Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Analysts Zhengchang Chu zhengchang‐[email protected] Saiyin Liu saiyin‐[email protected]
Delta Air Lines, Inc. (DAL) is a Georgia based company that mainly provide passengers and cargo air transportation internationally. Its network routes are based on hubs and international gateways, such as Atlanta, Detroit, Los Angeles, New York, Paris, and Tokyo. It connects these hubs with a fleet of aircrafts that different in sizes and capacities; so it is more flexible to adjust aircraft accordingly. Its main revenue stream is from passenger and cargo transportation. It has two oil refineries mainly serves to mitigate the increasing cost of fuel. Its expected revenue growth is steady and strong. For the fiscal year ended 12/31/2015, total revenues rose 6.85% to $40.362 billion.
52 week High $52.00 52 week Low $34.61 Beta Value 1.28326 Average Daily Volume 9.344m
Market Capitalization $37.57b Shares Outstanding 836m Book Value per share $10.54 EPS (period??) $3.47 P/E Ratio 13.75 Dividend Yield 1.10% Dividend Payout Ratio 37.97%
Current Price: $48.99
Target Price: $62.46
ROA 7.24% ROE 25.03% Sales 40.85 b Current Ratio 0.68
• The low oil price has provided Delta with sufficient cash flow for paying off debt, paying dividends for its investors, purchasing operating assets.
• By purchasing/leasing more new fuel efficient aircrafts, Delta is not only able to increase its capacity, but also attract more potential customers to increase its future earnings.
• Loading factor of Delta is at historical maximum in the recent years, and will be at the level for next a few years.
• Delta’s frequent flyer program enhanced the current customer loyalty. It will also attract more potential customers, resulting in an increasing market share.
One Year Stock Performance
Krause Fund Research
Fall 2015
Consumer Discretionary
Recommendation: BUY November 13, 2015
Delta Air Lines (NYSE: DAL)
Company Overview
Stock Performance Highlights
Share Highlights
Company Performance Highlights
DAL Potential Strength
Real Gross Domestic Production (GDP) Because Delta is in the consumer discretionary sector,
which provides products and services mainly for
household, the growth of real GDP is a strong indicator
that measures the development of the consumer
discretionary sector1. Historically, two‐thirds of the real
GDP are contributed by personal consumption
expenditure.
The chart below illustrates the change of the real GDP
in the past ten years. The pattern is clear that after
housing bubble in 2008, the GDP growth is stable, in
between 2% to 3%. 2015 quarterly data has actually
show that the GDP is slightly over the last 5‐year data,
at 1.5% and 3.9% in the second and third quarter.
The escalating economy and improving job market will
allow DAL to generate more revenue from the domestic
market because approximately 80% of its revenue
comes from the individual consumer. We project a
domestic revenue growth of 3.1% after 2015, which will
ensure Delta a stable company operation and growth.
Source: Bloomberg Business; updated 10/29/15
Oil Price The oil price has a huge impact on Delta because air fuel
cost consists more than 30% of the company’s total
cost. As noted in the chart above, the crude oil price has
been plummeting nearly 50% from over $100 per barrel
in 2014 to nearly $45 per barrel recently. A lower crude
oil price makes the cost of jet fuel less expensive, which
allows DAL to reduce the price of flight tickets to attract
more consumers while avoid shrinking its profit margin.
We believe that the reduction in fuel cost will further
increase the company’s price‐compatibility in the
future, even though the edge of owning the refinery is
relatively small. We are expecting the crude oil price to
increase, but it will not go back to 100 per barrel in the
next three years9.
Source: Forbes.com
DAL is one of the companies in the airline industry that
hedges against oil price. DAL benefited a lot from
hedging fluctuating oil price in previous years when the
oil price was still very high. In 2011 and 2013, the
company faced a hedging gain of $420 million and $444
million, respectively. Even though the company faced a
large hedging loss of $2,258 million due to the plunging
oil price. We still believe that as domestic and global
economy recover, oil price is inclined to be more
volatile, and hedging against price volatility reduces the
company’s exposure to volatility risk10.
