After Over 20% Gains In 2023 Will Delta Air Stock Outperform Alaska Air?

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Given its better prospects, we believe Alaska Air stock  (NYSE: ALK) is a better pick than its peer, Delta Air stock (NYSE: DAL). Although both stocks are trading at a similar valuation of 0.5x revenues, Delta has seen better revenue growth and is more profitable, as discussed below. In this note, we discuss why we believe that ALK will offer better returns than DAL 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 Delta Air vs. Alaska AirWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

Looking at stock returns, DAL stock has seen little change, moving slightly from levels of $40 in early January 2021 to around $40 now, while ALK stock has seen a decline of 20% from levels of $50 to around $40 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.

Overall, 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. Similarly, ALK has had a poor run, with the stock losing value in each of the last 3 years. Returns for the stock were 0% in 2021, -18% in 2022, and -9% 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 and ALK underperformed the S&P in 2021 and 2023.

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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 BA, CAT, and UNP, 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 DAL and ALK 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 strong jump? We expect a rebound in both stocks in the next three years, but ALK will likely fare better between the two.

1. Delta Air’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 23% for Alaska Air.
  • 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, Delta Air’s available seat miles (ASM) declined 30% between 2019 and 2021 but surged 20% in 2022. Similarly, its passenger revenue per available seat mile (PRASM) fell 25% between 2019 and 2021 but rose 49% y-o-y in 2022.
  • In comparison, Alaska Air’s ASM declined 21% between 2019 and 2021 but surged 16% in 2022. Similarly, its PRASM fell 11% between 2019 and 2021 but rose 35% y-o-y in 2022.
  • Looking at the last twelve months, Delta Air’s 23% sales growth has fared better than 14% for Alaska Air.
  • 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, Alaska Air’s revenue of $2.8 billion in Q3’23 was flat y-o-y. Although the company reported a 14% rise in available seat miles, the load factor was down 190 bps, and yield declined 10%, weighing on its overall top-line growth.
  • Our Delta Air’s Revenue Comparison and Alaska Air Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, we expect Alaska Air to see better revenue growth than Delta Air.
  • Last month, Alaska Air announced its plans to acquire Hawaiian Airlines for $1.9 billion. If the deal passes regulatory hurdles, it will result in over 50% market share for the combined entity in Hawaii.

2. Delta Air Is More Profitable 

  • Delta Air’s reported operating margin slid from 13% in 2019 to -91% in 2020 before recovering to 6% in 2022. In comparison, Alaska Air’s operating margin plunged from 12% in 2019 to -50% in 2020 before recovering to 1% in 2022.
  • Looking at the last twelve-month period, Delta Air’s operating margin of 8% fares better than 3% for Alaska Air.
  • Alaska Air’s margin metric is partly being weighed down by the costs associated with the retirement of its Airbus fleet. Looking forward, the company is likely to have a better margin profile with lower costs associated with pilot training.
  • Our Delta Air Operating Income Comparison and Alaska Air Operating Income Comparison dashboards have more details.

3. Both Airlines Have High Debt Levels

  • From a financial risk perspective, both stocks appear to be risky bets. While Delta Air’s 79% debt as a percentage of equity is lower than 137% for Alaska Air, its 7% cash as a percentage of assets is lower than 16% for the latter, implying that Delta Air has a better debt position, but Alaska Air has more cash cushion.
  • The high debt-to-equity figures for both airlines can be attributed to much higher debt levels compared to their market capitalizations ($26 billion for DAL and $5 billion for ALK).
  • 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, Alaska Air’s total debt increased from $3.2 billion in 2019 to $4.1 billion now, while its total cash increased from around $3 billion to $6 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.

4. The Net of It All

  • We see that Delta Air has seen superior revenue growth and is more profitable. On the other hand, Alaska Air has more cash cushion.
  • Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Alaska Air will likely offer better returns over the next three years, primarily due to its better-expected revenue growth.
  • Even if we compare the current valuation multiples to the historical averages, ALK fares better. Delta stock trades at 0.5x sales compared to its last five-year average of 0.8x, and Alaska Air stock trades at 0.5x revenues vs. the last five-year average of 1.1x.
  • Our Delta Air (DAL) Valuation Ratios Comparison and Alaska Air (ALK) 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 Air and 39% return for Alaska Air over this period, based on Trefis Machine Learning analysis – Delta Air vs. Alaska Air – which also provides more details on how we arrive at these numbers.

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

 Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 DAL Return 1% 1% -18%
 ALK Return -2% -2% -57%
 S&P 500 Return -1% -1% 112%
 Trefis Reinforced Value Portfolio -1% -1% 600%

[1] Month-to-date and year-to-date as of 1/3/2024
[2] Cumulative total returns since the end of 2016

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