Pick This Stock Over American Airlines As The Dip Ends

+88.23%
Upside
29.53
Market
55.58
Trefis
DAL: Delta Air Lines logo
DAL
Delta Air Lines

The shares of American Airlines (NASDAQ: AAL) and Delta Air Lines (NYSE: DAL) are observing a steep decline due to rising fuel prices and an overall geopolitical risk premium weighing on the broader market. Moreover, both companies do not have significant fuel hedging contracts to safeguard against short-term spikes in benchmark prices. Considering a scenario where oil prices make a dent on American and Delta Airlines’ profits for a couple of quarters, strong passenger numbers at TSA checkpoints are expected to assist cash generation. Notably, Delta Airlines observed just $529 million of operating cash burn in the past two years combined, as compared to $5.8 billion by American Airlines. Thus, a low cash burn figure and better financial and operating metrics make DAL stock a better pick to realize gains as the market recovers from the current bearish downturn. We compare the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, Delta Air Lines vs. American Airlines: Industry Peers; Which Stock Is A Better Bet? – parts of which are highlighted below.

  1. Revenue Growth

Delta Air Lines’ growth was slightly higher than American before the pandemic, with Delta Air Lines’ revenues expanding at an average annual rate of 6% from $39.4 billion in 2016 to $47 billion in 2019, versus American Airlines’ revenues which grew by 4.5% per year from $40 billion in 2016 to $45 billion in 2019. Both companies reported a strong recovery trajectory in 2021 after observing steep declines due to travel restrictions and capacity curtailments.

  • To abate operating losses due to low passenger demand, Delta and American trimmed capacity (available seat miles) by 51% and 50% in 2020, respectively. Thus, operating cash shortfall from reduced capacity and occupancy rate prompted the need for government aid in order to assist maintenance and salary costs.
  • Per PSP-3 requirements, dividend payouts and share buybacks remain suspended until September 2022 as the airline industry observed hiccups from multiple waves of the pandemic.
  • Delta and American’s top line was primarily driven by domestic demand last year. Notably, domestic business accounts for 71% and 73% of Delta and American’s total revenues, respectively.
  • Currently, passenger numbers at TSA checkpoints are almost comparable to pre-pandemic levels. (related: Optimism In Estee Lauder Stock A Trigger For Delta Air Lines?)

  1. Returns (Profits)
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Coming to Returns, Delta has a much higher operating margin than American – leading to better cash generation and shareholder returns.

  • Before the pandemic in 2019, American Airlines reported $3 billion of operating income and $3.8 billion of operating cash from $45 billion in revenues. The company utilized $2.2 billion in investing activities and paid $1.2 billion in dividends & buybacks.
  • Whereas, Delta Air Lines reported $6 billion of operating income and $8.4 billion of operating cash from $47 billion in revenues. The company utilized $4.5 billion in investing activities and paid $3 billion in dividends & buybacks.
  • American Airlines’ sizably low operating cash generating capabilities are largely due to $1 billion of annual interest expense from $22 billion of long-term debt (net of cash & cash equivalents).
  • Highly leveraged balance sheet has been weighing on American Airlines profitability in recent years with the company reporting an operating cash burn of $5.8 billion in 2020 and 2021. On the contrary, Delta Air Lines reported an operating cash burn of just $529 million in 2020 and 2021.
  1. Risk

From the perspective of financial leverage, American Airlines is the riskier of the two companies.

  • High fixed costs and significantly low demand took a heavy toll on all air carriers over the past two years. The airline industry faces downside risk from rising fuel prices and uncertain macroeconomic outlook due to Russia-Ukraine war. Thus, revenue contraction coupled with a loaded balance sheet negatively affects shareholder returns.
  • As dividends and share repurchases stand suspended until September 2022, profiting from short-term dips is an opportunity for investors.
  • Delta and American ended 2021 with $14 billion and $22 billion of long-term debt (net of cash & cash equivalents), respectively.
  • Given Delta Air Lines stronger balance sheet, we believe that the stock is a better pick to realize long-term gains.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
DAL Return -14% -12% -30%
AAL Return -15% -19% -69%
S&P 500 Return -1% -9% 93%
Trefis MS Portfolio Return -2% -12% 245%

[1] Month-to-date and year-to-date as of 3/7/2022
[2] Cumulative total returns since the end of 2016

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