Delta Air Lines or Southwest Airlines: Which Is a Better Buy As Vaccines Roll Out?

At one time, choosing between Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) was like fishing in a barrel. These have been two of the strongest, well-run airlines for investors. And heading into 2020, it looked like clear skies were ahead for the airline sector.

We all know what happened then. First, most international flights were suspended. And after that, most domestic flights were also grounded. And although there is some evidence that personal travel is beginning to recover (although recovery is a relative term, business travel has been mostly non-existent.

Truer Words Were Never Spoken

On the company’s third-quarter earnings call, Delta CEO Ed Bastian remarked about the many pieces that have to come in place for the airline to recover at scale, “Until then, our focus is on doing a great job at what we can control.”

Revenue is obviously not one of those items. Shortly after that remark, Bastian confirmed that the airline suspects it could be more than two years until it returns to a “normal” revenue environment.

So investors were keen to hear what the company’s latest earnings report would reveal. Delta reported its fourth-quarter earnings on January 14. And the numbers were more of the same. In other words, less bad remains the new normal.

In terms of adjusted EPS, Delta posted a slight beat coming in at -$2.53. However GAAP EPS, which came in at -$1.19, was a much more solid beat. And revenue was better than expected. The $3.97 billion was 65% lower on a year-over-year basis, but perhaps more meaningful to investors, the revenue was approximately 50% higher than the $2.6 billion recorded in the prior quarter. And investors had to be heartened that Delta continues to cut into its cash burn. The company is now burning “only” about $12 million a day. That’s a dramatic improvement from the $24 million average burn per day in the prior quarter. 

For Delta It’s a Question of When and Where

Multiple Covid-19 vaccines are injecting the economy with confidence. The rollout of the vaccines may be slower than expected. But at some point the vaccines will provide our society with critical mass against the virus.

And if the Vaccination Credential Initiative takes root, it may be easy for individuals to provide proof of their immunization. While this will be controversial, the idea of an encrypted digital passport has the backing of Microsoft (NASDAQ:MSFT), Salesforce (NYSE:CRM) and Oracle (NYSE:ORCL).

The Case For Southwest

It may be easy to look at LUV stock as the clear winner between these two airlines. The reason could simply be that the company is not reliant on international flights. Investors also love that the company has never had to go through the bankruptcy process.

Investors will have to wait until the end of January to hear from Southwest. But there’s no reason for investors to expect a massive surprise. Southwest entered the pandemic in better financial shape than many of its peers. In its last earnings report, it reported $14.6 billion in cash and cash equivalents which makes its $1 billion of debt a non-issue.

And Southwest has also made small, but savvy moves that position the company for success in a post-pandemic world. The company has expanded into its tenth Florida location and now offers service to and from Savannah, Georgia as well as from Long Beach to Honolulu. 

The Recovery Has Been Choppy

If you’re still hesitant to invest in the airline sector I don’t blame you. The recovery is still in its early innings. But as the saying goes, it could get late early. And for those investors with a more speculative appetite, the airline sector is beginning to look attractive.

Since closing at a pandemic low of $19.38 eight months ago on May 14, 2020, DAL stock is up more than 100%. The same is true of LUV stock. On May 14, the stock closed at just under $24 per share. Today the stock is up over $49.

Yet, DAL is still down approximately 30% from where it was prior to the pandemic. And LUV is down 16% from its 52-week high. To me that suggests that Delta provides investors with much more upside. And if the “vaccine passport” concept becomes a reality, demand may increase much faster than expected.

I’m betting on pent-up demand being a tailwind for both stocks, but if we presume that much of the good news is already baked into both stocks, I see Delta having more upside for the speculative investor.