[1 Stock per Day #236] Delta Air Lines (DAL): The resilience of the leading airline supported by its Amex partnership and diversified revenue streams

Hello, this is Hal.

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

The company I will cover this time is the leader in the US airline industry, which has diversified revenue streams beyond traditional passenger transport, including loyalty programs and maintenance services: Delta Air Lines [DAL] (hereinafter, Delta).

Article perspective and reason for focus (Why this stock, Why now?)

This is because, although the top line exceeded market expectations in the recent Q2 2026 earnings report with record-high adjusted operating revenue, the stock price fell temporarily due to concerns over declining operating margins caused by inflation in fuel and labor costs. I chose to cover it now because I believe it is a timely moment to objectively evaluate the current situation where macroeconomic cost headwinds intersect with micro-level strengths, such as the partnership program with American Express.

[What kind of company is it?]

It is a major carrier that holds the top market share in the US airline industry. It demonstrates strength in its "premiumization" strategy targeting business travelers and high-income earners seeking comfortable travel, and is characterized by having established stable loyalty revenue through its unique credit card partnership and an MRO business that handles maintenance for other companies' aircraft.

[Recent earnings summary and analysis]

• Revenue: Adjusted operating revenue was $17.666 billion (up approximately 14% year-over-year), marking a record high and exceeding the market consensus estimate of $17.43 billion (GAAP-based operating revenue was $19.757 billion).

• Non-GAAP EPS (Earnings Per Share): Adjusted EPS was $1.56, exceeding the market expectation of $1.49.

• Full-year guidance: The full-year 2026 adjusted EPS outlook was maintained at the initial target of $6.50 to $7.50 (a level implying approximately 20% growth year-over-year). This implies that despite the massive fuel cost burden, the company expects to maintain high profitability through resilient demand and cost normalization in the second half of the year.

Hal's "Short Insight":

The most powerful point that can be read from the earnings figures is the high pricing power that increased operating revenue per available seat mile (TRASM) by 12.4% while maintaining strict supply management that kept capacity growth based on available seat miles to about 1%. However, the market's negative reaction can be analyzed as being due to the adjusted operating margin falling 4.5 points from 13.3% in the same period last year to 8.8%, as the average fuel price per gallon surged 75% from $2.25 to $3.93 in the same period last year, and non-fuel unit costs (CASM-Ex) also rose 6.8%. While the market is reacting sensitively to the short-term margin compression, the fact that the full-year guidance was strongly reaffirmed can be seen as a testament to the durability of the company's business structure.

In the following [Detailed Analysis], I will delve into three themes that can be deciphered from the earnings data: "Expansion of loyalty revenue through the American Express partnership", "Capturing premium demand and growth of the MRO (maintenance) business", and "Reduction of net debt and transition to a shareholder return phase". I will also share Hal's recommendation rating and investment strategy.

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[Detailed Analysis] Diversified revenue structure and the power to offset cost inflation

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

1. Explosive Growth of the American Express Partnership and Loyalty Program

The 'Other Revenue' segment, which does not rely directly on ticket sales, surged 50% year-over-year to $3.856 billion, now accounting for approximately 20% of total revenue. This growth is driven by rewards from the co-branded card with American Express, with payment volume showing double-digit growth for seven consecutive quarters. The partnership rewards for the full year 2026 are projected to reach $9 billion, a 10% increase year-over-year, which can be objectively evaluated as acting as a powerful cushion against fare fluctuations and economic cycles.

2. Success of Premium Strategy and Expansion of Third-Party MRO (Maintenance) Business

While the passenger segment shows strong growth across the board, with domestic flights up 12% and international flights up 8% year-over-year, demand for premium cabins from business and leisure travelers (bleisure segment) seeking comfortable travel is outpacing economy class growth. Furthermore, the third-party MRO (TechOps) business, which maintains aircraft for other companies, is performing extremely well, with projected sales of $1.2 billion for the full year 2026—a 50% increase year-over-year—contributing to revenue diversification while maintaining high profit margins in the low double digits.

