We recently compiled a list of the 10 Best Airline Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Delta Air Lines, Inc. (NYSE:DAL) stands against the other airline stocks.
We also dive deep into trends in the commercial aviation industry, especially the impact the return of international travel to pre-pandemic levels has had on the airline industry.
The coronavirus pandemic wreaked havoc across the global airline industry. According to the International Air Transport Association (IATA), industry revenues slumped from $838 billion in 2019 to $384 billion a year later, registering a 54.1% downfall. However, the market has gradually recovered over the last few years and is on track for solid growth as international travel resumes worldwide.
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A report by UN Tourism in January this year stated that international tourism was recorded in 2023 at 88% of pre-pandemic levels, and is on track to return to levels before the coronavirus struck. The IATA anticipates global airline revenue to reach $996 billion in 2024, 19% higher than in 2019 and 1.5 times higher than the pandemic low of 2020.
The global travel recovery has been led by the Middle East, the strongest tourism market in 2023, as it welcomed 22% more travelers than it did in 2019, becoming the only region to prevail over pandemic levels. Europe reached 94% of the levels in 2019, while Africa stood at 96%. Asia Pacific has been rather slow, recovering only 65% of pre-pandemic levels as of last year.
The uptick in international travel is yielding solid returns this year. As of October 23, 2024, a major airline ETF issued by U.S. Global Investors has grown by 18.44% YTD, outperforming the broader market by 4.5%. Analysts at Forbes believe airline stocks are poised for strong growth during the second half of 2024 as fuel prices dip after long periods of price hikes. Fuel accounts for between 20-30% of airlines’ total costs. Moreover, airlines in the US are cutting down on excess domestic capacity after compressed margins during the summer season. The oversupply of seats has resulted in lower fares, and airline operators are determined to correct that. The deceleration of capacity, coupled with strong travel demand, will enhance their pricing power and improve earnings.
Hedge fund sentiment on airline stocks is also encouraging. Tony Bancroft from Gabelli Funds shared his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26. He noted a significant growth in aircraft orders, resulting in major aircraft manufacturers having a 12-year backlog of orders. Bancroft cited China as the primary catalyst driving robust demand.
According to the portfolio manager, the country represented 20% of all new aircraft orders as Chinese airlines strive to cater to the growing demand for travel among the middle class at home and in neighboring India. Bancroft also highlighted the rising middle class in the United States and other parts of the world that are increasing international travel, and contributing to the strength of the commercial aviation industry.
Methodology
We sampled stocks from ETFs with airline exposure and then picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial view of a commercial aircraft taking off from a coastal hub.
Delta Air Lines, Inc. (NYSE:DAL)
Number of Hedge Fund Holders: 51
Delta Air Lines, Inc. (NYSE:DAL) is a major American airline, headquartered in Atlanta, Georgia. It is the oldest operating airline in the United States, with its first passenger flight taking off nearly a century ago in 1929. The air carrier operates more than 4,000 daily flights to 275 destinations, across six continents.
The company announced its September quarter results on October 10. Delta Air Lines generated earnings of $971 million during the quarter, down 26% from $1.31 billion last year. As a result, its EPS of $1.50 fell short of expectations of $1.52 per share. The dip in earnings was significantly affected by the CrowdStrike-caused outage which resulted in direct losses of $380 million, primarily driven by canceled flights. It also incurred an additional $170 million in customer expense reimbursements and crew-related costs.
However, the airline is confident about finishing the year strong and anticipates a return to year-over-year earnings growth in the fourth quarter, driven by continued demand for its premium offerings. Delta Air Lines is also seeing healthy bookings for Thanksgiving and Christmas holidays, increasing the optimism for improved results.
The company expects total revenue during Q4 to grow 2% to 4% compared to 2023, aided by a 4% higher capacity level. EPS for the December quarter is forecast to be $1.60 to $1.85 per share on 11% to 13% operating margins. Guidance for Q4 takes into account a 20% expected decrease in fuel prices to hover in the range of $2.20 to $2.40 per gallon, which is likely to help earnings. A brief drop in travel spending around the presidential elections in November is also part of the forecast.
The overall sentiment around the stock is bullish as international travel recovers to pre-pandemic levels, and the holiday season coming ahead. Wall Street analysts have consensus on Delta Air Lines, Inc. (NYSE:DAL)’s Strong Buy rating and anticipate a 17% uptick, on average, in its share price. It is also one of the best airline stocks to buy according to hedge funds. According to Insider Monkey’s database, 51 hedge funds tracked by the financial website held a stake in the airline, as of Q2 2024.
Overall DAL ranks 2nd on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of DAL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.