Vacations are topping the list of reasons to fly now, with leisure trips sparking a resurgence in air travel that is quickly lifting passenger numbers back toward the levels of 2019. Domestic travelers, it seems, have an itch to get away that can't be contained, not even by inflationary pressures.
This is helping the stocks of Delta Air Lines (DAL -0.06%), and United Airlines (UAL), which are nearing liftoff after taxiing for two long years, and trying to bounce back from a pandemic that crushed share prices by as much as 78%. Will investing in these two airlines be a one-way ride to paradise, or will their takeoffs be delayed yet again?
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1. Delta grabs No. 1 ranking
Delta has been flying high lately, and various sources including WalletHub, The Wall Street Journal, Glassdoor, and the U.S. Department of Transportation have given the airline a top ranking. In terms of on-time travel, fewest cancellations, best places to work, and fewest customer complaints, Delta stood above all other major airlines.
Its stock price declined by as much as 28% between February and March of this year as a result of growing inflationary pressures and rising fuel prices, but then gained back most of those losses. Fortunately for shareholders, the company still has some thrust, and it is picking up a tailwind brought on by favorable press reports, an uptick in travel demand, and its ability to pass its higher costs on to consumers. So far, demand is not being hindered by the rise in ticket prices.
The easing of COVID-19 testing requirements to travel internationally is making travel options more abundant and appealing. This helped make March the best cash sales month in Delta's history, driven by positive unit revenue, record cargo revenue, and a 39% increase in co-brand spend thanks to new SkyMiles members. The company generated $8.2 billion in revenue during the first quarter -- a 6.5% improvement over its initial guidance for $7.7 billion back in January.
Now, just in time for summer's peak vacation season, the airline has lifted its own mask mandate in the wake of a federal judge's ruling that struck down the nationwide rules for masking on planes. That should help support Delta's expectations for a 12% to 14% operating margin in Q2, driven by pent-up demand from vacationers itching to get away after numerous staycations over the past two years.
In Q2, Delta expects to hit 95% of revenue recovery compared to 2019, on only 84% capacity restoration. There is also room for the carrier to benefit from a resumption of business travel. The pandemic, by necessity, drove a major shift toward the use of virtual meetings. As more companies bring staff back into the office and impediments to travel ease, in-person business meetings should return, making Delta an airline stock to buy now for the long haul.
The stock price sits 30% below its pre-pandemic high of $61 a share. If the company continues to see revenue growth, and strong demand enables it to pass its higher costs on to customers, it is conceivable that the Delta stock could rise back to its 2019 peak and beyond. Based on the higher end of analysts' estimates today, the stock has a potential upside of around 70%.
2. United is eyeing a profitable 2022
United's share price reached an all-time high of about $96 in November 2018. One year later, it had leveled out around $92, before the pandemic sent it nosediving to $28 a share. This year, finally, the travel environment is showing signs of returning to close to normal conditions, and United's share price is reflecting investors' renewed confidence in the airline industry.
When it delivered its first-quarter earnings release after the bell on April 20, United announced that it expects to be profitable in 2022 and forecast a 10% operating margin for Q2. That led to a 13% spike in the stock price the following day, but some investors quickly took their gains, and the share price has since given back half of that bump.
Regardless, the future looks bright. According to United CEO Scott Kirby, "the demand environment is the strongest it's been in my 30 years in the industry." The company expects continued strength from the travel boom and is projecting potentially its highest second-quarter earnings ever.
The fact that United compared its first-quarter numbers to its 2019 results should boost investors' confidence. The company is no longer putting front and center its comparisons to pandemic-impaired periods. But for what it's worth, Q1's revenue of $7.5 billion was 135% above the Q1 2021 result.
Analysts seem to be on board with the positive outlook, leading to price target increases from analysts at Cowen and Morgan Stanley to as high as $86 per share. If the average price target of $60 is an accurate indication of where the stock will go in the next 12 months, investors could be looking at a 20% upside from current prices in the neighborhood of $50 per share.
