Delta doubles down on premium as Glen Hauenstein exits on a high

A centennial year that delivered cash – not just rhetoric

Delta Air Lines closed its 100th year with the sort of numbers most legacy carriers once treated as theoretical. Full-year revenue reached a record $58.3 billion, up 2.3% despite a turbulent macro and regulatory backdrop. The carrier held its operating margin at 10%, produced pretax income of $5 billion, and earned $5.82 per share.

More striking for equity holders, Delta turned this profitability into cash. Free cash flow hit a record $4.6 billion in 2025, at the top end of management’s long-term framework, bringing three‑year cumulative free cash generation to $10 billion. That has allowed the airline to reduce leverage by more than half since the pandemic peak. Adjusted net debt now stands at roughly $14 billion, with gross leverage at 2.4x, and management targeting ~2x by the end of 2026.

Return on invested capital of 12% comfortably exceeds the cost of capital, a rarity in global aviation and a point Delta’s leadership clearly sees as a competitive moat: they placed the carrier in the upper half of the S&P 500 on this measure.

The December quarter underlined that this was not a one-off. Delta posted pretax profit of $1.3 billion, an operating margin of 10%, and EPS of $1.55, despite a government shutdown that shaved about $200 million (25 cents per share) from pretax income. Non-fuel CASM rose 4% on just 1% capacity growth, with the shutdown, FAA-mandated flight reductions and weather adding about one point of CASM pressure.

Premium and loyalty, not seats, are doing the heavy lifting

The underlying story is less about volume and more about mix. Delta’s leadership, and outgoing president Glen Hauenstein in particular, have spent two decades trying to structurally detach the airline from the commodity end of the market. The 2025 numbers show that project maturing.

Total revenue grew modestly, but its composition shifted further towards higher-margin streams:

• Diversified revenue streams (premium, loyalty, cargo, MRO, travel products) now contribute 60% of total revenue.
• Premium revenue grew 7% YoY, far outpacing the topline.
• Cargo revenue rose 9%.
• Maintenance, repair and overhaul (MRO) revenue increased 25%.
• Total loyalty revenue advanced 6%.

On the loyalty side, the co-brand partnership with American Express has become a core profit engine:

• American Express remuneration reached $8.2 billion, up 11%, driven by a fourth consecutive year with over 1 million new card acquisitions.
• Co‑brand card spend grew at double‑digit rates every quarter.
• Roughly one-third of active SkyMiles members now carry a Delta Amex card.

Management reiterated its expectation of high single-digit growth in co-brand remuneration in 2026, keeping Delta on track toward a $10 billion Amex contribution within a few years. Given the high-margin nature of this revenue, it is disproportionately important for free cash flow and ROIC.

Hauenstein underscored the financial payoff of this diversification, claiming Delta now sustains a unit revenue premium of nearly 115% relative to the industry – effectively more than double the RASM of the average US peer. While that figure is aggregated and non-GAAP, the direction is clear: Delta has successfully monetised brand, schedule and loyalty to escape the worst of the domestic fare war.

Cost discipline and a stronger balance sheet

On costs, Delta stayed within its self-imposed guardrails:

• Full-year non-fuel unit cost (CASM-ex) rose 2%, in line with the “low single-digit” long-term target.
• Q4 non-fuel CASM was up 4%, but management framed this as partly transitory, attributing roughly one point of growth to FAA-related flight reductions and weather.

Capital deployment remained disciplined despite the investment ramp:

• $4.3 billion in capex in 2025, including 38 new aircraft and continued spending on customer experience and technology.
• $2.6 billion in debt reduction during the year, alongside a dividend and ongoing fleet and infrastructure renewal.
• Unencumbered assets total $35 billion, supporting Delta’s claim that it now has the strongest balance sheet and highest credit quality in its history.

Looking ahead to 2026, the carrier plans capex of about $5.5 billion, including around 50 new aircraft, while still targeting free cash flow of $3–4 billion. Management acknowledged free cash flow will step down from 2025 due to the higher capital spend and the company’s transition to partial taxpayer status, but the guidance implies the underlying cash-generation engine is intact.

Fleet strategy: hedging the long haul with Boeing 787-10s

In a move that signals both financial confidence and strategic hedging, Delta announced a fresh wide-body order: 30 Boeing 787‑10s, with options for 30 more, slated for delivery from 2031.

The order diversifies Delta’s wide-body book beyond the Airbus A350 and A330-900neo, and is explicitly aimed at replacing older 767s. Management highlighted three financial and strategic advantages:

• Margin uplift: new widebodies deliver up to a 10-point margin advantage over the aircraft they replace, driven by more premium seats, lower fuel burn and better cargo capability.
• Fleet and engine diversification: adding the 787 family reduces dependence on any single OEM or engine supplier, while still building scale across major widebody types.
• Premium density and cargo: the 787‑10’s size and range allow for high premium-seat counts on transatlantic and select long‑haul routes, while unlocking additional cargo revenue.

Hauenstein’s parting quip – likening Delta’s triad of long‑haul types to Goldilocks’ “too hard, too soft, just right” – underscored the intent: to assemble a portfolio of widebodies optimized for different mission profiles and cost curves, not a single “one-size-fits-all” workhorse.

Demand backdrop: premium resilience, main cabin lag

If 2025 was the year Delta proved it could grow profits in a choppy demand environment, 2026 begins with signs of acceleration.

Management described the start of the year as “off to a strong start,” with last week’s cash sales the highest in Delta’s 100-year history, and record bookings across geographies and time horizons. For the March quarter, the airline expects:

• Revenue growth of 5–7% year over year, several points ahead of capacity.
• A return to positive unit revenue (RASM) growth.
• Operating margin of 4.5–6% and EPS of $0.50–$0.90, both improving year over year.

