This airline has compelling fundamentals amid a robust winter travel season. How to play it

United Airlines delivered another strong performance in its latest earnings report on Tuesday, posting revenue and earnings above expectations. This follows Delta Airlines Jan. 10 earnings release, which also exceeded revenue and earnings estimates. Both airlines highlighted an atypical surge in winter travel demand, a period that traditionally sees a slowdown following the holidays. This trend reflects a changing travel landscape, with consumers showing sustained interest in flying during what has historically been a quiet season. Factors such as increased flexibility in work arrangements, resilient leisure demand, and the rebound of international travel likely contribute to this unusual strength. United’s share price has outperformed Delta’s over the past few months, with its stock surging an impressive 188% since hitting its 2024 lows on August 5 of last year. In contrast, despite its strong performance, Delta’s stock has risen just under 80% over the same period. This rapid appreciation in United’s stock price has brought its valuation in line with Delta’s, erasing a significant discount last summer when Delta’s price-to-forward-earnings ratio was approximately 50% higher than United’s. However, based on current valuation metrics, Delta is the more attractive investment now. One key differentiator is free cash flow (FCF). Wall Street projects Delta to generate well over $4 billion in FCF for 2025, more than double the less than $2 billion expected for United. Despite this significant difference, the enterprise values of the two airlines are within about 10% of each other. Consequently, Delta offers a far higher projected FCF yield. Revenue growth forecasts add another layer of complexity to the comparison. Analysts anticipate over 6% year-over-year revenue growth for United in 2025, compared to stagnant revenue projections for Delta. However, the revenue trends of both airlines have historically tracked broader industry patterns and each other quite closely (charts below), suggesting that such a wide divergence in growth may not materialize. If industry-wide factors like macroeconomic conditions, fuel costs, and consumer demand impact both companies similarly, these forecasts might converge. Given the parity in price-to-earnings ratios, Delta’s superior free cash flow yield tips the scale in its favor for long-term investors. While United’s recent outperformance is undeniable, the valuation narrative has shifted, with Delta offering more compelling fundamentals. As both airlines gear up for what could be a robust winter travel season, investors must weigh United’s growth potential against Delta’s more substantial cash flow generation. Delta emerges as the more attractive option. At least one institutional trader recently bet on further upside for Delta in 2025, buying 5,000 December $80 calls, paying a $5.05 contract in mid-December last year. Those calls are still close to that price, around $5.40/contract as of today, January 22nd, 2025. While long-dated calls provide levered upside exposure with defined risk, a lower strike improves the probability that the long call will end up in the money. Another consideration is that the median realized volatility over the past few years is ~ 29.5. As expected, volatility is generally lower during periods that do not include a quarterly earnings release. As an alternative to purchasing the December $80s, one could choose a lower strike January option and sell March strangles, which are currently trading with an implied volatility of > 33% against it to offset the decay. The March strangle expires before Delta’s next anticipated earnings release, estimated for April 10th. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.