In this piece, I evaluated two airline stocks, Delta Air Lines, Inc. (DAL) and Air France-KLM SA (AFLYY), to determine which is a better buy this July. Based on the fundamental comparison of these stocks, I believe AFLYY is the better investment for the reasons explained throughout this article.
After an unprecedented slump in demand for air travel during the COVID-19 pandemic, the airline industry is experiencing a significant rebound. Passengers returned rapidly last year, and the recovery continues in 2023 and beyond, primarily driven by pent-up demand for travel, despite higher airfares and other economic challenges. Also, business travel has been picking up.
Based on the International Air Transport Association (IATA) monthly statistics, global passenger traffic ended the first quarter of this year on a strong note, with revenue passenger-kilometers (RPKs) increasing by 58.3% year-over-year. This robust growth recovered global RPKs to 85.9% of pre-pandemic levels, indicating a considerable improvement from the prior year.
Furthermore, the IATA announced an expected strengthening of airline industry profitability by upgrading its outlook for 2023. Airline industry net profits are anticipated to reach $9.80 billion this year, nearly more than double the previous forecast of $4.7 billion (December 2022).
According to IATA, approximately 4.35 billion people are expected to travel in 2023, which is quite close to the 4.54 billion people that flew in 2019. Moreover, total revenues are projected to increase 9.7% year-over-year to $803 billion. This is the first time the airline industry will top the $800 billion mark since 2019.
Willie Walsh, IATA’s Director General, said, “Airline financial performance in 2023 is beating expectations. Stronger profitability is supported by several positive developments. China lifted COVID-19 restrictions earlier in the year than anticipated. Cargo revenues remain above pre-pandemic levels even though volumes have not. And, on the cost side, there is some relief. Jet fuel prices, although still high, have moderated over the first half of the year.”
In addition, emerging digital technologies are reshaping the flying experience for the airline industry. Numerous innovations such as unmanned aircraft systems, robotics, artificial intelligence (AI), the Internet of Things (IoT), blockchain, alternative fuels and electric aircraft, and unmanned traffic management enhance airline and airport operations.
As per a report by Mordor Intelligence, the commercial aviation market is expected to reach $271.96 billion by 2028, growing at a CAGR of 4.4% during the forecast period from 2023 to 2028. Rising air passenger traffic and an increasing number of commercial aircraft orders from major airlines should drive the market’s growth. The industry’s tailwinds should bode well for DAL and AFLYY.
DAL is a clear winner in price performance, with 31% returns over the past month compared to AFLYY’s 6.6% gain. Moreover, DAL has gained 44.7% over the past six months, while AFLYY climbed 37.5%. Over the past year, DAL jumped 64.1% compared to AFLYY’s 53.3% gain.
However, here are the reasons why we think AFLYY could perform better in the near term:
Recent Financial Results
DAL’s adjusted operating revenue increased 45.1% year-over-year to $11.84 billion in the first quarter that ended March 31, 2023. Its adjusted operating income was $546 million, compared to an operating loss of $793 million for the same year in 2022. Its adjusted free cash flow came in at $1.85 billion, up 840.6% year-over-year.
In addition, DAL’s adjusted net income and adjusted EPS were $163 million and $0.25, compared to an adjusted net loss and adjusted loss per share of $784 million and $1.23 in the prior year’s quarter, respectively.
For the first quarter that ended March 31, 2023, AFLYY’s revenue from ordinary activities increased 42.4% year-over-year to €6.33 billion ($6.90 billion). The company witnessed strong demand, with 19.7 million passengers onboard, an increase of 35.3% year-over-year. Also, its EBITDA grew 29.4% from the year-ago value to €286 million ($311.98 million).
Furthermore, the company’s adjusted operating free cash flow increased 8.4% year-over-year to €683 million ($745.03 million).
