Transportation
Why Delta Is the Best Airline Pick Right Now
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A number of industries have benefited from the decline in oil prices over the past year, but none more so than the airlines space. Delta Air Lines Inc. (NYSE: DAL) just reported full-year 2015 net income of $4.5 billion — a 586% gain on the same period during 2014. Alaska Air Group Inc. (NYSE: ALK) reported a 2015 bottom line of $848 million, up 41% from the previous years’ net income of $605 million. The list goes on.
Despite the improved bottom lines, however, a number of the major airline stocks have been down of late. Factors such as a reduction in customer revenue per available seat mile, increasing labor costs and heated competition are all weighing on investor sentiment this quarter, and improved bottom lines are proving insufficient to boost valuation.
This isn’t necessarily a bad thing, however. Rarely do we see such a divergence between net income and market capitalization, and this could offer an opportunity to get in at a discount ahead of valuation realignment. Take Delta and Alaska Air, for example. Both are down double-digit percentage points on last year’s highs. With this said, which airlines look the most attractive at current rates?
We’ll focus on three of the leading U.S. airlines, with similar market caps: Delta, American Airlines Group Inc. (NASDAQ: AAL) and Southwest Airlines Co. (NASDAQ: LUV).
At last count, Delta came out on top from a market value perspective ($38.5 billion), followed by Southwest ($26.3 billion) and American ($25.6 billion). Looking at price-to-earnings ratios, however, the story is a little different. Trailing P/E puts American ahead, with a ratio of 3.67, versus the 8.69 of Delta and the 12.66 of Southwest. Having said this, it may be more accurate to use forward P/E, since this takes into account consensus expectations of low oil throughout the next 12 months, or at least the major part of this period.
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