respect to the index has been lackluster. Returns for the stock were -3% in 2021, -16% in 2022, and 22% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that DAL underperformed the S&P in 2021 and 2023 and LUV underperformed the S&P in 2021, 2022, and 2023.
• In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including CAT, UNP, and GE, and even for the megacap stars GOOG, TSLA, and MSFT.
• In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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 with high oil prices and elevated interest rates, could LUV and DAL face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months – or will they see a recovery? We expect a rebound in both stocks in the next three years, but DAL will likely fare better between the two.

2. Delta’s Revenue Growth Is Slightly Better

• Delta Air’s revenue growth has been slightly better, with a 27% average annual growth rate in the last three years, compared to 22% for Southwest.
• The rise in revenues for both airlines over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in recent years.
• For perspective, Southwest’s available seat miles (ASM) declined 16% between 2019 and 2021 but rose 12% in 2022. Similarly, its passenger revenue per available seat mile (PRASM) fell 19% between 2019 and 2021 but surged 44% y-o-y in 2022.
• In comparison, Delta’s ASM declined 30% between 2019 and 2021 but surged 20% in 2022, and its PRASM fell 25% between 2019 and 2021 but rose 49% y-o-y in 2022.
• Looking at the last twelve months, Delta’s 23% sales growth has fared better than 12% for Southwest.
• The demand for air travel is expected to remain high in the near term, boding well for both stocks in the near future. However, the average yield has cooled in the recent past while overall capacity has expanded.
• For perspective, Delta’s revenue of $14.6 billion (adjusted) in Q3’23 was driven by a 16% rise in the total available seat miles, partly offset by a 1% decline in passenger revenue per available seat mile. Similarly, Southwest’s revenue of $6.5 billion in Q3’23 was up 5% y-o-y. Although the company reported a 12.5% rise in available seat miles, the load factor was down 470 bps, and PRASM declined 6%, weighing on its overall top-line growth.
• Our Southwest Airlines Revenue Comparison and Delta Air’s Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, we expect Delta to see slightly better revenue growth than Southwest.
• Note that Delta and Southwest don’t fly Boeing’s 737 Max 9 aircraft, recently grounded by the FAA over safety concerns after incidents of loose bolts and Alaska Air’s cabin side panel blowout.

3. Delta Air Is More Profitable 

• Southwest’s reported operating margin contracted from 13% in 2019 to -46% in 2020 before recovering to 2% in 2022. In comparison, Delta’s operating margin plunged from 13% in 2019 to -91% in 2020 before recovering to 6% in 2022.
• Looking at the last twelve-month period, Delta’s operating margin of 8% fares better than <1% for Southwest.
• Our Southwest Airlines Operating Income Comparison and Delta Air Operating Income Comparison dashboards have more details.

4. Southwest Has A Better Financial Position

• From a financial risk perspective, Southwest stock appears to be a less risky bet. Delta’s 142% debt as a percentage of equity is higher than 54% for Southwest, and its 7% cash as a percentage of assets is lower than 32% for the latter, implying that Southwest has a better debt position and more cash cushion.
• The high debt-to-equity figures for Delta can be attributed to much higher debt levels of $31 billion compared to its market capitalization of $27 billion.
• Delta Air’s total debt increased from $11 billion in 2019 to $23 billion in 2022, while its total cash remained around $3 billion over the same period. However, the rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020.
• In comparison, Southwest Airlines’ total debt increased from $2.7 billion in 2019 to $8.1 billion in 2022, while its total cash increased from around $4.1 billion to $12.3 billion over the same period.

5. The Net of It All

• We see that Delta Air has seen superior revenue growth and is more profitable. On the other hand, Southwest has a better financial position.
• Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Delta will likely offer better returns over the next three years, primarily due to its slightly better (expected) sales growth and profitability.
• However, if we compare the current valuation multiples to the historical averages, LUV fares better. Delta stock trades at 0.5x sales compared to its last five-year average of 0.8x, and Southwest stock trades at 0.7x revenues vs. the last five-year average of 1.5x.
• Our Southwest Airlines (LUV) Valuation Ratios Comparison and Delta Air (DAL) Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 19% for Delta and 5% return for Southwest over this period, based on Trefis Machine Learning analysis – Southwest Airlines vs. Delta Air – which also provides more details on how we arrive at these numbers.

While DAL may outperform LUV in the next three years, it is helpful to see how Southwest’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 1/9/2024
[2] Cumulative total returns since the end of 2016

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