Delta Air Lines

Delta earned 11% less operating profit on 19% more revenue and 1% more capacity in the second quarter compared with 2025. Salaries increased 8% since last year, while fuel expenses climbed 67%. Delta's premium cabin sales rose 17% versus 2025, while economy seating revenue rose 8%.

Why it matters: Delta's industry-leading segmentation of its travel offerings allows it to outearn peers and command an outsize share of industry profits. Its fortunes are tied to continued demand for premium travel experiences from well-heeled consumers. Travel demand so far in 2026 closely resembles the overall volume of early 2025, with merely 0.5% more travelers passing through security by the end of June. Delta's premium-ticket sales continue to outpace economy-ticket sales, and ticket prices are on the rise industrywide, following the fuel cost spike. Management indicated its expectations for a return to moderate capacity growth in the second half of 2026 are improving, and it would appear that travelers have not begun to balk at persistently higher fares.

The bottom line: We have increased our per share fair value estimate for no-moat Delta to $50 from $48, reflecting a near-term rebound in profit due to abating fuel costs. Even with our forecast of nearly $9.3 billion in EBITDAR in 2026, Delta's shares seem overvalued, as we do not anticipate that market conditions will allow the airline to maintain such outsize profits indefinitely.

Our fair value estimate is $50 per share, which represents 9 times our 2026 adjusted earnings estimate and an enterprise value multiple of 5 times our 2026 EBITDA estimate. We increased our fair value estimate for no-moat Delta's shares from $48, primarily due to a steeper near-term profit rebound following the fuel price spike in early 2026.

Beyond 2026, we forecast continued single-digit revenue growth with a return to more normal industry operating conditions and as consumers slake pent-up demand for travel. Delta surpassed 2019 levels of capacity in 2024, and we expect available seat miles will be approximately 14% higher in 2030, our midcycle year, than in 2019.

Delta's five-cabin segmentation strategy sets it apart from peers; it gives customers more options to pay up for premium experiences (whether with miles, dollars, or their flyer status) and the airline more opportunity to monetize its capital investments. Delta commanded an industry-leading $0.0409 spread between its passenger revenue and structural costs per mile over 2015-19. But load factors in the high 80s mean the front two cabins may be perennially booked, leaving fewer opportunities to trade miles for perks. Without enough fully reclining seats or lounge passes to go around, and a functionally equivalent experience available on another carrier, Delta wouldn't be able to continue to maximize its spread to the same degree, in our view. We forecast this metric converging closer to peers in the next five years, trending below $0.02.

Our average forecast operating margin for Delta is 5.7%, or 700 basis points below its 2017-19 average. We no longer see evidence that pandemic-related restructuring has generated labor efficiencies at Delta, nor do we believe that the airline or its peers will benefit from elevated yields indefinitely. In fact, we observe airlines adding unit costs as they rehire necessary crew and renegotiate labor agreements. We forecast $0.055 more in structural costs per available seat mile in Delta's midterm future than in 2017-19, while passenger revenue yields remain about $0.03 above 2019 highs.

We expect capital expenditure on aircraft around $5 billion in 2026 and to average around $4.6 billion per year over our forecast period. We think this elevated capital expenditure is reasonable relative to historical levels, as Delta has orders to replace much of its fleet and deferred capital expenditures during the pandemic.

We think an above-average cost of equity and standard cost of debt are reasonable for this airline, which leads us to a 7.6% weighted average cost of capital.

We assign Delta Air Lines a Morningstar Economic Moat Rating of none.

Airlines rent seats by the hour on aircraft that fly for decades; their operations and financial results are subject to fluctuations beyond their control, including volatile fuel costs, growth in labor costs, weather, seasonal variation in travel demand, and ticket prices in most markets. The airline business remains price-competitive, capital-intensive, and labor-intensive, all of which make it difficult for an airline to generate any profit beyond its cost of capital. IATA, an industry group, published estimates in 2020 and 2026 that return on invested capital had only approached the industry's cost of capital once in 30 years, never exceeding it. Our own modeling reflects the same reality for Delta: since 2008 it showed volatile annual ROICs ranging from 31% to negative 49%, averaging 8.8%, consistent with our 8% cost of capital estimate. We forecast Delta’s ROICs reaching its cost of capital in our midcycle forecast.

