U.S. Airlines' Turnaround Potential Amid Tariff Uncertainty: Delta's Lead in a Sector Rebound

Delta Air Lines' second-quarter 2025 earnings report has reignited optimism in the airline sector, offering a glimpse of stability amid persistent macroeconomic headwinds. The carrier's decision to reinstate its full-year profit forecast, despite challenges like overcapacity and soft corporate demand, signals a turning point for an industry grappling with uncertainty. For investors, Delta's performance highlights both the resilience of premium travel demand and the sector's sensitivity to geopolitical risks—creating a nuanced opportunity to capitalize on undervalued peers while navigating lingering risks.

Delta's Catalyst: Premium Growth and Operational Discipline

Delta's Q2 results defied expectations, with adjusted EPS of $2.10 surpassing estimates and total revenue hitting $15.5 billion. The airline's premium revenue grew 5% year-over-year, driven by demand for first- and business-class seating, while partnerships like its American Express co-brand deal added $2 billion in revenue. This focus on high-margin segments underscores a strategic shift: airlines are increasingly prioritizing quality over quantity in the face of volatile demand.

Cost discipline also shone: non-fuel unit costs rose just 2.7% year-over-year, with fuel expenses dropping 11% due to lower oil prices. These metrics, paired with a 25% dividend hike, reflect Delta's confidence in its ability to navigate a challenging landscape. CEO Ed Bastian's “surgical” capacity cuts post-summer peak further demonstrate operational agility, balancing supply with demand to avoid fare erosion.

Macro Tailwinds: Oil and Tariffs

Two external factors are critical to the sector's outlook. First, oil prices have fallen 14% year-to-date, easing a key cost pressure. Airlines like Delta, which burn over 1 billion gallons annually, benefit directly from this trend. Second, the U.S.-China tariff deadline, initially set for July 2025, has been delayed—a relief for international travel demand, which had softened due to tariff-related uncertainty.

While these tailwinds are supportive, they are not without risks. Oil prices remain volatile, and tariffs could resurface if trade tensions escalate. Still, the sector's resilience in Q2 suggests that airlines are better positioned to weather such shocks than during the pandemic or 2022's inflation crisis.

Valuation Gaps: United and American as Undervalued Plays

Delta's success has not translated broadly into peer valuations, creating opportunities for selective investors.

United Airlines (UAL) trades at a P/E of 7.39 and an EV/EBITDA of 5.13, both below its historical averages and Delta's 4.51 EV/EBITDA. Despite operational challenges like labor disputes, United's growth in loyalty revenue and partnerships (e.g., with JetBlue) position it to rebound if demand stabilizes.

American Airlines (AAL) is even more undervalued, with a P/E of 9.86 and a EV/EBITDA of 4.3, yet it carries a debt-to-equity ratio of 474%, raising liquidity concerns. However, its Q2 revenue growth of 1% and cost-cutting efforts suggest it could leverage its scale if travel demand holds.

Risks and Caution: The Clouds on the Horizon

While the sector's trajectory appears positive, risks remain. Corporate travel, a key revenue driver, grew only flat year-over-year—far below expectations—and leisure demand remains sensitive to consumer confidence. A recession or renewed tariff imposition could reverse momentum. Additionally, overcapacity in domestic markets, though mitigated by Delta's cuts, persists as a drag on pricing power.

Investment Strategy: A Balanced Approach

Investors should consider a two-tier strategy:
1. Core Position in Delta (DAL): Its operational excellence, premium focus, and restored guidance make it the sector's safest bet.
2. Selective Exposure to Undervalued Peers: Use dips in UAL and AAL to build positions, particularly if oil prices stay low and tariffs remain delayed.

Conclusion: A Sector on the Cusp of Recovery

Delta's Q2 results mark a pivotal moment for U.S. airlines. By balancing premium growth with disciplined cost management, the carrier has set a path for recovery. With oil prices falling and tariff risks receding, the sector is primed for a rebound—but investors must remain vigilant. The airlines most likely to thrive are those, like Delta and United, that can sustain profitability through both premium offerings and cost control. For now, the skies are clearing—but the storm clouds have not yet vanished.

Final Note: Monitor oil prices and trade policy developments closely. A recession or tariff resurgence could reverse the sector's momentum.