Date: June 13, 2025
Type: Long
Conviction: Medium
Time Horizon: 1-3 months
Catalyst Profile: Strong fundamentals, undervalued
The market's overreaction to the 10% surge in crude oil prices, leading to a disproportionate 5% single-day decline in Delta, fundamentally misprices Delta's unique fuel cost hedging mechanism through their Monroe Energy refinery and overlooks the robust, and now structurally stronger, recovery in both domestic and international travel demand. Despite travel demand meeting or exceeding pre-COVID highs, Delta remains approximately 25% below its pre-pandemic peaks, signaling a significant valuation disconnect that I believe will normalize as investors recognize Delta's differentiated profitability and operational resilience.
Delta's ownership of Monroe Energy, a 185,000 barrel-per-day refinery, provides a significant and often underappreciated competitive advantage in managing volatile fuel costs. This unique asset allows Delta to convert crude oil directly into jet fuel and other refined products, significantly reducing its exposure to unpredictable crack spreads and saving hundreds of millions to over a billion dollars annually depending on market conditions. The 5% single-day stock decline on June 13, 2025, in response to a 10% increase in crude oil prices, represents an overreaction from the market. While higher crude prices are a headwind, Monroe Energy offers a material offset that most other airlines lack, cushioning the impact on profitability. This differential should translate to outperformance relative to peers during periods of rising fuel costs. This lack of refinery ownership among Delta's major domestic competitors creates a significant competitive advantage for Delta, particularly during periods of volatile or surging oil prices. While other airlines must rely solely on financial hedges, which come with costs and imperfect coverage, or pass increased fuel expenses directly to consumers, Delta's Monroe Energy refinery provides a physical, operational hedge that can directly mitigate the impact of rising jet fuel costs on its bottom line. This inherent cost stability allows Delta greater flexibility in pricing and capacity deployment, potentially enabling it to offer more competitive fares, maintain superior margins, or invest more aggressively in product enhancements even when competitors are struggling with fuel-induced profitability pressures. Consequently, in a market where fuel is often the largest or second-largest operating expense, Delta's unique refinery ownership positions it to capture increasing market share by offering more stable pricing to consumers and maintaining consistent service quality, strengthening its long-term competitive standing within the U.S. airline industry.
The core argument for DAL's undervaluation lies in the complete recovery, and exceeding, of pre-COVID travel demand, particularly in the premium segments where Delta excels in. TSA checkpoint throughput has consistently met or exceeded 2019 levels since late 2024, indicating a full recovery of domestic leisure and a strong return of business travel. International passenger volumes have shown robust growth, with key long-haul routes nearing or exceeding 100% of pre-pandemic capacity and revenue levels by early 2025. Delta's strategically expanded international network and is capitalizing on this pent-up demand. Delta's focus on premium cabins and its SkyMiles loyalty program continue to attract higher-yielding customers. Q1 2025 earnings demonstrated strong premium revenue growth, indicating that the recovery is not just in volume but also in profitability per passenger. Despite the return of strong demand and often better revenue per available seat mile (RASM) driven by pricing power and premiumization, DAL's stock currently trades ~25% below its pre-COVID highs. This discount is unwarranted given the operational improvements, deleveraging efforts post-pandemic, and the structural advantages Delta has consolidated.
Economic downturn, geopolitical events.
Not expecting to DCA, as it is trading at a significant discount already.
Delta Air Lines, uniquely positioned with its Monroe Energy refinery and a highly successful premiumization strategy, is fundamentally mispriced by a market that continues to react excessively to short-term fuel price volatility while underestimating the full, and perhaps improved, post-pandemic demand landscape. The ~25% discount to pre-COVID highs, despite fully recovered and resilient travel volumes, presents a compelling opportunity to invest as Delta’s valuation re-rates to reflect its true value.