Here Are My Top 2 Airline Stocks to Buy Now

Core Viewpoint - United Airlines and Delta Air Lines are positioned for long-term growth and valuation rerating due to significant megatrends beyond traditional consumer discretionary spending in the travel sector [1] Financial Performance - United Airlines and Delta shares have seen strong performance in 2024, trading at 7.1 times and 9.2 times Wall Street analyst earnings expectations respectively, indicating potential for further growth despite high debt levels [2] - Delta ended Q3 with $18.7 billion in adjusted net debt and generated$2.7 billion in free cash flow (FCF) in 2024, with expectations of $3.4 billion for the full year [2] - Management plans to repay$4 billion in debt in 2024, contributing to improved credit ratings from Moody's and Fitch [2] Industry Dynamics - Recent industry trends challenge the traditional view of high cyclicality, with airlines reducing capacity in response to overcapacity issues [3][4] - Delta's president noted that domestic industry seat growth has moderated, aligning with demand [3] - United's CEO indicated that unprofitable capacity is exiting the market, leading to expected domestic yield improvements [4] Revenue Metrics - Both airlines reported rising cost per available seat mile (CASM) and declining revenue per available seat mile (RASM), but these metrics are expected to improve [5][6] - Delta's non-fuel CASM growth is projected to moderate to 3% in Q4, while United's domestic PRASM showed positive growth in August and September [5][6] Customer Segmentation - Delta's focus on premium customers is yielding positive results, with premium product revenue growing 4% despite challenges, while main cabin revenue declined [7] - Delta's loyalty program revenue increased by 7%, and revenue from co-branded credit cards continues to grow [7][8] Market Outlook - A lower interest rate environment in 2025 is expected to boost consumer discretionary spending on travel, alongside improvements in corporate travel [9] - Both airlines are enhancing their balance sheets through improved FCF and debt reduction, with stable revenue streams from loyalty programs and credit cards [9] - The International Air Transport Association (IATA) projects the global airline industry to earn $30.5 billion in net profits, with North America contributing$14.8 billion [9] Valuation Considerations - Both airlines are generating profitability above the industry average, but their earnings remain cyclical due to economic fluctuations and high fixed costs [10] - There is a case for a valuation rerating as the North American airline industry shows signs of rational behavior in capacity management [10]