Delta Air Lines Stock Looks Attractive After Strong Quarterly Results

On Wednesday, Delta Air Lines (NYSE: DAL) reported impressive revenue and earnings momentum for its first quarter, despite facing a tough year-ago comparison. Even more encouraging, management expressed optimism about demand trends going into the summer.

Strong customer demand is culminating in what Delta expects to be a record spring and summer travel season, fueled by "generational shifts and evolving consumer preferences," explained Delta CEO Ed Bastian during the company's fourth-quarter earnings call. Specifically, Delta is seeing a consumer shift toward services and premium experiences, as well as accelerating business travel demand. Combining these demand trends with the industry's increased focus on efficiency, Bastian sees "the most constructive backdrop that I've seen in my airline career."

Impressive sales and earnings momentum

Delta's first-quarter revenue rose 8% year over year to approximately $13.75 billion. Adjusted operating revenue rose 6% year over year to $12.6 billion. This is on top of an extremely tough year-ago comparison, when operating revenue soared 45% year over year as the company continued its recovery from a dip in sales during the COVID pandemic.

This good top-line performance and momentum in high-margin initiatives led to better-than-expected adjusted earnings per share of $0.45, easily beating analysts' average forecast of $0.36.

"For the March quarter, we delivered record revenue on outstanding operational performance, enabling strong earnings growth," commented Bastian in the company's first-quarter earnings release.

Looking out to the full year, Delta expects this momentum to continue. Management guided for revenue to grow 5% to 7% in the second quarter.

A "premium" tailwind

A reacceleration of business travel and a continued shift of consumer spending from goods to services only captures part of the story behind Delta's impressive momentum. The airline's secret is arguably in its success with higher-spending "premium" customers.

The company's premium revenue, which commands a higher profit margin than other revenue sources, rose 10% year over year in the quarter. Key to this growth was a 12% year-over-year increase in revenue associated with its loyalty program and the continued addition of premium seats on its aircraft. Growth in premium seats, of course, leads to higher in-flight retail sales.

"Diverse, high-margin revenue streams generated 57% of total revenue," Bastian explained during the company's fourth-quarter earnings call, "differentiating Delta and underpinning industry-leading financial performance."

Fortunately, Delta believes there's a long runway ahead for continuing to improve and grow its premium offering. Management said during the call that it will share more about this at its Investor Day in November.

Time to buy?

Delta is trading at just 7 times the midpoint of management's expected earnings per share in 2025, so the market doesn't seem to be giving Delta enough credit for its operational execution and its momentum with premium customers.

If consumer spending trends continue to shift away from goods and toward services, and if the company's premium experiences continue gaining momentum like management thinks they will, today's price for Delta stock may prove to be a bargain over the long haul.

Of course, there are big risks to investing in airlines. For starters, their cost structures are highly dependent on commodity prices. In addition, airplane manufacturer productivity and quality control can play a role in both cost structures and industry growth. Finally, the industry is tied closely to economic health. Airline revenue, therefore, could suffer severely during a recession. For these reasons, any investment in Delta should be small as a percentage of an investor's overall portfolio.