We anticipate the oil price in the next two years to
recover because of the slow growth of substitute
energy resource. Considering the fact that the oil is a
commodity and its price is relatively volatile, we believe
the oil price will be where it was a year ago, which is
around $100 per barrel.
Source: Seasonal Chart
Economic Outlook
Interest Rate As most of analysts’ forecasted that the interest rate
will increase by the end of 2015, it would impact high
levered firms, such as Delta. The current low‐interest
rate environment has enabled Delta to increase its cash
flow, which they have mainly used to repay its debt and
issue dividend payments. Increasing the interest rate
will increasing the cost of capital, but Delta will be
benefited from it because it also decreases the present
value of its underfunded pension18.
Unemployment rate The unemployment rate is illustrated by the percentage of individuals who does not have a resource of income. It is an important indicator of the economy because a prosperous job market determines the healthiness of the economy. Historically, the sales of companies in consumer discretionary sector are highly correlated to the unemployment rate. The unemployment rate has a large impact on DAL. During the period when the unemployment rate is stably low, consumers have more money for travel because income inflow encourages consumers to spend more money on companies under consumer discretionary sector. Therefore, we should employ unemployment rate as one of the major predictors to determine the demand for consumption.
Source: Bloomberg Business; updated 11/2/15
The unemployment rate continues to decrease. As of
November 2nd, the latest unemployment rate for last
month is 5%, which meets a consensus estimate of 5%
1. The continually lowered unemployment rate boosts
the performance of industries within the consumer
discretionary, such as hotel/restaurants/leisure,
textiles/apparel/luxury goods, and retailing. Recently,
the U.S. Government added 33,000 jobs in professional
and business services and 11,000 jobs in temporary help
subcomponent. Retail industry also increases 11,000
jobs in vehicle dealers. We projected that the
unemployment rate will continue decreasing to 4.9 % in
the next two years and finally stabilize at 4% in the long
run. The demand for consumer goods and services will
be stimulated as the unemployment rate becomes
lower.
Consumer Confidence Index (CCI) Consumer Confidence Index illustrates the individuals’ confidence of their expenditure. Consumers are willing to spend more on goods and services if they feel confident about their financial situation. Thus, the outlook for the consumer discretionary sector is highly correlated with the consumer confidence index.
Source: U.S. Conference Board
The Conference Board Consumer Confidence Index had
increased moderately in September and declined in
following October. Based on the monthly Consumer
Confidence Survey, Lynn Franco, Director of Economic
Indicators at The Conference Board, commented that
Consumers were less positive in their assessment of
present‐day conditions, in particular, the job market. As
a result, they do not anticipate the economy
strengthening much in the near‐term. Therefore, we
believe that in the short term, the consumer confidence
index will remain fluctuate around current standing,
which is 97.6. However, we believe that in the long
term, the index will remain at the level of 110.0 as a
result of recovering the economy and improving the job
market, two major components that affect the index.
With the forecast being made, we believe that the
market within the consumer discretionary will perform
strongly in the next two years as a result of constantly
increasing consumer optimism towards the economy
and the job market8.
Capital Market Outlook The Consumer Discretionary Sector consists of auto
components, automobiles, household durables,
homebuilders, leisure equipment/products, textiles and
apparel, hotels/restaurants/leisure, media and
advertising, distributors, internet retail, department
stores, and specialty retail industries; these industries
tend to be the most sensitive to economic cycles.
We will compare Vanguard Consumer Discretionary ETF
and Consumer Discretionary Select Sector SPDR. The
purpose of both funds is tracking “the performance of
the Morgan Stanley Capital International US Investable
Market Consumer Discretionary Index”, by comparing it
to the S&P500 and DJIA, which represent the market.
The following chart shows VCR:US, XLY:US, INDU:IND
and SPX:IND over the past six months.
