UBS Group lowered its price target on Delta Air Lines (NYSE: DAL) from $105 to $102, while maintaining a "Buy" rating. UBS believes that Delta Air Lines' fourth-quarter cost guidance came in higher than expected, particularly the limited improvement in non-fuel unit operating costs, which could put pressure on short-term profitability.
However, the company's fourth-quarter revenue growth guidance of approximately 20% exceeded market expectations, and its third-quarter load factor also increased year over year despite higher ticket prices, reflecting that air travel demand remains strong. Based on a share price of $81.06, UBS's latest price target implies potential upside of about 25.8%.
Third-quarter revenue beat expectations, but earnings fell short of market forecasts
Delta Air Lines previously reported its third-quarter 2026 financial results, showing revenue of $20.19 billion, above the market expectation of $17.61 billion, representing a 16% year-over-year increase. The strong revenue performance was mainly driven by growth in leisure travel, business travel, and premium passenger demand.
However, the company's earnings performance did not exceed expectations in tandem. Third-quarter earnings per share came in at $1.72, below the $1.92 forecast by Wall Street analysts. UBS noted that Delta Air Lines' third-quarter load factor increased year over year, and passenger demand remained resilient even as the company raised ticket prices during the same period. This indicates that consumers are relatively insensitive to fare increases, and airlines still possess a certain degree of pricing power.
Fourth-quarter revenue growth guidance of about 20%, unit passenger revenue expected to accelerate
UBS believes that Delta Air Lines' fourth-quarter revenue guidance is one of the positive factors in the recent earnings report. The company expects fourth-quarter revenue growth of approximately 20%, surpassing prior market expectations. According to UBS's analysis, this guidance implies that Delta Air Lines' fourth-quarter revenue per available seat mile (RASM) year-over-year growth rate is expected to accelerate compared with the third quarter.
RASM is an important metric for measuring an airline's ability to generate revenue per unit of capacity, calculated by dividing operating revenue by available seat miles. This metric not only reflects fare levels but is also affected by changes in load factor and other operating revenue. UBS believes that the third-quarter fare increases did not significantly dampen passenger demand, and combined with the strong fourth-quarter revenue growth expectations, this shows that Delta Air Lines' core business continues to maintain good growth momentum.
Limited improvement in non-fuel costs, but UBS views pressure as temporary
Despite the positive revenue performance, Delta Air Lines' fourth-quarter cost guidance remained above UBS's prior expectations, becoming the main reason for the price target cut. According to company guidance, fourth-quarter cost per available seat mile excluding fuel (CASM-ex) is expected to improve by only 1% to 2% compared with the third quarter, while available seat miles are expected to increase by about 3% quarter over quarter.
Typically, after airlines expand capacity, they can improve unit operating costs by spreading certain fixed costs. However, Delta Air Lines' fourth-quarter non-fuel unit cost reduction was relatively limited, indicating that capacity expansion has not yet brought the expected cost efficiency improvement.
UBS believes that these non-fuel cost pressures are mainly temporary. As the company moves into 2027 and gradually absorbs this year's higher cost base, UBS expects non-fuel unit cost inflation to moderate. Therefore, although short-term costs above expectations may weigh on profitability, UBS still believes that Delta Air Lines' long-term operating outlook remains stable.
Multiple investment banks cut price targets but remain bullish on the company's long-term performance
In addition to UBS, Susquehanna also recently lowered its price target on Delta Air Lines from $100 to $95, while maintaining a "Positive" rating. The firm also focused on Delta Air Lines' cost structure issues but believes that the related pressures may not persist over the long term. Susquehanna noted that Delta Air Lines' continued investment in its route network and passenger products helps improve its long-term competitiveness, particularly in the premium passenger and business travel markets.
From a valuation perspective, Delta Air Lines currently trades at a price-to-earnings ratio of approximately 13.51 times, with revenue growth of 14% over the past 12 months. Although the company remains profitable, 18 analysts have recently lowered their earnings forecasts, reflecting market concerns about cost pressures.
UBS's latest adjustment reflects a similar assessment: Delta Air Lines' passenger demand and revenue growth remain strong, but short-term cost control performance fell short of expectations, making a moderate reduction in the valuation target necessary. Overall, UBS believes that Delta Air Lines' main issues are concentrated on the cost side. Fourth-quarter revenue growth is expected to accelerate, and load factor and fare performance also demonstrate resilient demand, but slow improvement in non-fuel unit costs may limit short-term profit growth. As the related cost pressures gradually ease in 2027, the company's profitability still has room for improvement.