The airline industry is notorious for its various operational challenges, including volatile fuel prices, unpredictable demand trends, labor issues, and various regulatory concerns. That often translates to razor-thin margins for even the most successful airlines, and there has been quite a bit of consolidation in the industry over the years as smaller players have struggled to survive, let alone compete.

Given that, it may surprise investors to learn that the single highest-rated stock among S&P 500 Index ($SPX) components is none other than Delta Air Lines (DAL), which has earned a unanimous “Strong Buy” recommendation from all 15 analysts tracking the shares. So what's the forecast for this airline stock in 2024 - and are Delta shares worth scooping up at current levels? Here's a closer look.

About Delta Airlines

Based out of Atlanta and founded in 1929, Delta is one of the top U.S. airlines by market share, operating flights to over 300 destinations across 60 countries. Delta currently commands a market cap of $27.24 billion.

Delta stock has gained nearly 27% in 2023, narrowly outperforming the broader S&P 500. The stock also offers a modest dividend yield of 0.47%.

Q3 Earnings Beat Expectations 

Delta posted a solid set of numbers in its latest results for the third quarter, beating Wall Street's expectations across the board. Revenues rose 10.8% to $15.5 billion, while EPS shot up by 34.4% from the year-ago period to $2.03, topping the consensus estimate of $1.95. 

Operationally, the company reported yearly improvement in revenue passenger miles (up 17% YoY), available seat miles (up 16% YoY), and passenger load factor (88% in Q3 2023 vs 87% in Q3 2022). Total revenue per available seat mile fell 5% YoY. 

Net cash from operating activities increased by 23.8% yearly to $1.1 billion, and the airline closed the quarter with a cash balance of $2.8 billion. Delta also reduced net debt by $2.1 billion compared to the end of 2022.

Successful Long-Term Strategy

Longer term, Delta's revenues and EPS have expanded at a 10-year CAGR of 4.38% and 8.18%, respectively.

Over the past 20 years, anticipating the regional market would become less profitable, the airline streamlined its regional jets portfolio by eliminating 50 passenger regional jets even while adding larger, more efficient mainline jets, including the highly efficient Airbus A220 and the Boeing (BA) 717. Notably, Delta contracts for hundreds fewer regional jets than rivals American (AAL) and United (UAL).

Delta has also shifted its focus toward the lucrative coastal markets of Boston, New York and Los Angeles. Moreover, it has forged long-term strategic partnerships by acquiring stakes in seven airlines across the world. 

Notably, Delta also boasts the biggest contracted business travel revenue than any other U.S. airline. This has further boosted profitability for the company, as business travel passengers provide higher margins.

Strong Short-Term Outlook

In the shorter term, analysts at Bank of America noted that corporate air travel recently strengthened to levels last recorded in April - and more broadly, AAA is forecasting holiday season travel to hit new records this year, pushing past the pre-pandemic highs set in 2019. 

At the Morgan Stanley Global Consumer & Retail Conference, Delta reaffirmed its profit and revenue forecasts for 2023. The airline company expects Q4 revenue to improve 9% to 12% from a year ago, operating margin to rise 9% to 11%, and EPS to land in a range between $1.05 to $1.30.

Analysts are expecting EPS of $1.16 for the current quarter, on average, down 21% from the prior year. For fiscal year 2024, analysts are targeting 10.5% EPS growth to $6.75.

How Do Oil Prices Impact Delta?

Another key strategic advantage for Delta is its Refinery unit, acquired from Philips 66 (PSX) in 2012, which has served as an effective hedge against fuel prices. Ten years later, this move yielded a refinery benefit of 23 cents/gallon on each of the 3.5 billion gallons of jet fuel its aircraft used in 2022.

“Our Monroe refinery provides a unique benefit, acting as a partial hedge to elevated cracks,” CFO Dan Janki has explained. “This is especially true with New York Harbor Jet cracks, where our production at Monroe provides 100 percent offset.”

Fuel prices for Delta averaged $2.78 a gallon during Q3, including a refinery benefit of $0.11. By comparison, rival carrier American paid an average of $2.91 per gallon for fuel during the third quarter.

Is Delta Stock a Good Buy Right Now?

Despite the modest outperformance in Delta shares this year, the stock is still reasonably valued at current levels. DAL is priced at 6.91x forward earnings, 0.47x forward sales, and 3.69x cash flow - all of which represent a discount to the sector median valuations for industrial sector components.

Overall, the 15 analysts tracking Delta have a unanimous rating of “Strong Buy” for the stock, with not a single dissenter - not even so much as a “Moderate Buy.”

Plus, the mean target price is $55, which implies a healthy upside potential of 33% from current levels.