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Better Buy: Delta Air Lines, Inc. vs. Hawaiian Holdings

By Dan Caplinger – Jun 20, 2017 at 11:18AM

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Airlines have grown fast and furious in recent years. Stronger economic conditions, cheaper fuel, and industry merger and acquisition activity have all helped boost prospects for surviving airlines, and while airline giant Delta Air Lines (DAL 1.71%) has aimed to grab up a huge chunk of the global market, Hawaiian Holdings (HA 1.55%) has concentrated on the appeal of a particularly attractive tourist destination. Given how airlines have performed recently, investors are curious which of the two is more likely to thrive going forward. Let's compare Delta Air Lines and Hawaiian Holdings on several key metrics to see which looks more attractive currently.

Valuation and stock performance

Delta and Hawaiian have both been good to shareholders over the past year. Delta has climbed a little bit further, posting a 38% rise since June 2016, compared to Hawaiian's only slightly less impressive 31% gain.

From a valuation perspective, both airlines trade at what appear to be very low levels compared to the stock market. Based on trailing earnings, Delta stock trades at a multiple of less than 10, compared to a trailing earnings multiple of almost 12 for Hawaiian. However, when you take into account expectations that Hawaiian is likely to grow more quickly than Delta in the immediate future, their forward multiples of between eight and nine look very similar. Based on valuation and stock performance, the two airlines are almost in a dead heat.

Delta airplane.

Image source: Delta Air Lines.


When it comes to dividends, though, there's a clear winner between the two airlines. Hawaiian doesn't pay dividends, but Delta has a current dividend yield of 1.6%.

What's particularly impressive is that Delta has managed to rebound so quickly from tougher times. Barely a decade ago, the airline emerged from bankruptcy, but it emerged stronger and then sought to combine forces with Northwest Airlines through a merger. Four years ago, Delta declared its first dividend, and dramatic increases over the past several years have made quarterly payouts a much larger part of the picture for Delta shareholders. Until Hawaiian gets to the point at which it feels comfortable starting a dividend, Delta wins this category by default.

Growth and risk profile

Despite strong financial performance, airlines have come under pressure from a customer service and perception perspective. For Delta, April's weather-induced logistical disaster led to thousands of cancellations because of the strategic importance of the airline's Atlanta hub to its overall route network. Yet despite poor earnings performance, Delta believes that it should be able to reverse the negative trend that has led to depressed levels of revenue per available seat mile, the primary metric on which investors evaluate airline success. Indeed, the most current month's numbers show solid growth, and investors hope that this will let Delta meet its goals for the second quarter. With plans to offer higher-tier economy seats that add legroom and collect more revenue, Delta expects it can squeeze more profit from its customer base and create a larger number of upgrade pathways.

For Hawaiian, strong demand in a good economic climate in the U.S. has dramatically lifted traffic to the island state, and the airline has seen the impact. In its most recent quarter, Hawaiian was able to boost its profit margin and post growing earnings per share, and it got a head start on larger airlines by being able to keep its unit revenue on the upswing more easily. Recently, though, competitors like Southwest (LUV 1.75%) and United (UAL 1.40%) have looked to take advantage of demand for Hawaiian destinations, with United adding more Hawaii routes and Southwest looking for ways to enter the market. Still, many believe that the share price plunge that ensued for Hawaiian has been overblown, and long-term prospects for the airline still remain favorable because of its positive perception among customers.

Overall, Hawaiian looks like a more interesting play for investors than Delta. Despite competitive pressure, Hawaiian has built up a reputation for quality, and that should help it into the future. However, Delta also appears to be on the upswing, and its dividend makes it the only stock that income investors will appreciate.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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