Airlines have traditionally been difficult investments. Fuel prices can swing margins overnight, capacity can erode pricing power, and even strong demand doesn’t guarantee strong returns. But the current environment is pushing investors to view U.S. airlines differently. Delta Air Lines, Inc. (NYSE:DAL) and United Airlines Holdings, Inc. (NASDAQ:UAL) are both trying to build more resilient businesses, with greater exposure to premium travel, loyalty, and higher-margin revenue.
The interesting question is whether investors are already paying for that improvement.
At the valuations provided, United trades at about 7.4x forward earnings, compared with 9.2x for Delta. That is a meaningful discount for United; however, it may be warranted, as analysts expect Delta to have steadier, stronger earnings growth over the next few years. While both stocks appear cheap, some of that cheapness accounts for how notoriously volatile the airline business is.
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United’s transformation creates the upside
The more interesting part of the United story is what happens if its strategy continues to compound. The airline has been deliberately moving away from a commoditized model by building a larger premium offering, strengthening MileagePlus, improving its hubs and investing heavily in the customer experience.
That strategy is starting to change the economics of the business. United has been gaining local share across its hubs, while premium revenue and loyalty have become increasingly important contributors. Management is also targeting 2%-3% growth in core CASM-ex as the fleet becomes larger-gauged and newer aircraft enter the system. The combination of better pricing, a richer product mix and lower unit-cost growth could create significant operating leverage.
There is another important piece to the United story: the runway. Starlink, premium-configured A321s, the MAX 10 and other product initiatives are still being rolled out. Management believes these investments can help push the airline toward double-digit pretax margins in 2027 and eventually into the mid-teens.
That makes UAL’s valuation particularly interesting. At roughly 7.4 times forward earnings, investors are paying considerably less for United than for Delta. The question is whether that discount reflects United’s still-lower profitability or whether it underestimates how much the business could improve.
Delta starts from a stronger position
Delta Air Lines, Inc., meanwhile, has less to prove. It has already spent years building a business around premium travelers and loyal customers, rather than relying mainly on selling economy seats. Its Amex partnership, SkyMiles program, corporate travel business, and premium cabins give it several sources of revenue that can hold up better when the core airline business gets tougher.
That diversification gives Delta some breathing room when fuel, labor, or capacity costs move against the industry. The airline has spent years building revenue streams beyond the basic airfare, and the strategy is paying off. Its Amex partnership alone is expected to bring in roughly $9 billion this year, while premium and loyalty revenue continue to grow faster than the overall business.
Delta is also pursuing its own margin expansion, with management targeting mid-teens operating margins over the long term. Its strategy is less about reinventing the airline and more about widening an existing competitive advantage through premium products, loyalty, international partnerships, technology and ancillary businesses such as MRO.
The trade-off is valuation. At 9.2 times forward earnings, DAL costs about 24% more than UAL on this measure. Investors are therefore paying a premium for a business that has already demonstrated stronger profitability and a more diversified revenue base.
The bottom line
The DAL versus UAL debate ultimately comes down to what investors believe will happen to the profitability gap. Delta offers the more established business model, with a significant loyalty ecosystem and multiple sources of high-margin revenue. United offers more transformation potential, as its investments in premium capacity, loyalty, technology, and fleet modernization have yet to be fully reflected in its long-term earnings power.
At these prices, I’d give United Airlines Holdings, Inc. the edge. Delta is the more established business, but its 9.2x forward P/E already reflects a lot of that quality. United is cheaper at 7.4x, and it still has plenty of room to improve its margins, upgrade its fleet, and grow its premium and loyalty businesses. If those investments pay off, UAL has more room to surprise investors on the upside.
Market Sentiment
Hedge fund interest in United Airlines weakened in Insider Monkey’s latest data. The number of hedge funds holding the stock fell from 73 to 68, while the total value of their positions declined from approximately $5.92 billion to $3.78 billion.
Hedge fund interest in Delta Air Lines also weakened. The number of hedge funds holding the stock fell from 75 to 68, while the total value of their positions dropped from approximately $8.59 billion to $5.15 billion.
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This article is originally published at Insider Monkey.
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