Better Airline Stock: Delta vs. American
For the time being, oil prices have begun to fall as a promised resolution to the global conflict with Iran nears the finish line. While this may change by next week, this news has helped airline stocks hit multiyear highs. In fact, the US Global JETS ETF is close to eclipsing its pre-pandemic high.
Many readers may be looking for the best airline stock to buy to ride the falling oil prices. Which airline is a better bet today: Delta (DAL +0.40%) or American (AAL +0.12%)? The answer is clear when you look at the numbers.
Today’s Change
(0.40%) $0.37
Current Price
$93.14
Key Data Points
Market Cap
Day’s Range
$93.06 – $95.01
52wk Range
$52.88 – $95.68
Volume
7.5K
Avg Vol
7.4M
Gross Margin
15.96%
Dividend Yield
0.83%
Faster revenue growth
The airline industry experiences rising demand along with the growth of the global economy. Wealthier citizens will, on average, want to travel around the world more or visit different regions domestically than was previously viable within their annual budgets.
This generally means rising demand for airline tickets each year, except during periods like the COVID-19 pandemic. Airline brands will compete for these ticket sales, with the better customer experience likely to drive faster revenue growth, either through increased traffic or higher ticket prices.
When comparing Delta and American — the two largest airlines in the U.S. by traffic — it is clear which has won the revenue race coming out of the pandemic. Delta’s revenue is up 180% during the last five years, compared to 138% growth for American, likely due to Delta’s higher ratings, reliability, and in-flight experience. This is likely to continue in the years ahead.
Image source: Getty Images.
Loyalty ecosystem driving margin expansion
For a business with high input costs, such as fuel and labor, revenue growth is not the only metric airlines should care about. Profit margins are just as important, if not more so.
The company with vastly superior profit margins is once again Delta, with an 8% operating margin versus 1.8% at American. This gap has actually widened during the past few years.
Why is Delta so much more profitable? It comes down to its superior loyalty program, which drives high-margin spending.
Delta is the leader in the U.S. among airline credit card issuers, with a long-standing partnership with American Express. Loyalty revenue grew 19% year over year last quarter for Delta, with 16% growth in remuneration from American Express of $2.4 billion. That means it is collecting about $10 billion annually from its credit card partner. American’s loyalty program only drove 8% growth in card spending last quarter and is much smaller than Delta’s.
DAL Total Return Level data by YCharts
Should you buy airline stocks?
If you are weighing two airline stocks, it is clear Delta is the better business to bet on right now. However, when looking at stock returns across the entire industry, the case for buying airline stocks as a whole becomes much more difficult.
Airline stocks severely underperform relative to another part of the air travel supply chain: airports. Airports are local monopolies that charge these airlines every time they fly. In other words, airlines operate and pay for the flights, while airports operate as toll roads.
This superior business model is why airports have delivered strong returns for shareholders. Even for Delta, one of the best airline stocks, the returns of the Mexican airport operator Grupo Aeropuertario del Centro Norte and the Spanish operator Aena have trounced its returns during the past few years. This is because airports simply collect fees on flight traffic, while airlines have to deal with fuel costs, safety regulations, labor unions, and other expenses that can erode profit margins.
A person clamoring to buy an airline stock will do fine owning Delta. But if you want superior long-term returns, it is probably best to consider airport stocks for your portfolio instead.