Source: yahoo finance http://finance.yahoo.com/echarts?s=VCR#{"range":"6mo","allowChartStacking":true
Below is another chart demonstrating VCR:US, XLY:US,
INDU:IND and SPX:IND over the past two years.
Source: yahoo finance http://finance.yahoo.com/echarts?s=VCR#{"range":"2y","allowChartStacking":true
Based on these two charts it is apparent that VCR:US
and XLY:US have similar trends compared to the S&P
500 and DJIA.
Throughout the last two years, the Consumer
Discretionary Sector well performed during the U.S
economic upturn. However, the U.S. market has
experienced turmoil over the last six months, leading
the Consumer Discretionary Sector to plummet.
Although due to changing in oil price and interest rate,
the market could be volatile over the next two quarters
or two years, we still believe that the industries within
the consumer discretionary will outperform going
forward. As we have mentioned before, the oil price
boosts up earnings for a lot of companies, but the
growth of them were steady and strong during the
period when oil price doubled the recent number in
2012. As showing in the chart below, the XLY:US has
increased more than 21%, whereas oil price during 2012
was fluctuating between $95 to $105 per barrel. The
increasing interest rate will increase the cost of capital,
which will drive the stock market into a downturn.
However, no one knows whether the Fed will raise the
rate until mid‐September. Even if the Fed raised the
interest rate, most of the industries, which sensitive to
only the overall economic environment, would still
outperform, such as the retailing and media.
Most industries within consumer discretionary sector
are outperforming, because of the blooming economy.
Specifically, automobiles, hotel, restaurants and leisure,
media, and retailing is likely to perform strongly over
the next to a quarter and two years. Since we are
confident to these industries, we will focus on a
company within one of these industries for our future
analysis.
Recent Trends and development The demand for airline industry has been increasing due
to the stable economic growth and decreased oil prices.
Stable economic growth enables travel activities of both
business and personal propose. Low oil price reduced
fares for passengers, as well as the cost for companies
within the airline industry. According to Department of
Transportation (see table below), the revenue
passenger‐miles, an indicator of demand on the airline
industry, has been increasing every month compared to
same month of the previous year.
Industry Analysis
Source: Bureau of Transportation Statisitcs, T‐100 Segment;
Note: Revenue passenger‐miles are a measure of the volume of air passenger
transportation. A revenue passenger‐mile is equal to one paying passenger
carried one mile.
The diplomatic policy made between US and EU is
favorable to the entire airline industry. The US and EU
have made an agreement, which enable US airlines to
reach any cities in the 27 countries in EU, as well as
European airlines. As a consequence, US airlines can
create more routes, which essentially fill up the demand
of the market.
Strategic collaboration between major airlines made
every single flight more efficiently. The collaboration
includes shared flight numbers, shared resource within
an airport, and system investments. According to a
press released from a Chinese media, China Eastern
Airline and Delta Airline has already signed the related
contract.
The average net profit of airline industry has been
increasing in recent four years. Average EBIT of the
airline industry has increased from 5.1% to 6%, and it is
expected to grow continuously in following years. The
average net profits of was $19.9 billion dollars in 2014,
and it is expected to be $25 billion dollars in 201512.
Source: IATA. Domestic &international traffic
Competition Competition in the airline industry is highly intensive
when every airline carrier competes for its market share
by reducing costs to lower price. Over the past decades,
consolidation in the airline industry, the emergence of
government supported international carriers,
alterations in international alliances and so forth have
changed the competitive environment in the industry.
Delta Air Lines, Inc. has both domestic and international
operations, making the company exposed to
competitors not only from the United States but
international airline carriers as well11.
Source: transtats.bts.gov
In the United States, Delta is subject to competition
from traditional network carriers, national point‐to‐
point carriers, and discount carriers; these competitors
include American Airlines, United Airlines, Southwest
Airlines, Alaska Airlines, and so on. Based on data
extracted from Bureau of Transportation Statistics,
during the period September 2014 – August 2015,
Delta’s domestic airline market share is 17.0%, while
the four major US Airlines (American, Delta, Southwest
and United) account for around 70% of the domestic
airline market.
