Delta Versus Hawaiian: Which Airline Stock is Better Now?

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After being plagued by various headwinds for most of the year, the airline industry has recently started seeing better days and eyeing a favorable finish to the year. With the advent of the holiday season, U.S. carriers are going through a busy time with demand for air travel picking up, courtesy of an improving economy and declining air fares. The bullish forecast for the upcoming winter holiday period (Dec 16-Jan 5), after the Thanksgiving travel rush, is a strong indication of the improving scenario for airlines.

The improving scenario for the airline industry can be further gauged by fact that the current Zacks Industry Rank of 76 (among more than 260 groups) for the Transportation-Airline division is much more favorable than the 200+ rank carried couple of months ago.

Given this favorable backdrop, let's try to ascertain which of these two key airline players - Delta Air Lines DAL and Hawaiian Holdings HA - presently makes for a better investment.

Delta has a market capitalization of $37.42 billion, while for Hawaiian Holdings - the parent company of Hawaiian Airlines - the same is a mere $2.96 billion. Going by their business size, Delta is undoubtedly a winner. Despite Delta's massive scale of operations, which better positions it to withstand industry headwinds over the long run, short-term investment opportunities do not appear promising. Let's delve into the details.

Zacks Rank

Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, Hawaiian Holdings is a better bet as it sports a Zacks Rank #1 (Strong Buy), highlighting the fact that it is likely to outperform the broader market over the next one to three months. You can see the complete list of today's Zacks #1 Rank stocks here .

On the other hand, Delta carries a Zacks Rank #3 (Hold), highlighting the fact that it is likely to perform in-line with the broader market over the next few months. The favorable Zacks Rank of Hawaiian Holdings is primarily attributable to its upbeat fourth-quarter guidance for revenue per available seat mile (RASM: a key measure of unit revenue).

While announcing its November traffic numbers, the carrier mentioned that it expects fourth-quarter RASM to grow in the range of 3% to 6%. Earlier, the company had anticipated an increase of 0.5% to 3.5%. No wonder the update found favor with investors as unit revenue woes have been plaguing airlines for quite some time and improvements in this metric, which is a measure of sales relative to capacity for a carrier, is naturally a positive.

On the other hand, Delta slashed its operating margin outlook for the fourth quarter a few days ago, due to the increase in costs following the recently ratified pilots' contract. The deal is retroactive to Jan 2016. Due to the contract, costs in the fourth quarter will increase to the tune of $475 million. Based on the estimated higher costs, Delta expects fourth-quarter operating margin in the band of 9.5% to 10.5% (earlier outlook had projected the metric in the band of 14% to 16%). The carrier also anticipates non-fuel unit costs, including profit sharing, to increase 10% in the current quarter, on a year-over-year basis.

Price Performance

The impact of the updates is well-reflected in the price performance of the companies so far in December. While shares of Delta have underperformed the Zacks categorized Transportation-Airline industry, those of Hawaiian Holdings have comfortably outpaced the broader industry. The industry has advanced 6.73% so far this month, while shares of Delta and Hawaiian Holdings have appreciated 4.61% and 9.82%, respectively.

Estimate Revisions

Upward estimate revisions reflect optimism in a stock's prospects, going forward. The Zacks Consensus Estimate for the current quarter has climbed 6.8% over the last seven days to $1.26. However, the same has gone down 33% over the last seven days to 75 cents at Delta, reflecting the pessimism about the Atlanta, GA-based carrier.

The top line and bottom line at Hawaiian for the fourth quarter are expected to expand 48.6% and 7.5%, respectively. However, the scenario is not favorable for Delta due its lowered operating margin view. Revenues and earnings per share are projected to contract 3.1% and 36.3%, respectively, in the final quarter of 2016.

Hawaiian Scores on Momentum

While both Delta and Hawaiian Holdings carry favorable Value and Growth Style Scores, the Honolulu, HI-based carrier's Momentum Score of 'A' as opposed to Delta's 'F' makes it "A stock on the Move".

Hawaiian Holdings' Zacks Rank # 1 when combined with its attractive Momentum Score makes it a favorable investing option. Our research shows that stocks with a Momentum Style Score of 'A' or 'B' when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.

The above arguments clearly suggest that the Hawaiian Holdings stock currently offers a more attractive entry point.

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DELTA AIR LINES (DAL): Free Stock Analysis Report

HAWAIIAN HLDGS (HA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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