Delta Air Lines (DAL 0.31%) stock rose by 16.2% in May, according to data provided by S&P Global Market Intelligence. The move primarily results from the de-escalation of the tariff conflict, primarily between the U.S. and China in mid-May.
Why airlines are cyclical industries
Airlines are good bellwethers of the economy. When travelers (consumers or corporate) are feeling confident in growth prospects, bookings are high, revenue passenger miles are in growth mode, and load factors (the percentage of seating capacity filled by paying passengers) are also high. The opposite applies when the economy turns down, or there's a fear of a downturn ahead.
NYSE: DAL
Key Data Points
Moreover, these responses to a changing environment tend to be relatively rapid; thus, when President Donald Trump initiated the current tariff dispute, it caused uncertainty among consumers and corporate travelers, leading Delta and other airlines to revise or withdraw their initial full-year guidance.
Delta is a case in point, with management electing not to reaffirm its full-year guidance during the first-quarter earnings call. That's hardly surprising given that first-quarter revenue growth of 3.3% came in significantly lower than the estimate for 7% to 9% given in January.
Why Delta Air Lines' stock rose in May
That said, just as analysts and investors will rush to pencil in lower estimates for earnings based on rising trade tensions and greater uncertainty in the economy, they will assume higher earnings when trade tensions ease, as they did with the joint announcement of a rolling back of previously announced tariffs, for 90 days, in mid-May.
The de-escalation raised hopes of an amicable end to the conflict, or at the very least a cessation of escalatory actions.
Image source: Getty Images.
Outside of tariff uncertainty, there are several reasons to like Delta Air Lines' stock. The airline continues to grow its higher-margin premium revenue. The airline industry is acting in a more disciplined manner than in previous decades by reducing capacity when demand slows. Additionally, Delta's loyalty programs and co-branded credit cards are diversifying its revenue streams.
Moreover, management plans to utilize Delta's cash flow to reduce its debt load and enhance its balance sheet in the coming years.
What's next for Delta Air Lines
While it's incredibly tough to predict what the tariff landscape will look like through 2025 and beyond, all parties are saying they would like to resolve the various conflicts that created them in the first place. That's a positive, and given its positive exposure to thawing in the dispute, and its underlying attractiveness as a stock, Delta is worth buying for investors who are confident that there will be a resolution to the conflict that doesn't end up impairing growth.
