The numbers that suggest Delta is the best airline-stock bet for 2023 and 2024


U.S. airlines will begin their flurry of fourth-quarter earnings reports on Jan. 12, when Delta Air Lines Inc. announces its results.

But investors interested in the airline space might be better served to look ahead to what may be a more normal growth environment for U.S. carriers over the next two years. A set of data for the six largest U.S. carriers by market capitalization (see chart below) shows that Delta DAL, +1.41% is expected to be the best generator of free cash flow.

It is reasonable to question whether a return to good times for airlines is possible, in light of the Federal Aviation Administration’s crippling computer system outage on Jan. 11, the massive late-December flight disruptions, especially at Southwest Airlines, and the concern that events beyond the industry’s control, such as the COVID-19 pandemic, could send it reeling again.

Looking back five years, the S&P 500 SPX, -0.26% has returned 56%, with dividends reinvested, while the benchmark index’s airline industry group has fallen 44%, according to FactSet.

So far in 2023, the airlines are up 16%, while the S&P 500 has returned 3%.

With so much bad news already baked into airline stocks, the market may be indicating that it is time for the punishment to end.

Read: American Airlines stock rises on stronger-than-expected profit view

A look at airline efficiency, earnings and cash-flow estimates

Jefferies analyst Sheila Kahyaoglu believes Delta “stands in a class alone” among the four U.S. airlines she and her colleagues cover. They rate Delta a “buy” and have “hold” ratings for American Air Lines Group Inc. AAL, +4.89%, Southwest Airlines Co. LUV, +0.67% and United Airlines Holdings Inc. UAL, +3.87%.

In a Jan. 11 report, Kahyaoglu wrote that unlike United and Southwest, Delta is estimated to be “a cash generator” through 2025 and, unlike American, “has a clear path to returning to an investment grade credit rating.”

She also sees capital spending as “limiting room for error” among the airlines, and singled out Southwest because “required investments are likely to weigh on 2023 and 2024 profitability.”

So how does Delta compare with other U.S. airlines when it comes to the efficiency of its core business of transporting passengers and cargo? We can calculate gross profit per available seat kilometer (ASK) by subtracting reported or estimated operating expenses per ASK from reported or estimated total revenue per ASK.

Here are the largest six U.S. airlines, sorted by market capitalization, with 2019 numbers for gross profit per ASK (to set a pre-COVID baseline) and expected gross profits per ASK for 2022, 2023 and 2024, based on consensus estimates among analysts polled by FactSet.

Airline Ticker Market cap ($bil) 2019 gross profit per ASK 2022 est. gross profit per ASK 2023 est. gross profit per ASK 2024 est. gross profit per ASK
Delta Air Lines Inc. DAL, +1.41% $24.5 $1.49 $0.18 $1.11 $1.38
Southwest Airlines Co. LUV, +0.67% $21.4 $1.17 $1.11 $1.30 $1.44
United Airlines Holdings Inc. UAL, +3.87% $15.6 $0.94 $0.53 $1.12 $1.26
American Airlines Group Inc. AAL, +4.89% $10.0 $0.81 $0.06 $0.85 $1.05
Alaska Air Group Inc. ALK, +1.55% $6.1 $0.99 $0.73 $0.91 $1.06
JetBlue Airways Corp. JBLU, +0.77% $2.5 $0.78 -$0.15 $0.41 $0.77
Source: FactSet

In 2019, Delta ranked highest by this measure of efficiency. Looking ahead, analysts expect Southwest to be in the lead for 2002 through 2024, with Delta ranking a close second in 2024.

Also see: Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Earnings and cash flow

Here are the group’s earnings per share for 2019 and consensus estimates for 2022 through 2024:

Airline Ticker 2019 EPS 2022 est. EPS 2023 est. EPS 2024 est. EPS 2024 estimate/ 2019 EPS
Delta Air Lines Inc. DAL, +1.41% $7.30 $3.05 $5.16 $6.81 93%
Southwest Airlines Co. LUV, +0.67% $4.27 $1.61 $3.09 $4.10 96%
United Airlines Holdings Inc. UAL, +3.87% $11.58 $2.16 $6.84 $9.02 78%
American Airlines Group Inc. AAL, +4.89% $3.80 -$0.20 $1.70 $2.73 72%
Alaska Air Group Inc. ALK, +1.55% $6.19 $4.34 $5.47 $6.73 109%
JetBlue Airways Corp. JBLU, +0.77% $1.91 -$0.85 $0.70 $1.30 68%
Source: FactSet

Among the six companies, only Alaska Air Group Inc. is expected to increase profit beyond its pre-COVID level by 2024, although Delta and Southwest are expected to come close.

What about cash flow? A company’s free cash flow is its remaining cash flow after capital spending. This is money that can be spent to expand organically, make acquisitions, pay dividends or buy back shares, or used for other corporate purposes.

The airline business is capital intensive — equipment and facilities are continually being purchased, leased or upgraded. The bulk of this spending is amortized and is not immediately reflected in a company’s income statement.

So free cash flow is important to investors because it can be used to do things that can be expected to benefit them.

Here are the actual numbers for free cash flow per share in 2019 and consensus estimates for 2022 through 2024:

Airline Ticker 2019 FCF per share 2022 est. FCF per share 2023 est. FCF per share 2024 est. FCF per share
Delta Air Lines Inc. DAL, +1.41% $5.34 $0.63 $1.24 $2.88
Southwest Airlines Co. LUV, +0.67% $5.49 -$0.56 -$1.23 -$0.03
United Airlines Holdings Inc. UAL, +3.87% $9.16 $1.91 -$7.78 -$13.42
American Airlines Group Inc. AAL, +4.89% -$1.02 $2.17 $1.07 $1.20
Alaska Air Group Inc. ALK, +1.55% $8.25 $1.81 -$2.49 -$4.20
JetBlue Airways Corp. JBLU, +0.77% $0.98 -$1.48 -$2.17 -$2.00
Source: FactSet

These figures underline Kahyaoglu’s view about Delta being the best cash-flow generator among this group. It is the only airline expected to push free cash flow up for the next two years. It also ranks near the top for expected efficiency of its air-transportation operations in 2024.

Wall Street’s view

Here’s a summary of ratings for the six airlines among analysts polled by FactSet:

Airline Ticker Share ‘buy’ ratings Jan. 11 price Consensus price target Implied 12-month upside potential
Delta Air Lines Inc. DAL, +1.41% 90% $38.18 $50.12 31%
Southwest Airlines Co. LUV, +0.67% 71% $35.97 $47.44 32%
United Airlines Holdings Inc. UAL, +3.87% 62% $47.71 $53.88 13%
American Airlines Group Inc. AAL, +4.89% 14% $15.34 $16.07 5%
Alaska Air Group Inc. ALK, +1.55% 93% $47.70 $62.68 31%
JetBlue Airways Corp. JBLU, +0.77% 7% $7.81 $8.68 11%
Source: FactSet

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