United vs. Delta: Which Airline Stock Is A Better Bet?

by Trefis Team
United Airline Holdings
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United Airlines stock (NASDAQ: UAL) has declined by 50% in the past year as compared to a 30% drop observed for Delta Airlines stock (NYSE: DAL). Does that make United a better pick over Delta? Given the ongoing vaccination efforts in multiple countries and the possibility of economic recovery by mid-2021, Trefis believes that United’s stock can provide stronger gains to investors willing to bet on the slow-moving airline industry.

Per PSP2 (second phase payroll support program) restrictions, airline companies cannot return capital to investors through dividends and share repurchases until March 2022. Considering United’s low P/S multiple, the stock has more room for growth and provides investors with a likelihood of near-term capital gains. Trefis compares the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, United Airlines Holdings vs. Delta Air Lines – parts of which are highlighted below.

  1. Revenue Growth

United’s growth has been similar to Delta’s over the last three years, with United’s Revenue expanding at an average rate of 5.8% per year from $36.6 billion in 2016 to $43.3 billion in 2019, versus Delta’s Revenue which grew by 6% per year from $39.5 billion in 2016 to $47 billion in 2019.

  • United and Delta’s topline has been majorly driven by tepid domestic demand in the past few years. Domestic passenger revenues account for 62% and 71% of United and Delta’s total revenues, respectively.
  • While both companies have a similar topline, Delta has a smaller and comparatively younger fleet – indicating lower maintenance and capital costs to sustain revenue growth.
  1. Returns (Profits)

Coming to Returns, Delta has consistently outperformed United with a 5-percentage-point higher operating margin.

  • United’s lower operating margin has largely been due to higher compensation expenses and maintenance costs.
  • Thus, Delta’s stock trades at a higher P/S multiple, supported by its operating margin and lower interest expenses.

  1. Risk

United looks like the riskier of the two companies from the perspective of financial leverage.

  • High fixed costs and significantly low demand took a heavy toll on all air carriers. With limited support from the CARES Act grant, all airliners loaded their balance sheet with cash to face any adverse situation if vaccine trials reported dismal results.
  • United and Delta ended Q3 2020 with $22 billion and $30 billion of long-term debt, respectively.
  • Interestingly, higher long-term debt during these times indicates a company’s capability to raise capital against unencumbered assets.
  • Thus, Delta is a safer bet as its balance sheet is loaded with cash to tackle any adverse scenario.

Based on historical revenue growth, margins, and liquidity risk, Delta is a safer bet over United. However, the government has been limiting losses via the payroll support program during the pandemic. In 2020, United and Delta observed $4 billion and $3.8 billion of operating cash outflow, respectively. As both companies observed similar operating cash outflows, a steeper decline in United’s P/S multiple looks unwarranted. Thus, United is a better pick over Delta for investors looking for near-term capital gains.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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