Delta Air Lines (DAL 0.27%) stock has underperformed the S&P 500 (^GSPC +0.54%) over the last five years and the last year, but has beaten it in the previous three years. Still, the key question isn't so much where a stock has come from -- it's where it's going.
On that basis, Delta Air Lines is one of the best stocks in the transportation sector, not least because it's likely to climb a wall of worry as the market wakes up to the airline's transformation over recent years.
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The airline industry historically
Long-term investors will be pleased to hold the stock because management is delivering on its strategic vision, and the airline is passing the usual end-market tests that have previously been problematic for it.
Traditionally, the airline industry has been a very difficult one for equity investors. It has struggled to generate a return on invested capital (ROIC) that covers its cost of capital. It's a highly cyclical industry, with passenger bookings catching a cold every time the economy sneezes. Moreover, airlines have stubbornly maintained routes during a slowdown, waiting for an upturn, which has led to severely declining earnings.
NYSE: DAL
Key Data Points
Delta's transformation
Armed with this knowledge, Delta's management has transformed the airline from a network carrier offering commoditized tickets into one that generates value for shareholders in multiple ways.
First, there's been a growing focus on premium products. For example, back in 2010, just 10% of Delta's seats were premium, but that rose to 30% by the end of 2024. Moreover, in the recent third quarter, revenue from the higher-margin premium cabin of $5.8 billion was comparable to that of the main cabin, at $6 billion, and is likely to surpass it in the future.
Second, Delta's Skymiles loyalty program and its co-branded credit cards with American Express have been highly successful in fostering loyalty among higher-income customers, generating billions in revenue for Delta from American Express. Management expects $8 billion in remuneration this year, and is well on its way to its long-term target of $10 billion.
Third, the focus on premium and loyalty programs has differentiated it from the low-cost carriers that are suffering in the current environment of rising airport and labor costs. An increase in the cost of, say, $10 a ticket will have a far greater impact on the price of a low-cost carrier's ticket than on a network carrier like Delta.
Image source: Getty Images.
Where next for Delta Air Lines?
The airline industry has been hit by two slowdowns over the last couple of years (the most recent caused by the Trump tariffs), and, in a change from previous behavior, the industry and Delta rationalized their expansion plans and cut unnecessary capacity.
That's a green flag waving, suggesting a new era of rational behavior is at hand, and with Delta trading at just 10.7 times 2025 earnings estimates, the stock looks like a great value, particularly as the best is yet to come for Delta Air Lines.
