Q4 performance: Goldman Sachs Group, Inc. supports Delta Air Lines, Inc. (DAL.US): maintains "buy" rating, bullish on the company's ability to outperform industry driven by corporate and international demand.

Goldman Sachs Group, Inc. commented on Delta Air Lines, Inc. (DAL.US) after the release of their fourth-quarter earnings report on Tuesday. Delta Air Lines, Inc. reported better-than-expected fourth-quarter performance, but their mid-point 2026 earnings per share (EPS) guidance was lower than market consensus and investor expectations. Goldman Sachs Group, Inc. reiterated their "buy" rating, with a target price indicating a 15% upside potential. In the short term, Delta Air Lines, Inc.'s projected 5% to 7% revenue growth in the first quarter of 2026 is in line with investor expectations. Following the earnings report, Delta's stock price underperformed compared to other airlines covered by Goldman Sachs Group, Inc., closing down 2.4%, which was roughly in line with the overall decline of covered airline stocks excluding Delta (-2.0%). The stock continued to decline on Wednesday, closing down 1.21%. The main reason for the underperformance of Delta's stock price is believed to be the lower-than-expected performance outlook for 2026. However, positive comments during the conference call regarding accelerating demand/revenue trends helped Delta's stock price to perform on par with other covered stocks. Positive revenue data for Delta includes: 1) Cash sales last week increased by 10% from the strong booking levels at the beginning of 2025, setting a new record and laying a strong foundation for the peak booking season in March; 2) Corporate revenue growth in 2026 is accelerating, driven by both ticket prices and passenger volume increases, unlike the primarily price-driven growth in 2025; 3) Revenue growth continues to come from premium cabins and international business, with main cabin returns lagging behind. Although strong overall bookings are a positive signal for the industry as a whole, Delta's high exposure in these end markets is expected to drive outperformance against peers. Key points from the conference call Revenue environment Management stated that booking trends for the start of the 2026 fiscal year are strong, with cash sales in the first week of January increasing by double digits year-over-year and further improvement from the strong trends at the beginning of last year. The company noted that demand in all geographies they serve is accelerating, and they expect an improvement in both international and domestic revenue per available seat mile (RASM) in the first quarter of 2026. International route network is expected to remain strong during the summer, with positive capacity trends on transatlantic routes and continued expansion of international partnerships cited as major positives. Corporate revenue Corporate revenue grew by 8% in the fourth quarter of 2025, and demand is expected to accelerate in the 2026 fiscal year. Management stated that the improvement in corporate demand is broad-based, and current trends are not primarily driven by significant changes in Delta's share of the corporate market. It is noteworthy that the growth in corporate revenue in 2025 was primarily driven by pricing, while current booking volumes have seen both price and quantity increases. Free cash flow outlook Free cash flow for the 2026 fiscal year is expected to be in the range of $30 to $40 billion, aligning with Delta's long-term target of $30 to $50 billion, but lower than the $46 billion in the 2025 fiscal year. Management noted that unfavorable factors include an expected $1.2 billion year-over-year increase in capital expenditures (CAPEX) and the company's transition to partial taxpayer status. Fleet planning Delta announced an agreement with Boeing Company (BA.US) to purchase 30 787-10 wide-body aircraft, with an additional 30 purchase options, with deliveries expected to start in 2031. These new aircraft are expected to drive a 10 percentage point improvement in profit margin compared to the replaced aircraft, with specific benefits including an increase in premium seat numbers, a 25% improvement in fuel efficiency, and enhanced cargo capacity. Diversification of airframe and engine suppliers is also cited as a key advantage of this order. Capital allocation Management currently expects the total leverage ratio to decrease to 2.0 times by the end of 2026, gradually approaching the company's long-term target of 1.0 times. Management reiterated that incremental returns to shareholders are not ruled out before reaching the 1.0 times leverage ratio, and noted that the company registered a three-year shelf issuance plan last year, which is expected to be utilized during that period. While debt repayment remains a top priority, as the company progresses towards its long-term leverage target, management will continue to evaluate shareholder return options (including increasing dividends or share buybacks), with company valuation also becoming a consideration in capital allocation decisions. Management explicitly stated that capital expenditures exceeding current plans will not be included in capital allocation discussions. MRO business Regarding the decision to separately disclose unit cost metrics for the MRO business, Delta stated that this aims to provide more information about the businessexpected to achieve significant revenue growth in the coming years, with profit margins anticipated to increase from the high single digits in 2025 to the mid-teens. As a result, MRO business revenue for 2026 is expected to grow by over 20%. Outlook and valuation Goldman Sachs Group, Inc. raised Delta Air Lines, Inc.'s first-quarter 2026 earnings per share (EPS) expectations from $0.65 to $0.68 (FactSet consensus is $0.72), incorporating better-than-expected revenue outlook. However, this upward revision was partly offset by front-loaded unit cost inflation and higher fuel costs. The firm raised the full-year 2026 earnings per share expectation from $6.60 to $7.00 (FactSet consensus is $7.28), adjusting unit revenue outlook based on stronger first-quarter trends and slightly lowering expectations for cost growth, but this increase was also partially offset by higher fuel costs. The firm also increased the 2027 earnings per share expectation from $7.45 to $8.50 (FactSet consensus is $8.25), due to adjustments based on stronger yearend performance in 2026, and released the first-time earnings per share expectation for 2028 as $9.60. The 12-month target price was raised from $77 to $80, while the target enterprise value/earnings before interest, taxes, depreciation, amortization, and rent (EV/EBITDAR) multiple was raised from 4.8 times to 5.0 times.