[1 Stock a Day #177] Delta Air Lines (DAL): Re-evaluating the 'King of the Skies' through Premium Strategy and Financial Strengthening

Hello, this is Hal.

In this note, I analyze one US stock every day.

The stock I am covering this time is Delta Air Lines [DAL] (hereinafter referred to as Delta), a major airline that boasts the highest profitability in the US aviation industry, armed with a focus on premium customer segments and a powerful customer loyalty program.

Article perspective and reasons for attention (Why this stock, Why now?)

This is because in the Q1 2026 earnings report released on April 8, 2026, the company overcame external headwinds such as soaring fuel prices and bad weather to record its highest-ever revenue for a first quarter. Furthermore, I decided to cover it now because I believe it is time to objectively evaluate the 'quality of earnings' of the company, which is simultaneously advancing financial health and digital experience innovation against the backdrop of its strong cash flow generation capability.

[What kind of company is it?]

It is a full-service carrier based in the US with a route network spanning the globe. Rather than getting caught up in low-fare competition, it is characterized by building a highly profitable customer base that is resistant to economic fluctuations through the expansion of premium seating and a loyalty program in partnership with American Express.

[Recent earnings summary and analysis]

• Revenue: 14.2 billion dollars (up 9.4% year-on-year), exceeding the market consensus estimate of 13.94 billion to 13.97 billion dollars.

• Non-GAAP EPS (Earnings Per Share): 0.64 dollars (up 44.0% year-on-year), exceeding the market estimate of 0.61 dollars.

• Full-year guidance: The company maintained its outlook for fiscal year 2026 adjusted EPS of 6.00 to 7.00 dollars and free cash flow (FCF) of 3.0 to 4.0 billion dollars. This implies strong confidence in further expansion of international demand toward the second half of the fiscal year.

Hal's 'Short Insight':

The most important point that can be read from the earnings figures is that the growth in passenger revenue (up 10.0% year-on-year) is outpacing the growth in seat capacity. This indicates that profitability per mile (yield) is improving. In a phase where fuel costs are rising and pushing up operating costs, the fact that such strong profit growth (adjusted pre-tax profit up 42%) was achieved can be attributed to the powerful pricing power that Delta Air Lines possesses.

In the following [Detailed Analysis], I will delve into three themes that can be read from the data in this earnings report: 'Stability of premium strategy and loyalty revenue', 'Status of financial structure improvement', and 'Future digital investment'. I will also share Hal's recommendation level and investment strategy for this stock.

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[Detailed Analysis] Qualitative improvement of earnings through premiumization and financial strategy

I will delve into the macro and micro factors that shape the current company while incorporating specific figures.

1. Stabilization of revenue structure through premium seating and loyalty revenue

Delta Air Lines' revenue base has diversified beyond simple ticket sales. In the current quarter, revenue from premium cabins increased by approximately 8% year-over-year, becoming a key pillar of total sales. Additionally, loyalty revenue from the partnership with American Express recorded a 12% year-over-year increase. By capturing high-income customers who do not cut back on spending even during economic downturns, as well as card users who accumulate miles, the company can be evaluated as having built a more stable revenue structure than traditional airlines.

2. Dramatic Improvement in Financial Health and Cash Generation

The reduction of debt that ballooned during the pandemic is progressing steadily. Adjusted net debt in the current quarter was reduced to $18.6 billion from $19.8 billion in the same period last year. Furthermore, the net debt-to-EBITDA ratio has fallen to 2.9x, returning to the management's target range of 2.0x to 3.0x. Given the outlook for generating $3 billion to $4 billion in free cash flow for the full fiscal year 2026, it can be considered that the financial strength for future dividend increases, share buybacks, and fleet renewal is extremely solid.

3. Innovation in Digital Experience and Investment in the Future

The company is also actively pursuing digital investments to secure future competitive advantages. Recently, it partnered with Amazon Leo to introduce next-generation satellite Wi-Fi services from late 2026 onwards. This will enable stress-free streaming and digital experiences even at 30,000 feet. The improvement in digital experience is characterized by its contribution to further enhancing customer loyalty and brand premiumization.

[Hal's View] Recommendation Rating and Investment Judgment

Recommendation Rating: ★★★★★★★★☆☆ (8/10 scale)

Although industry-wide risks such as soaring fuel costs and delays in aircraft deliveries exist, considering the high profit margins driven by an overwhelming premium strategy and valuation levels that are extremely low compared to historical averages, it can be considered highly attractive as a medium- to long-term investment target.

Positive Factors

• Success of Premium Strategy: Premium revenue and loyalty programs are supporting company-wide profit margin expansion.

• Solid Cash Flow: The structure capable of generating $3 billion to $4 billion in FCF annually is outstanding within the U.S. airline industry.

• Undervalued Valuation: The forward P/E ratio remains in the 7x to 8x range, suggesting that stock price valuation may not be keeping pace with the improvement in the company's fundamentals.

Points of Caution

• Fuel Price Fluctuation Risk: Rising crude oil prices due to geopolitical risks are the external factor that most directly pressures profits.

• Aircraft Delivery Delay Risk: If the introduction of new aircraft is delayed due to factors such as Boeing's production delays, there is a concern that operational efficiency improvements will not proceed as expected.

• Policy Risk: If regulatory proposals regarding credit card interest rate caps or loyalty programs emerge, there is an inherent risk that it could impact the AMEX partnership revenue, which is a pillar of earnings.

[Signpost] Investment Strategy as a Logical Proposal

In conclusion, 'ignoring short-term external noise based on strong cash flow and undervalued valuation, and holding Delta Air Lines as a sector leader from a medium- to long-term perspective' can be considered a logical approach.

Tips for Readers (Signposts)

• How to find an entry point

The current P/E ratio is at a historically low level. However, because the stock has a tendency to experience short-term pullbacks due to fuel cost fluctuations caused by geopolitical risks and other factors, it is considered reasonable to accumulate positions by diversifying over time across several months rather than investing in a lump sum.

• Next Points of Focus

In upcoming quarterly earnings, it is necessary to focus on whether the company is 'fully covering rising fuel prices through fare pass-throughs and cost efficiencies,' while simultaneously monitoring 'international booking trends for the peak summer season and whether revenue per mile continues to improve.'

• Mindset

Investing in airline stocks always carries risks related to the external environment. Rather than being swayed by short-term price fluctuations caused by news, it is important to calmly observe how Delta's fundamental business model shift toward 'premiumization' and steady deleveraging will bolster future corporate value.

Delta Air Lines' management strategy, which balances a premium customer experience with a solid financial foundation, can be expected to continue demonstrating an unshakable competitive advantage in the U.S. airline market.

That is all from me, Hal.

An Important Request
This article is intended for informational purposes regarding U.S. stocks and does not recommend the purchase or sale of any specific securities. Please make investment decisions based on your own judgment and responsibility.