Here’s why this airliner’s results should make investors in airline stocks reconsider their methodology forever

Investors in airline stocks have long been told they are foolish for considering the entire sector. Yes, the entire sector and not just one company. The logic has been that margins are low whilst capex and opex is high. Warren Buffet literally said once,’ Never buy an airline!’ And ironically he broke his own rule in 2016 thinking ‘it’s different this time’…and paid a price when airline stocks dropped when the pandemic emerged.

But recent results from Delta made us think that investors should scrape out and start over again with the way they should look at airline stocks.

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The results that should make investors in airline stocks think again

Delta (NYSE:DAL), one of America’s Big 3 airlines and headquartered in Atlanta, released its Q4 and annual results last week. The other 2 of the ‘Big 3’ are American Airlines and United, although increasingly it is the case that American is trailing Delta and United because while it has an enormous domestic network, it lacks the penetration in the premium travellers market. Sorry for the spoiler alert for what we will soon reveal.

Let’s look at Delta’s Q4 revenue from ‘main cabins’ (i.e. economy) and ‘premium cabins’ (i.e. first class, business class and premium economy). It is common knowledge that airlines make higher margins from premium cabins, although it has still been the case that more revenue overall has been made from economy (even if there are lower margins on each passenger). This is no longer the case. Delta’s main cabin revenue was US$5.62bn and its premium cabin revenue was $5.7bn – these were down 7% and up 9% respectively.

Turning to the full year results and main cabin revenue does exceed premium cabin revenue – $23.39bn to $22.1bn. But again, the former was in decline (by 5%) and the former is in the other direction (up 7%). Overall, passenger revenues were $12.9bn for Q4 (up 1%) and annual revenues were $51.8bn (up 2%). The balance of revenue is made up from loyalty travel awards and travel-related services, $1.6bn in Q4 and $6.3bn for the full year.

The two speed economy

It is common knowledge in any business that it is better to make more money from less people than less money from more people and that is true in the airline business with such high capex and low margins. That is why we are seeing airlines invest so much in premium travel (i.e. cabins and reward programs) rather than economy travel. Look at how ‘premium-heavy’ Qantas’ current 787s are (i.e. the proportion of premium class seats and how much space they take up) and also how the future A350s will be.

But also that while premium travel demand keeps going up and up with no end in sight whilst economy travel demand keeps decreasing due to the two-speed economy that has existed since early 2022. Now, you could say Delta is just one airline…but look at the entire industry and you’ll see the same thing. Spirit Airlines has been in administration for over a year now, JetBlue has not turned a profit since the pandemic, Allegient just snapped up boutique airline Sun Country, and Frontier is struggling too (looking at a merger with Spirit).

Source: Imgflip/Fox

What does it mean?

Arguably the key consideration for investors in any airline stock is to what extent it goes after premium travellers, or everyone else. Because if all else goes well (i.e. there are no fleet issues, market disruptions like pandemics and oil prices are reasonable and stable), then that will be the key factor in determining whether or not the airline goes well.