UAL vs. DAL

Which is a better choice?

It’s been a bumpy ride for airline stocks recently.  Over the past two quarters air carriers have seen their share prices suffer as the fourth wave ripped through the southern states.  But experts say that infection rates may have peaked, which makes for a compelling case for buyers to return to the space.  

Former Food and Drug Administration commissioner Dr. Scott Gottlieb told CNBC last week he believes the resurgence in infection numbers may be nearing its peak citing early signs that infection rates are beginning to recede in the southern states that were most affected by spreading variants. 

Only time will tell when the tides will turn for the beaten down airline stocks, but if Dr. Gottlieb is correct, now may be a good time to start to look at the airlines once again.  

Not all airlines are set for lift-off when a reversal does finally take place.  In this article we’ll take a closer look at the major airlines comparing two to determine which is a better choice.

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United Airlines (UAL) was a weaker airline than the other major U.S. airlines before the pandemic. In 2019 the company recorded $43.26 billion in revenues but only managed around $3 billion in net income. In contrast, Delta recorded $47 billion in revenues and $4.77 billion in net income for the same time period, meaning they squeezed 58.9% more income out of revenues that were less than 9% greater.  

At the onset of the pandemic, most investors anticipated that there would be winners and losers among the four major U.S. airlines. The early narrative that Southwest and Delta would see a quicker rebound and suffer less than American and United has formulated into reality.  

UAL released Q2 earnings on July 20th. The bright spot was a reported net loss of $400 million, a vast improvement from their $7 billion loss for 2020. 

United reported that capacity was 46% lower in Q2 2021 than Q2 2019 and gave guidance that it expects capacity in Q3 to be 26% lower than in Q3 2019. According to the company’s expectations, it should achieve profitability in Q3 and beyond, but they clarify that the profitability, in this case, is defined by positive adjusted pre-tax income.  

The current consensus among 22 polled analysts is to Hold UAL stock.  Nine analysts rate the stock a Buy, ten rate it a Hold and three rate it a Sell.  A median 12-month price target represents a 37% upside from its current level.  

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Delta Air Lines (DAL) was strong before the pandemic, and it seems likely that continued strength is in the wings for DAL.  In 2017 Delta’s revenues grew by 14% from $41 billion to $47 billion in 2019.   Moreover, the company’s margins improved from lower operating costs and interest expenses.  Thus, the EPS surged by 64% from $4.45 in 2017 to $7.32 in 2019.  In 2020 when capacity dropped by 51% and the passenger load factor plummeted to 55%, Delta’s revenue fell by 60% year-over-year.

Strong second quarter performance indicates a likelihood of quick demand rebound after the fourth wave and an upside in Delta Air Lines stock.  In the second quarter, ended June 30, DAL’s total operating revenue increased 385.4% year-over-year to $7.13 billion.  Furthermore, its net income came in at $652 million compared to a $5.72 billion net loss in 2020.  

DAL stock has not been immune to the effects of resurgence fears, share price is down more than 17% over the past 3 months.  Even though the resurgence of Covid cases is detrimental to air lines in the near term, progress on the vaccination front should help the industry recover with time.  Analysts expect DAL’s revenue and EPS to increase 43.5% and 224.6%, respectively, year-over-year to $41.27 billion and $4.31 in 2022.   

The consensus among 23 polled analysts is to buy Delta stock 15 say to Buy DAL stock and 8 say to Hold.  There are no Sell ratings for the stock.  A median price target of $55 represents a 38.38% increase from its current price.   

Conclusion

Delta was better positioned than United before the pandemic and seems prepared to bounce back once travel demand has risen once again.  Therefore we recommend adding Delta to your watchlist for when the reversal in airline stocks is confirmed.  

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