Airline stocks have underperformed the broader markets by a wide margin since the onset of the COVID-19 pandemic. As the airline sector is capital intensive, several companies were forced to increase balance sheet debt to keep operations running amid global lockdowns. While economies reopened by the end of 2021, airlines were wrestling with a slew of macro headwinds such as inflation, rising fuel prices, higher interest rates, and sluggish consumer spending.
Today, several airline stocks, including Air Canada (TSX:AC) and Delta Air Lines (NYSE:DAL), trade at compelling valuations. So, let’s see which airline stock is a good investment right now.
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Is Delta Air Lines stock a good buy?
Valued at US$29 billion by market cap, Delta Air Lines stock is down 30% from all-time highs. In the second quarter (Q2) of 2024, Delta Air Lines reported adjusted revenue of US$15.4 billion with earnings of US$2.36 per share. While its earnings aligned with estimates, Delta Air missed revenue forecasts of US$15.45 billion.
However, during its earnings call, Delta Air Lines forecast record revenue for Q3 due to strong summer travel demand. Despite its optimistic outlook, it did not meet consensus estimates as several carriers lowered airfares in the current quarter to offset an oversupply of flights.
Notably, the company’s June airfare fell by 5.1% year over year and was 5.7% lower compared to May, primarily due to slowing inflation numbers.
Delta Air Lines emphasized that higher-margin corporate travel continues to increase and expects customers to grow or maintain corporate travel spending in the future. Further, the company reported a growth in airline tickets, up 10% to US$5.6 billion in Q2 of 2024. Its credit card partnership with American Express brought in US$1.9 billion, up 9% from last year.
In 2024, Delta Air expects earnings to range between US$6 and US$7 per share while forecasting free cash flow at US$4 billion. Priced at seven times free cash flow, DAL stock is relatively cheap and trades at a 30% discount to consensus price target estimates.
Is Air Canada stock undervalued?
Down over 50% from record levels, Air Canada stock might seem a compelling buy for value-seeking investors. In the June quarter, Air Canada reported revenue of $5.5 billion, an increase of 2% year over year. However, its operating income fell from $466 million to $336 million in the last 12 months.
A key reason for Air Canada’s underperformance is its balance sheet debt, which is around $12.5 billion. Comparatively, the stock has a market cap of $5.5 billion.
In the last 12 months, Air Canada’s interest has totalled $839 million, while its free cash flow is close to $2.3 billion. Thus, it is evident that Air Canada is generating enough cash flow to service its debt obligations.
Further, priced at less than three times trailing free cash flow, Air Canada stock is very cheap and trades at a 40% discount to consensus price targets.
The Foolish takeaway
Air Canada and Delta Air Lines continue to generate significant cash flows despite a challenging macro environment. However, their financials could quickly deteriorate if recession fears come true. Given these factors, I would choose Delta Air over Air Canada due to the former’s larger fleet size and expansive international network.