Southwest 18%
Delta17%
United 15%
American14%
Other36%
MARKET SHARE
Delta competes with both international and domestic
carriers, in the international scope. Well‐funded carriers
in the Gulf region have increased competition in the
industry, for instance, Emirates and Qatar Airways who
are enlarging their service to the U.S. In addition,
carriers from China, India, and Latin America, they are
funded or supported by governments who have helped
them grow rapidly.
U.S. carriers have expanded their international
business, through alliance and other marketing and
code sharing agreements with foreign carriers, when
foreign carriers have obtained access to interior U.S. air
travel market through these relationships. Furthermore,
Sky Team, the Star Alliance and the oneworld alliance,
these are alliances consist of carriers from different
countries. Delta is one of Sky Team member airlines13.
Peers Competitors Though Delta competes against many different airlines
either in the domestic market or its international
operations, American Airlines, United Airlines and
Southwest Airlines are regarded as Delta’s direct
competitors14.
American Airlines Group is the one of world’s largest
airline, having a market cap of $33.5 B and sales of
$42.65 B as of May 2015. However, many investors
concern that the company’s stock is still risky because
American Airlines only emerged from bankruptcy in
2013 indicating its weak financial position15.
United Continental Holdings, Inc. is another largest
airline holding companies worldwide, competing
directly with Delta. The company aims at customers as
the upper middle class, high‐net‐worth individuals and
frequent business travelers who are Delta’s target
customers as well.
Though both American and United went through
bankruptcy and their financial position are still causes
for concern, long‐term low oil price can make both
companies have strong potential upturns. In particular,
American does not have any fuel hedging program so
that the company can quickly benefit from the low cost
of fuel.
Southwest has played an influential role in the airline
industry for a decade, threatening booming airlines, for
example, Delta. Although the firm recently has
successful achievements because of its friendly
customer service and cheap flights, it is comparatively
new in comparison to traditional network carriers and
the company targets different customer groups from
Delta’s. Moreover, Southwest mainly operates its
business in the American market compared to Delta,
who has global operations.
Delta is considered as one of the outstanding airlines
worldwide. The firm has thrived and continued to
outperform in the upper‐class market where it focuses
on. Furthermore, Delta has been reducing its debts and
pension obligations in recent years. All these successes
help Delta outstanding in the industry and become a
market leader16;17.
Besides all these three major competitors, Delta should
also be aware of some carriers, such as discount
airlines. Despite their much smaller networks, these
discount carriers can steal market share leading to
cutthroat pricing.
Business Description Delta Air Lines, Inc. (DAL) is a Georgia based company
that mainly provide passengers and cargo air
transportation internationally. Their network routes are
based at hubs and international gateways, such as
Atlanta, Detroit, Los Angeles, New York, Paris, and
Tokyo.
Source: delta.com
They connect these hubs with a fleet of aircrafts that
different in sizes and capacities; so they are more
flexible to adjust aircraft accordingly. Their main
revenue stream is from the passengers, cargo
transportation, and whole‐owned subsidiaries called
Monroe Energy, LLC and MIPC, LLC1. Monroe Energy,
LLC and MIPC, LLC operate the Trainer refinery and their
related assets, serving to mitigate the increasing cost of
Company Analysis
fuel. The dividend payout, debt payoff, revenue growth
suggest that the company is in the mature stage of its
life cycle. The company will not be in the decline stage
soon because of the expected revenue growth is steady
and strong.
Corporate Strategy In the passenger transportation, their relationships with
other airlines have enabled them to match capacity
with demand in the air travel market.
Delta has Joint Venture Agreements with Air France,
KLM, Alitalia, Virgin Atlantic Airways (non‐controlling
49% equity stake by Delta) and Virgin Australia Airlines.
