Delta wins highest praise as HSBC launches U.S. airline coverage

By Steve Gelsi

Delta is the 'preferred stock,' as HSBC initiates it as a buy along with United and American Airlines

Delta Air Lines Inc. drew praise as the strongest competitor among U.S. air carriers as HSBC on Monday initiated coverage of four big carriers amid an uptick in corporate travel.

Delta (DAL), United Airlines Holdings Inc. (UAL) and American Airlines Group Inc. (AAL) each drew a buy rating from HSBC, while Southwest Airlines Co. (LUV) was rated as a hold.

"Continued recovery in corporate travel, stronger international demand, tighter capacity and pandemic-driven behavioral changes support our positive view," HSBC analyst Achal Kumar said.

While cost pressures may not fade in the short term, profitability is set to improve, capital spending cycles are manageable and the industry could see some consolidation, he said.

HSBC prefers larger, full-service carriers over the discount specialists that may face headwinds due to rising cost pressures and limited opportunity to hike prices, Kumar said.

Among the three buy-rated names, Delta stands out as HSBC's "preferred stock." Delta offers investors "the strongest competitive positioning," with a roughly 70% to 75% market share at its top six hubs, where it has deployed more than 50% of its capacity, Kumar said.

It also offers the highest penetration in the premium traffic segment among the three U.S. full-service carriers. Its business traffic accounts for nearly 50% of its revenue, he said.

Delta also runs the strongest loyalty program among the group, while employing the highest level of nonunionized labor, according to HSBC.

Delta's stock also remains attractive on valuation, with a forward price-to-earnings ratio of 7.5 times, which is about 19% lower than its long-term historical average of 9.2 times, he said.

Overall, a better traffic mix, including a rebound in in higher-paying corporate traffic, a tight capacity environment, cost pressures and strong international demand, should support better yields by the airlines, Kumar said.

While U.S. courts have blocked proposed acquisitions such as the merger of JetBlue Airways Corp. (JBLU) and Spirit Airlines Inc. (SAVE), some consolidation remains likely, potentially in the near term, he said.

"This should further improve the industry's financial health, and in turn result in a structural improvement in operating margins," he added.

HSBC's research note also mentioned JetBlue, Allegiant Travel Co. (ALGT), Spirit, Alaska Air Group Inc. (ALK) and Frontier Group Holdings Inc. (ULCC), but it did not assign any stock ratings to them.

Also read: United Airlines is soaring toward its best day since 2020 and leading S&P 500 gainers

-Steve Gelsi

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05-13-24 1214ET

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