What's more, the industry was pummeled by severe macroeconomic shocks over the last two decades: Sept. 11, 2001, two global pandemics (SARS and covid-19), and the global financial crisis. Airlines experienced drastic and systemic disruptions to their operations, staffing, and financial viability, resulting in much higher leverage and many bankruptcies. Similar shocks are likely to recur at any time, which no airline can defend itself from, leaving investors persistently at risk of permanent capital loss.

Although the amount of fuel needed to power every flight is known to the gallon by weight at takeoff, the price the airline will pay for it can vary widely over a week, seasonally, and regionally. Most important about fuel prices is that each airline experiences them in more or less the same way: they are a commodity. Most of the time, airlines can pass this cost on to customers by charging more per mile when fuel prices are high. Over the long term, airline CPI, a component of consumer CPI, has been remarkably stable (notwithstanding bumps since 2022 that reflected transitory spikes in fuel prices), implying that aggregate airline fares operate similarly to a commodity, as well.

Major US carriers have partnered with a credit card issuing bank to promote loyalty programs that feature their frequent flyer points. For some, these programs, in which the bank pays the airline more for the points upfront than they are technically worth to redeem, represent the lion's share of ongoing operating profit. We do not see these programs as changing the competitive dynamics or structural profitability of the airline. Rather, the airlines have time-shifted when they experience any profit from serving a loyal segment of customers, in many cases redeeming points for perks such as premium seating and lounge access that add incremental cost to provide and maintain.

Through persistent price competition, basic advertised airfares now only include transportation for a passenger (and a small personal item) in an unassigned seat. Labor and other cost inflation have narrowed the historical gap in structural unit costs between discount and full-service carriers. Instead, by charging higher fares to include baggage allowance, seat assignments, and a widening array of other perks, and by exchanging them for collected loyalty points, airlines have tried to establish switching costs among certain segments of their customers. For us to reconsider our moat rating, Delta’s premium customer segments would have to represent a large enough, loyal enough, and profitable enough portion of revenue to deliver economic profits over an entire cycle. However, we believe that industry fundamentals and price competition will still outweigh segmentation through the next downturn.

The most costly competition airlines engage in is for aircraft. Every other decade or so, Boeing and Airbus offer new models powered by new engines that can fly farther, carry more passengers, and consume less fuel. We observe a steady increase in available seat miles flown per gallon of fuel consumed across all airlines, as they consistently upgrade their fleets. Delta, United, and American were able to fly an average airplane seat about 60 miles on a gallon of fuel in 2012 and approached 70 in 2023. They fly hub-and-spoke routes with regional and wide-body jets that burn more fuel per seat mile than narrow-body jets. Southwest went from 70 ASMs per gallon a decade ago to over 80 in 2023; its mileage advantage versus the Big Three is because it flies only variants of the narrow-body 737 on point-to-point routes. The mileage trend reflects improvements in engine efficiency, wing design, and fuselage materials, and it represents a competitive ratchet that no airline can afford to ignore: multiplied over many hundreds of millions of ASMs per year, even a small difference in fleet efficiency would represent a structural disadvantage for an airline competing on similar routes. Thus, airlines constantly refresh their fleet to stay competitive (new seats, bigger luggage trays, and the like are a side benefit of new planes that also may augment an airline's brand perception for a short time).

Airlines provide invaluable service to their customers and communities, often stimulating the economies of those destinations they connect to the global travel network. However, investors in airlines are literally flying on a wing and a prayer, as we see no prospect for durable economic profit in this industry. Instead, we observe that the duopoly airframe suppliers Airbus and Boeing and the oligopoly engine manufacturers GE, Safran, Pratt & Whitney, MTU, and Rolls-Royce reap the economic reward from providing successively more efficient, powerful aircraft that airlines line up to buy or rent so their service and cost profile can keep up with competing carriers.

The strategy of providing premium travel experiences has resonated with customers, and Delta generally earns a unit revenue premium relative to peers.

Delta has the largest frequent-flyer program of the US-based network carriers. These frequent-flyer programs bring in high-margin advances on revenue from banks to fund mileage rewards.

Airport throughput has begun to lap prepandemic levels in almost every segment amid robust leisure demand and recovering business and international travel.

Business travel recoveries tend to lag economic recoveries, and Delta has high and evolving exposure to the business travel market.

Amid very strong demand and constrained capacity, Delta may be the first US airline to face challenges delivering on its premium promise in overcrowded cabins and lounges.

Delta has the most to lose if a financially distressed rival were to lower prices to compete for passengers.