In addition, the company invested in AeroMéxico and
GOL who operate in Latin America’s two largest
markets. Furthermore, Delta is one of SkyTeam’s airline
members. The agreements have improved Delta’s
access to international markets.
In the domestic market, they have reciprocal
codesharing and frequent flyer program and airport
lounge access agreements with some regional air
carriers, such as Alaska Airlines and Hawaiian Airlines;
these air carriers feed traffic to Delta’s route system.
Besides those agreements with other air carriers to
enlarge the company’s route network, Delta has a
SkyMiles to retain and increase customer loyalty.
SkyMiles Program is a Frequent flier program.
Customers can earn credits for future purchases by the
program, on the one hand. On the other hand, male
credits may also be earned by other programs, such as
credit cards, hotels, and car rentals1.
Although they do not operate a special cargo fleet, they
are able to provide cargo transportation among major
gateways by using their cargo space on regularly
scheduled passenger aircrafts. They are a member of
SkyTeam Cargo, which is an international cargo alliance
that has more than then airline companies1.
In order to stabilize the price changing and availability
of aircraft fuel, one of their major factor in the cost
structure, their subsidiaries, Monroe Energy, LLC and
MIPC, LLC are able to utilize pipelines and other
terminal assets to supply aircraft fuel throughout the
Northeastern states. The two subsidiaries can provide a
lower cost of fuel to the company, while there is an
increase in oil price; moreover, subsidiaries can benefit
from increasing oil price.
Delta utilizes different contract and commodity types
according to market condition, to rebalance the
portfolio. They actively manage their cost of fuel by a
hedging program to mitigate the financial influence
from fluctuating price of oil. Hence, they can stabilize
the fuel price better1.
Revenue Composite As of December 21, 2014, the total revenue that Delta
generated was $40,362 million dollars, which is
increased by 6.9% to the year of 20133. As showing in
the chart below, its revenue has been strongly and
steady growing from 2008. Additionally, an earnings
estimates made by ThomsonOne suggests that its
revenue is likely to increase continually by 1% ‐ 2% in
2015 and 20162.
Delta Air Lines, Inc. Revenue 2008 – 2014
*Source: Statista; Dollars in million
As the chart showing below, more than 70% of its
revenue is from main line passenger, which is $28,688
million dollars. 15% revenue is from regional carriers,
which is $6,266 million dollars. Cargo and others have
generated 5,408 million in revenue. The revenue is
expected to grow due to increased domestic demand,
higher corporate sale, and merchandising initiatives1.
*Source: Delta Air Lines, Inc. Annual Report
Compared to data from last year, main line passenger
has increased 8%, cargo transportation has remained
28,688
6,266
9344,474
Revenue Composite
Main Line Regional Carriers Cargo Other
the same, and other sources of revenue has increased
15%. However, the regional carriers have decreased 2%,
because of decreased capacity and increased load
factor1. Delta is likely to fix its regional carriers because
if it is willing to lower its PRASM, the load factor would
be driven up and revenue would be boosted up.
Other revenues, 11% of the total revenue, has increased
by 15%, mainly because of sales of mileage credit,
baggage services, aircraft maintenance services, and oil
refinery products1. Other revenues of Delta has
decreased 5% and 2% in the year 2013 and 2012. We
believe that the sudden boost is mainly driven by oil
refinery products that were sold to third parties,
because the crude oil price, the main factor of refinery
cost structure, has fallen more than $50 per barrel in
2014.
Cost Structure The total operating expense was $34,373 million
dollars, which mainly consists of aircraft fuel, personal
salaries.
Aircraft fuel, averagely 35% of the total cost, has
increased 24%, from $$9,397 million dollars in 2013 to
$$11,668 in 2014, because it utilizes the FIFO
accounting method for recording its inventory. It
purchased mass inventory before the crude oil price
drop in mid‐2014. Thus, the aircraft fuel will be declined
significantly in 2015 due to the same reason.