3. Steady Reduction of Adjusted Net Debt and Strengthening of Shareholder Returns via Cash Flow

The company recorded $4.027 billion in operating cash flow in the first half of 2026, generating $1.4 billion in free cash flow. Against the backdrop of this robust cash-generating ability, adjusted net debt was reduced by 17% from $16.316 billion in the same period last year to $13.591 billion, keeping the leverage ratio at a healthy level of approximately 2x. With the repair of the financial foundation proceeding as planned, a 15% increase in the quarterly dividend has been announced starting from the third quarter, marking a smooth transition into a phase of shareholder returns.

[Hal's View] Recommendation and Investment Judgment

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

Although the stock price has temporarily adjusted due to concerns over short-term margin pressure from rising fuel and labor costs, the diversified business model, including the $9 billion annual Amex partnership rewards and the MRO business, remains robust. Therefore, it can be considered that the stock is at an attractive level relative to its intrinsic value from a valuation perspective.

Positive Factors

• Stable revenue from loyalty program: Partnership rewards with Amex are projected to reach $9 billion in 2026, providing a resilient cushion structure that does not depend on ticket sales.

• Reliable capture of premium demand: Demand growth for premium classes from business travelers and the bleisure segment is outpacing economy class, supporting strong pricing power.

• Steady progress in deleveraging: Adjusted net debt has been reduced by 17% year-over-year, and the company has generated the financial flexibility to increase dividends by 15% while keeping the leverage ratio at approximately 2x.

Points of Caution

• Fuel price volatility: As seen in the 77% year-over-year surge in fuel costs in the second quarter, high oil prices due to geopolitical risks are the biggest variable risk that directly worsens profit margins.

• Labor cost inflation: Non-fuel unit costs (CASM-Ex) have risen by 6.8% due to wage increases, and the challenge is whether cost efficiency will progress as expected in the second half of the year.

• Macroeconomic hard landing: If inflation and high interest rates persist and consumer travel spending cools completely, there is an inherent risk of deteriorating performance due to the nature of the airline business, which carries heavy fixed costs.

[Signpost] Investment Strategy as a Logical Proposal

In conclusion, 'evaluating the diversified revenue power brought by the Amex partnership and MRO business, as well as steady debt reduction, we can view the short-term stock price dip caused by excessive caution regarding cost inflation as a buying opportunity, and it is logical to build a position gradually through time diversification.' is a logical approach.

Tips for Readers (Signpost)

• How to explore entry points

The current trailing P/E ratio (approx. 14.5x) and forward P/E ratio (approx. 13.4x) are at levels that do not indicate overheating when considering the company's cash flow generation and balance sheet improvements. Furthermore, in quantitative analyses such as the Discounted Cash Flow (DCF) model, the current stock price is considered to be at a significant discount to its intrinsic value ($156.34). While viewing the post-earnings decline caused by cost concerns as a good opportunity for a trial buy, it is considered reasonable to use a dollar-cost averaging approach to enter the position gradually.

• Next points of focus

In upcoming quarterly earnings, it is necessary to focus on whether the operating margin is reliably recovering to 11%-13% in the third quarter as per company guidance, while simultaneously monitoring whether the increase in non-fuel unit costs (CASM-Ex) is narrowing to the low single digits as management expects.

• Mindset

Delta Air Lines is currently evolving from a simple cyclical airline into a diversified aviation platform company that incorporates a loyalty ecosystem and maintenance business. Rather than being overly sensitive to short-term fuel price spikes or apparent margin deterioration, it is important to continue to calmly evaluate, based on objective data, how the free cash flow the company consistently generates is steadily leading to the strengthening of its balance sheet and shareholder returns.

With infrastructure supply constraints continuing, Delta Air Lines maintains an overwhelming industry-leading position, and its business structure, which demonstrates robust resilience through diversified revenue sources, can be considered capable of continuing to provide stable rewards to long-term investors once it overcomes the cost pressures of this transition period.

That is all from me, Hal.

An important request
This article is created for the purpose of providing information regarding US stocks and does not recommend the purchase or sale of any specific securities. Please make investment decisions based on your own judgment and responsibility.