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Delta Air Lines’ Valuation Multiple: What’s Priced In?

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Current valuation

Delta Air Lines (DAL) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.6x. That’s higher than its average valuation of 5.4x from January 2009 to date.

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Peer comparison

Southwest Airlines (LUV) is trading at an industry high valuation of 7.1x, followed by American Airlines (AAL), which is trading at 6.7x. Alaska Air Group (ALK) is trading at 6.6x. Spirit Airlines (SAVE) is trading at 6.0x, followed by JetBlue Airways (JBLU) at 5.8x. United Continental (UAL) has the lowest valuation multiple of 5.1x among its peers.

For 2017, the market is expecting legacy carriers’ EBITDAs to fall. AAL’s EBITDA is expected to fall 1.1%, and DAL’s is expected to fall 2.2%. UAL’s is expected to fall 9.0%. Alaska Air’s EBITDA is expected to rise 14.5% due to the Virgin America acquisition. The market is expecting Southwest’s EBITDA to fall 3.3% and JetBlue’s to fall 7.5%. Spirit Airlines is expected to record a 9.9% rise in EBITDA.

Our analysis

Currently, Delta Air Lines seems to be at the forefront of unit revenue growth, a key metric tracked by airline investors. Improving unit revenues are expected to translate to increasing profitability. That could help restore investor confidence in the short term.

In the long term, economic growth, both global and in the United States, will play a key role. Growth in passenger travel demand has been found to be highly correlated with economic growth. Other important determinants will be how well airlines are able to maintain capacity discipline and increasing fuel and labor costs.

You can gain exposure to Delta Air Lines by investing in the PowerShares Buyback Achievers ETF (PKW), which invests 1.7% of its holdings in Delta.

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