As its second largest cost factor, the salaries paid to
their employees has been increasing 5% ‐ 6% since
2012. As of 2014, the salaries and related costs are
$8,120 million dollars. The increasing in salaries
expense helps build a good cooperation image, which
not only raise employee’s loyalty but also build a
reputation for the company.
Marketing Strategy Delta is the most reliable airline companies and
characterized itself by being on time, notifying
consumers of delays and cancelations, risk‐free
cancelation, and providing fast refunds4. With these
marketing strategies, Delta is able to satisfy more
current and potential customers.
As the chart showing below, Delta has the highest
percentage of punctual flights, which is near 80%,
compared to other large airlines. The percentage of
punctual flights of US Airways, American Airline, and
United Airlines are 78%, 74%, and 73%3.
Percentage of Punctual Flights in North America
*Source: Statista
Delta’s marketing strategies enable it to make business
travelers as its targeted customers. In fact, it has ranked
as the first place in the Business Travel News Annual
Airline survey5. Business travelers enable Delta to
experience less sensitive of its revenue when the fare is
volatile because business travelers are less likely to
switch airlines when fare price goes up.
Key Partners Labor unions, airports, and oil refineries are three major
partners to Delta. To keep good relationships with labor
unions enable Delta reduce or at least remain the
salaries and related cost. Airports help Delta not only
with ground customer services but also aircraft logistics.
Corporate with the airport is one of the major ways to
improve customer satisfaction, by increase percentage
of punctual flights, efficient check‐in services, and
baggage services. Oil refineries control the largest cost
of Delta. It has more leverage in controlling both price
and availability of aircraft fuel due to its subsidiary oil
refineries.
Competitive Environment In the airline industry, four largest domestic airline
companies are Southwest, Delta, United Airline, and
American Airline. Each of the four company has more
than 10% market share. Delta with the 16.9% of
domestic market share is the second to the Southwest
with 17.7% of the market share6. United Airlines and
American Airlines each has 14.8% and 12.1 percent,
which are close to the Delta’s share; so Delta might face
strong challenges from other three large airline
companies.
“At Delta, we’re really focused on providing a premium
product for all travelers.” Delta’s CEO Richard Anderson
said to one of the reporters from The Seattle Times7.
This is how Delta’s CEO differentiate the company from
others. In order to provide premium services, Delta also
utilizes advanced technology, such as on‐board Wi‐Fi
system and advanced self‐check‐in system8. As
mentioned in the Market Strategy section, Delta’s
operating performance is stellar. Because of business
travelers’ characteristic and increasing users of SkyMile
program, Delta would not have any problem when
facing challenges from other competitors.
SWOT Analysis Strengths: Delta has a strong presence in the airline
industry worldwide. It occupies high market share in
U.S. airline industry. Meanwhile, it also has alliances
with foreign airlines to expand its international market.
In addition, Delta provides over 15000 daily flights to
the passengers to enhance its presence in worldwide.
Moreover, the low oil price saves its fuel cost, and
hedging oil increases the non‐operating profit a lot9.
Weakness: Delta has substantial long‐term debt, so the
company also has much interest expense. Too much
interest expense may lead the net income to decrease.
Besides that, the company has different covenants. If
the company cannot meet the standards of maintaining
the various minimum ratios and minimum liquidity, the
default would result. The default will make the
company adversely impacted9.
Opportunities: The global tourism stimulates the
demand for airline services. The World Tourism
Organization (UNWTO) released the data that the
number of international tourists increased from 1,087
million in 2013 to 1138 million in 2014. The increasing
trend continues for five years since the 2009 financial
crisis. The Delta can expect to utilize this trend to lead
the airline industry. Delta also has a bright anticipation
on global air freight sector. The revenue from air
freight increases for consecutive five years9.
Threats: Delta faces the great challenges from small
carriers such as Allegiant because these small carriers
require lower cost than the large airline company does.
