Investing In Delta, American Airlines, Or Southwest Airlines?

In this week’s blog post, I compare three of the leading airlines in the United States – Delta (DAL), American Airlines (AAL), and Southwest Airlines (LUV). Using fundamental data, I will determine which one of these three stocks is the best investment. I will talk about the company overview, and then perform the fundamental analysis on each stock. Let’s dive in.

Company Overview

Delta (DAL) – Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo in the United States and internationally. The company operates through two segments, Airline and Refinery (note: Delta has been trying to sell its east coast refinery). Its route network is centered on a system of hubs and markets at airports in Amsterdam, Atlanta, Boston, Detroit, London-Heathrow, Los Angeles, Mexico City, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, São Paulo, Seattle, Seoul-Incheon, and Tokyo-Narita. The company sells its tickets through various distribution channels, including and mobile applications/Web, telephone reservations, online travel agencies, traditional brick and mortar, and other agencies. It also provides aircraft maintenance, repair, and overhaul services; and vacation packages to third-party consumers, as well as aircraft charters, and management and programs. The company operates through a fleet of approximately 800 aircraft.

American Airlines (AAL) – American Airlines Group Inc., through its subsidiaries, operates as a network air carrier. It provides scheduled air transportation services for passengers and cargo. As of December 31, 2018, the company operated a mainline fleet of 956 aircraft. It serves 350 destinations in approximately 50 countries, principally from its hubs in Charlotte, Chicago, Dallas/Fort Worth, London Heathrow, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C.

Southwest Airlines (LUV) – Southwest Airlines Co. operates a passenger airline that provides scheduled air transportation services in the United States and near-international markets. As of December 31, 2018, the company operated a total of 750 Boeing 737 aircraft; and served 99 destinations in 40 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 10 near-international countries, including Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. It also offers inflight entertainment and connectivity service on Wi-Fi enabled aircraft; and sells points and related services to business partners participating in the Rapid Rewards loyalty program, such as car rental agencies, hotels, restaurants, and retailers. In addition, the company provides a suite of digital platforms to support customers’ needs across the travel journey, including,, an iOS app, and an android app; and, a Website for business customers that offer businesses shared stored company credit cards, company activity reporting, and centralized traveler management services.

Fundamental Overview

As you can see in the table below, I compared each company’s profitability by looking at Return on Equity (ROE) % and Return on Invested Capital. I compared each company’s quality of cash flow by looking at Free Cash Flow to Net Income. I looked at each company’s financial health through Debt to Equity Ratio and Current Ratio. Lastly, I compared each company’s efficiency by looking at the Inventory Turnover. The Price to Earnings (P/E) ratio gives us an idea of how expensive the stock price is compared to the company’s earnings. Here is the pdf version of the table below.


As we can see from the table above, Delta has the lowest P/E ratio, American Airlines gives you the highest Return on Equity, and Southwest Airlines has the best debt to equity ratio. Delta has the best Free Cash Flow to Net Income ratio, and Southwest has the best current ratio, inventory turnover, and return on invested capital. We can tell from the table above that American Airlines is financially weak. Furthermore, American Airlines and Southwest were affected by the recent ban on Boeing 737 Max planes (temporary upsets). Let’s look at the intrinsic value and expected rate of return of each stock.

Intrinsic Value and Expected Rate of Return

I performed a Discounted Cash Flow (DCF) analysis with a 15% discount rate. As pictured below, I found the Intrinsic Value of DAL to be $32 per share, AAL to be N/A since it had negative free cash flow, and LUV to be $56 per share. In comparison to the intrinsic value, the current price of DAL is $55.99 per share, AAL is $32.68 per share, and LUV is $51.82 per share. So, it looks like LUV is the only undervalued stock. If you had only focused on the price of the stock, you would have found AAL to be the best investment. However, the financials of AAL are out of hand, which is possibly a reason for its low stock price. Here is the pdf version of the table below.


The last row in the table above is for Expected Rate of Return (RoR). If you were to invest your money at the current stock price, the expected RoR gives you an idea of what kind of annual return can you expect to get on that investment for the years to come. Expected RoR takes into account the Free Cash Flow (FCF) for the past 10 years, and the likelihood of FCF growth for the next 10 years. Here are the past and projected FCF arrays along with the Upperband, Lowerband, and Most Likely assumptions for DAL, AAL, and LUV:

Expected Rate of Return of 2.7% (if 10% likelihood of 5% FCF growth, 65% likelihood of 1% FCF growth, and 25% likelihood of (-5)% FCF growth)
Expected Rate of Return is N/A (AAL’s FCF has been negative for the past 8 of the 10 years, so the likelihood of FCF is negative in the future)
Expected Rate of Return of 9.3% (if 10% likelihood of 5% FCF growth, 65% likelihood of 1% FCF growth, and 25% likelihood of (-5)% FCF growth)

As you can see from the AAL’s graphs above, for 8 out of the past 10 years, American Airline had negative free cash flow. This is why I was not optimistic with AAL’s expected rate of return. Looking at the past 10 years of FCF, we can tell that Southwest Airlines has the least volatile graph. Moreover, Southwest has an expected rate of return of 9.3% as compared to Delta’s expected rate of return of 2.7%.

Even though none of these 3 stocks provide an amazing margin of safety (a huge difference between its intrinsic value and current price), Southwest Airline would be the best bet in this group. LUV has the best fundamentals, has had a growth in free cash flow for the past 10 years, and is the only stock that is undervalued. As a result, if I were given a choice today to invest in Delta Airlines, American Airlines, or Southwest Airlines, I would most likely pick Southwest Airlines.


Hope you learned a little and found this blog post helpful. We analyzed 3 major airlines: Delta Air Lines (DAL), American Airlines (AAL), and Southwest Airlines (LUV). We compared various fundamental ratios, intrinsic values, and expected rate of returns. As always, you can sign up for our mailing list here.  Like us on our Facebook page here. Thank you!

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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions.

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