Past And Expected Financial Performance
Over the past three years, DAL’s revenue and total assets grew at 6.2% and 2.1% CAGRs, respectively. However, the company’s EBITDA and net income declined at CAGRs of 3.2% and 18.5% over the same time frame, respectively. Also, its EPS decreased at a CAGR of 18.3%.
Analysts expect DAL’s revenue and EPS for the fiscal year (ending December 2023) to increase 13.4% and 90.3% year-over-year to $57.37 billion and $6.09, respectively. For the fiscal year 2024), the company’s revenue and EPS are expected to decline 0.3% and increase 18.7% from the previous year to $57.19 billion and $7.23, respectively.
AFLYY’s revenue and EBITDA grew at 2.5% and 5.9% CAGRs over the past three years, respectively. Over the same period, the company’s EBIT increased at a 23.7% CAGR, while its levered free cash flow grew at a CAGR of 66.5%.
For the fiscal year ending December 2023, AFLYY’s revenue and EPS are expected to increase 14.1% and decrease 16.3% year-over-year to $32.20 billion and $0.36, respectively. Furthermore, analysts expect the company’s revenue and EPS for the fiscal year 2024 to grow 2.4% and decline 19.2% year-over-year to $32.96 billion and $0.29, respectively.
Profitability
DAL’s trailing-12-month revenue is 1.76 times what AFLYY generates. DAL’s trailing-12-month EBITDA margin and net income margin of 12.81% and 3.51% are higher than AFLYY’s 9.10% and 3.31%, respectively. DAL’s trailing-12-month ROA and ROTC of 4.85% and 8.48% compared with AFLYY’s 1.35% and 5.96%, respectively.
However, AFLYY’s trailing-12-month levered gross profit margin of 23.27% is higher than DAL’s 20.90%. Also, AFLYY’s trailing-12-month levered FCF margin of 9.41% compared to DAL’s 2.95%.
Valuation
In terms of forward P/E, AFLYY is currently trading at 4.68x, 47.7% lower than DAL, which is trading at 8.94x. AFLYY’s forward EV/Sales multiple of 0.41 is slightly lower than DAL’s 0.95. Likewise, AFLYY’s forward EV/EBITDA of 2.79x is 54.4% lower than DAL’s 6.12x.
In addition, AFLYY’s trailing-12-month Price/Sales of 0.13x compared to DAL's 0.56x. Also, AFLYY’s trailing-12-month Price/Cash Flow multiple of 0.88 is 80.4% lower than DAL’s 4.48.
Thus, AFLYY is relatively more affordable.
POWR Ratings
DAL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, AFLYY has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DAL has a C grade for Value, justified by its mixed valuation. DAL has a forward non-GAAP P/E of 7.81x, 55% lower than the industry average of 17.35x. However, the stock’s forward Price/Book multiple of 2.97 is 13.22% higher than the industry average of 2.62.
On the other hand, AFLYY has an A grade for Value, consistent with its lower-than-industry valuation. AFLYY’s forward non-GAAP P/E and Price/Sales of 5.13x and 0.15x compared to the industry averages of 17.35x and 1.38x, respectively.
Of the 28 stocks in the A-rated Airlines industry, DAL is ranked #14, while AFLYY is ranked #3.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Momentum, Sentiment, and Quality. Click here to view DAL ratings. Get all AFLYY ratings here.
The Winner
The rebound in air travel observed in 2022 is expected to maintain momentum this year, driven by pent-up travel demand. Despite purchasing power pressures and worries regarding an economic downturn, demand for air travel is proving resilient as people are prioritizing previously postponed trips.
In addition, the growing adoption of cutting-edge technologies to revolutionize the flying experience is boosting the airline industry’s prospects. Given the industry’s bright growth prospects, airline stocks DAL and AFLYY should grow significantly in the foreseeable years.
However, DAL’s relatively stretched valuation and dim growth outlook make its competitor ALFYY the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.
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DAL shares fell $0.09 (-0.19%) in premarket trading Monday. Year-to-date, DAL has gained 44.67%, versus a 16.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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