For full-year 2026, Delta guided to:

• EPS of $6.50–$7.50, implying ~20% year‑over‑year growth at the midpoint.
• Capacity growth of about 3%, with all net seat growth concentrated in premium cabins, via retrofits and new deliveries.

Notably, management stressed that the demand acceleration to date is broad-based – corporate and leisure, domestic and international – but that the main cabin has yet to “move” in pricing or volume. Hauenstein was explicit: the upside scenario embedded in the higher end of guidance assumes some recovery in main-cabin yields. For now, premium products continue to carry the growth and margin story.

Corporate demand appears to be firming after a tentative 2025. Corporate sales were up 8% in December, with strength in banking, consumer services and media. Management attributed the improvement to a more optimistic macro backdrop and pointed to surveys indicating corporates expect to grow travel spend in 2026.

Industry structure: rationalisation at the bottom, share at the top

Much of Delta’s narrative was framed relative to an industry still struggling to earn its cost of capital. Hauenstein suggested that when peers report, Delta will have captured the highest share of industry profits in its history, reflecting both a premium revenue mix and better cost control.

The commentary on competitors was unusually blunt:

• The “bottom end” of the US market – ultra‑low cost and heavily commoditised models – is “unable to grow”, and when growth stalls, CASM inflates faster than at network carriers.
• This segment faces a choice between internal restructuring, consolidation, or liquidation, with activist investors and creditors adding pressure.
• Delta sees ongoing capacity rationalisation in this cohort, which tightens the supply-demand balance and supports fare levels in its own hubs.

On competitive capacity, new Chief Commercial Officer Joe Esposito described the environment in Delta’s core hubs as “in a really good place,” with rational departures by weaker players. Delta intends to grow system capacity by 3% in 2026, focusing on premium-heavy domestic routes, international expansion out of strong US gateways, and deeper integration with joint-venture partners in Europe, Asia and Latin America.

The broader implication for investors is that Delta is now increasingly decoupled from the health of the marginal ULCC. The carrier’s performance is being driven by loyalty economics, co‑brand economics and premium segmentation, rather than pure seat-mile competition.

Operational reliability and the “post-COVID” reset

Operationally, Delta continues to market itself as the industry standard-setter. Cirium named it the most on-time airline in North America for the fifth consecutive year, a statistic the carrier is quick to deploy in corporate sales pitches.

Yet CEO Ed Bastian acknowledged that the resiliency of Delta’s recovery from irregular operations has slipped relative to pre‑COVID standards, citing:

• Structural changes in pilot contracts affecting rerouting and rescheduling during disruptions.
• The broader complexity of operations in a constrained air traffic control environment.

Delta is working with its pilots’ union, flight operations, maintenance, and technology teams to restore recovery performance, though Bastian emphasised the airline remains number one across most operational metrics even today. For investors, the operational story is less a red flag than a reminder that Delta is not immune to the systemic chokepoints of US aviation – from the FAA’s capacity mandates to weather-related gridlock.

MRO and reporting transparency: carving out the adjacencies

One subtle but important change for investors is Delta’s decision to break out its third‑party MRO business in more detail. The carrier will report MRO revenue and cost separately and exclude MRO from non-fuel unit cost metrics, in order to preserve visibility into the airline’s underlying CASM trends.

MRO has quietly grown into a billion‑dollar revenue line with high single-digit margins, and management believes it should migrate toward mid‑teens margins as scale and capability expand. The long-term ambition is to see MRO move from $1 billion to $2–3 billion in revenue, building off Delta’s in‑house maintenance capabilities.

The move to realign loyalty-related revenues with how the business is managed – separating out Amex remuneration and other high‑margin components – also suggests Delta intends to make the economic contribution of these adjacencies more visible, potentially paving the way for future valuation re-rating arguments around “airline plus financial services” rather than “airline only.”

Culture, politics and capital allocation

The call also highlighted elements that, while less quantifiable, matter for long‑term investors.

First, labour and culture. Delta will pay $1.3 billion in profit sharing to its employees in February, one of the largest payouts in its history, alongside a 4% pay increase for 2025. In a sector where labour relations can quickly erode shareholder value, Delta continues to lean into a “sharing success” narrative – costly in the short term, but historically associated with fewer disruptive labour events.

Second, regulatory and political risk. Bastian was cautious but clearly sceptical about the proposed 10% cap on credit card interest rates floated by the administration, noting that any such move would require legislation and would “upend the whole credit card industry,” including access to credit for lower-income consumers. Given Delta’s deep entanglement with American Express and the scale of Amex remuneration, any structural change to US card economics is a non-trivial risk factor, though still speculative at this stage.

Finally, capital allocation. With leverage now approaching levels historically associated with investment-grade industrials, Delta is opening the door to broader shareholder returns:

• The dividend has been reinstated and modestly grown.
• A share repurchase shelf was filed last year, and Bastian signalled an intention to use it over the coming three years as leverage trends toward 1x gross.
• Management reiterated that debt reduction remains the top priority for now, and explicitly ruled out using balance sheet strength to fund aggressive capacity growth or M&A-driven expansion.

For equity holders, the message is that Delta intends to translate its differentiated margin profile and loyalty economics into sustained free cash flow and a more predictable capital return profile, moving closer to the behaviour of a high-quality industrial rather than a perpetually levering cyclical.

In his final earnings appearance, Hauenstein framed it as “mission accomplished” on restoring Delta to the top of US aviation. The numbers suggest he is not exaggerating. The open question, now, is less whether Delta’s model works – and more how far it can stretch without diluting the very premium scarcity on which it depends.