No one should be under any illusions that the air travel market isn’t under some pressure right now. It is. Still, the long-term case for investing in a higher-quality airline like Delta Air Lines (DAL -4.88%) remains undiminished, and some of the forces that created the weakness are now strengthening the case for buying the stock. Here’s why buying Delta stock can set you up for many years of profitable income.
Near-term weakness, long-term strength
Unfortunately, the escalation in trade conflicts and tariff actions has had a negative effect on the travel market in 2025. CEO Ed Bastian noted on the last earnings call in April that “given broad economic uncertainty around global trade, growth has largely stalled” with “softness in both consumer and corporate travel” in Delta’s main cabin. As such, Delta’s management elected not to update on its full-year guidance.
While that’s not a good sign, it’s crucial to note Delta’s and other airlines’ reactions to events, as they help support the buy case for the stock. Simply put, Delta is planning to reduce its expected capacity growth in the second half to align supply with demand. United Airlines is also decreasing its international and domestic capacity relative to previous expectations in response to market conditions.
The airline industry is demonstrating discipline in reducing capacity when and where it’s necessary in response to changing demand conditions. That’s something that hasn’t always been a part of the industry’s history. Instead, airlines have often maintained routes (partly due to high fixed costs) through slowdowns and, consequently, suffered the slings and arrows of margin degradation.
However, the newfound discipline — which, incidentally, was also in place last summer when overcapacity appeared — is good news for the industry. It’s particularly good news for the higher-quality airlines like Delta.
Image source: Getty Images.
Airport costs and return on invested capital
One of the long-standing criticisms of the industry (also made by Buffett) is that it fails to generate the return on invested capital (ROIC) necessary to cover its cost of capital. It’s a valid criticism, also made by the International Air Transport Association (IATA), but not all airlines are equal.
The chart below shows that premium airlines, such as Delta and United, are generating good ROICs and have recovered since the devastation the industry suffered due to the pandemic lockdowns.
However, that’s not the case for the low-cost carriers (LCC) like Southwest or JetBlue.
DAL Return on Invested Capital data by YCharts.
One reason for this is the rising cost of airport operations, driven by the need to replace, improve, or expand airport infrastructure. These increasing costs pressure low-cost carriers more because the increases are a relatively higher percentage of their ticket prices. For example, $10 on a $300 Delta ticket doesn’t have the same effect on margins and demand as $10 on a $30 JetBlue ticket.
As such, the current environment pressures LCCs more than Delta, and the latter is likely to emerge stronger out of a slowdown.
Diversifying revenue streams
Finally, Delta has done a great job of growing its non-main cabin revenue. Delta and United both said that their premium cabin revenues are holding up well. Moreover, premium products revenue rose 7% year over year in Q1, accounting for $4.7 billion at Delta. That’s now representing 41% of total passenger revenue, up from 39.6% in Q1 2024. Meanwhile, loyalty-based revenue grew 11% to $940 million.
Image source: Getty Images.
These growth numbers reflect the success of Delta’s SkyMiles loyalty program and its co-brand credit card remuneration from American Express. Again, the growth of these programs and spending on Delta/American Express cards help diversify Delta’s revenue streams and reduce the cyclicality of its profitability.
A stock to buy
All told, Delta is likely to emerge stronger from the slowdown, and there’s also potential upside to current expectations if the tariff dispute is resolved amicably. It all adds up to making Delta an excellent stock to buy on a dip, because its long-term growth prospects remain in good shape.
American Express is an advertising partner of Motley Fool Money. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
