Is Delta Air Lines Undervalued Amid Industry Shifts?

The airline industry is at a crossroads. Post-pandemic demand surges, volatile fuel prices, and structural shifts toward budget travel have reshaped the landscape. For Delta Air Lines (DAL), the question isn't just about survival—it's about whether its ROIC sustainability and structural advantages over budget carriers position it as an undervalued play in this turbulent market. Let's dive into the data.

Delta's ROIC: A Glass Half-Full?

Delta's trailing twelve months (TTM) ROIC of 5.44% as of June 2025 falls short of its WACC of 10.61%, signaling value destruction. This is a stark contrast to pre-pandemic years, when Delta's ROIC hit 5.88% in 2019. However, two factors temper this concern:

1. Operational Resilience: Delta's on-time performance and network reliability remain unmatched. Its hub-and-spoke model allows it to dominate high-traffic routes and extract premium fares, while budget carriers face oversupply in commoditized markets.
2. Cost Efficiency Gains: Post-pandemic, Delta shed $3 billion in annual costs through labor renegotiations and fleet modernization. Its free cash flow of $3–$4 billion in 2024 (up from $2 billion in 2023) hints at a path to narrowing the ROIC-WACC gap.

Budget Carriers: A Cautionary Tale

While Delta struggles to meet its cost of capital, its budget peers fare worse. Take Spirit Airlines (SAVE) and Frontier (ULCC):

• Spirit's TTM ROIC of -8.35% (vs. WACC of 2.00%) reflects bankruptcy-driven chaos. Its reliance on debt restructuring and equity infusions has diluted shareholder value.
• Frontier's ROIC of 0.66% (vs. WACC of 4.01%) highlights flawed capital allocation. Its merger talks with Spirit—aimed at $600 million in synergies—underscore desperation rather than strategic strength.

Structural Advantages of Delta:
- Ancillary Revenue Dominance: Delta's loyalty programs and co-branded credit cards generated $3.8 billion in 2024, far outpacing budget carriers. Spirit, by contrast, derives <10% of revenue from ancillary fees.
- Fleet and Route Flexibility: Delta's average fleet age of 9.5 years (vs. Spirit's 15 years) reduces maintenance costs. Its global network allows it to pivot demand between premium transatlantic routes and cost-sensitive domestic flights.

Industry Tailwinds and Risks

Tailwinds:
- Lower Fuel Costs: Jet fuel at $86/barrel (13% cheaper than 2024) reduces Delta's largest expense.
- Strong Demand: Passenger traffic is up 4% in 2025, with premium travelers prioritizing reliability over budget fare wars.

Risks:
- SAF Costs: Mandates for sustainable aviation fuel (SAF) could add $0.05/gallon to costs by 2030, squeezing margins.
- Labor Costs: Pilots' union demands could reverse recent cost savings.

Investment Thesis: Buy the Dip?

Delta's stock trades at a 12x P/E, below its five-year average of 14x. While its ROIC-WACC gap is concerning, its structural advantages over budget peers and leverage on industry tailwinds suggest it's undervalued. Key catalysts:

1. WACC Reduction: Lower debt costs (Delta's interest coverage ratio rose to 5.0x in 2024) could bring its WACC closer to 9–9.5%, narrowing the gap with ROIC.
2. Margin Expansion: Ancillary revenue growth and fuel savings could push ROIC to 7–8% by 2026, making it the first major airline to close the ROIC-WACC gap.

Risk-Adjusted Play:
- Buy: For investors with a 1–3 year horizon, DAL's dividend yield (3.2%) adds a safety net.
- Hold: Avoid if you prioritize short-term returns; Delta's recovery is gradual.
- Avoid: If you believe budget carriers will outperform, but their ROIC struggles suggest caution.

Conclusion

Delta isn't a perfect investment, but its operational excellence, ancillary revenue streams, and superior capital structure make it a safer bet than budget peers drowning in red ink. While ROIC remains below WACC, the path to improvement is clearer. For long-term investors, Delta's undervalued valuation and industry leadership position it as a buy—even amid ongoing turbulence.

Data as of June 2025. Past performance does not guarantee future results.