Airlines continue to struggle with inflation and declining international travel, which have both been dampened by a decrease in consumer demand.

Delta (DAL) has managed some progress with increased premium revenue and improved cash flow, yet high debt and lowered revenue forecasts remain significant concerns.

Overall, ongoing economic and diplomatic headwinds suggest that the industry remains vulnerable, urging caution for investors.

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It has been a difficult path for airlines as they try to move past the effects of the pandemic, and it seems like there are more headwinds on the way.

With inflation resurfacing and households tightening spending, demand for air travel is showing cracks.

The drop in consumer sentiment, driven by concerns over economic policies and rising costs, is pushing many to rethink discretionary expenses like vacations and business trips.

Compounding these pressures is a sharp decline in international travel, especially coming from Canada, which is historically the largest source of U.S. tourists.

Diplomatic friction over tariffs and new visa rules has sparked a 70% plunge in summer bookings between the two nations, stripping airlines of a critical revenue stream.

Meanwhile, investors are growing increasingly skittish with shares of most major carriers having fallen between 20% to 30% last month.

Despite these challenges, Delta (DAL) has made some progress over the past year.

The company saw a 6% rise in revenue in 2024 compared to the previous year. This gain was largely driven by the growing demand for premium seating.

By offering more high-end options like First Class and Delta One, the airline has managed to get more revenue on each flight.

Operating cash flow has also improved by about $1.5 billion year over year.

However, one major concern for the company is its high debt level. Delta ended the year with roughly $16 billion in debt and finance leases.

Although the management team has been using improved cash flows to reduce these obligations, the debt is still a big part of the balance sheet.

Furthermore, for the first quarter of the current year, Delta revised its revenue growth forecast from 7%-9% down to 3%-4%.

High-profile incidents in the airline industry and worries about inflation contributed to a slowdown in bookings.

Management remains optimistic about the future, even while taking a more conservative view on near-term revenue.

Fuel costs have stabilized somewhat, and there is still strong demand for premium travel experiences.

Delta is also working on paying down its debt, which remains an important focus as the airline continues to invest in newer, more fuel-efficient aircraft.

These investments are expected to lower operating costs over time and improve the company’s overall margins.

For now, it is not surprising that investors remain cautious.

Our EEA model clearly shows this.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform return on assets ”ROA” to decline to 5% from 7% last year.

Despite the management’s optimism, the reality is that airlines will likely remain vulnerable.

They operate in a cyclical industry where macro factors like economic slowdowns and diplomatic conflicts can stifle demand.

Until the broader environment improves and consumer sentiment recovers, investors should consider remaining on the sidelines.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research