Although the services are limited to these small carriers,
these carriers can also provide direct domestic flights to
major cities for a short time as the big airline carriers
do. So Delta should be cautious about the rise of the
small carriers. Another threat is the competition for the
international route. In the global airline industry, there
are many alliance group formed by different airline
carriers such as SkyTeam, the Star Alliance (among
United Airlines, Lufthansa, Air Canada and others) and
the Oneworld alliance (among American Airlines, British
Airways, Qantas and others). Thus, Delta ought to make
strong consolidation with big foreign carriers to win
more international routes9.
Dividend Payout The first two quarters of the fiscal year 2014 is
$0.06/share. Then next two quarters, the dividend
increased to $0.09/share. In June 2015, the dividend is
$0.135/share10. When the dividend payout increased,
the net income did not decrease. This situation
indicates that the company earned enough profit to
afford more dividend paid.
Debt Policy Delta has been paying off its debt in the recent six
years. It is able to reduce its debt from $17 billion
dollars in 2009 to $9.4 billion in 2013. As the chart
showing below, its expected debt will be less than $6
billion dollars by the end of 2015. By reducing its debt,
Delta is able to strength its balance. In other work, Delta
is not dependent on its debt to grow. On another hand,
Delta saved nearly $200 million dollars as interest
expense11. Instead of paying interest, Delta is started
declaring the dividends, which will ultimately benefit
shareholders.
Delta Air Lines, Inc. Debt 2009 ‐ 2015
*Source: Delta Air Lines, Inc.
Recent earning release In 2015, the EPS of first two quarter is greater than the
estimated number. The EPS is on the recovering trends
even though the EPS of the first quarter in 2015 is at a
low level. In the recent two years, the actual EPS
always beats the estimated EPS1. Due to the decreasing
fuel cost and increasing air flight revenue, the EPS will
keep its upward trend.
Delta Earning Release 2013 ‐ 2015
*Source: Delta 10‐K Report
Investment Positives Low P/E ratio due to the undervalued price and
the relatively high earning per share Large market capital that reduces price volatility Few substitutions for long-distance and
international travel The leader in the market of the both domestic
and international aviation industry
Investment Negatives
Low EBIT margin due to aircraft expense Highly dependent on fluctuating oil price Vulnerable to changes in currency exchange
rates Heavily dependent on the global economy
Revenue The total passenger revenue is expected to grow 4% by
the end of this year, 5% in the next two years, and 4.5%
in the future. The main reason of the growth is because
of increased capacity, as more aircraft is utilized.
Specifically, Delta has more than 50 aircraft will be
delivered by 2016 and 2017.
Cost Delta’s cost is mainly driven by the aircraft fuel and
salary‐related cost. Due to the crude oil price drop,
Delta’s expected cost of fuel is expected to drop by 9%,
which will be less than 25% of the revenue. However, as
the diminishing of the oil oversupply and no substitute
energy for the aircraft fuel, it is expected to grow at 5%
when it stabilize. The fuel cost has a strong impact on
the stock value, because as the scenario analysis
showing that 0.5% increasing in the fuel growth rate will
result in a $2.56 price decreasing. As the overall
economic growth and labor union pressure, the labor
and related cost will be growing at 4% in the future,
which will be 20% of the total revenue. The labor cost
to Delta is as just as strong as fuel cost. 0.5% increasing
in labor growth rate will result in a $2.52 decreasing in
its stock price. 21Other cost, more than 40% of the
revenue, such as aircraft maintenance, landing fees and
other rents, passenger services, etc. has a strong
pattern that will grow at the same rate as the revenue
growth.
Debt and Assets As Delta suggested that the aircrafts that they
rented/bought will be delivered in 2017 and 2018, we
assumed that their PP&E growth will be near 5%.
Whereas other years PP&E growth will be a little more
than 4%. As the historical data indicates that it has been
paying back its debt in recent years due to the higher
cash inflows that provided by low fuel cost. We have
assumed that they will pay back their debt until the D/E
ratio reaches to 30%, which is its optimum peer data.
These two major cash outflows will have a strong
impact on the intrinsic value of Delta’s share under the
DCF and PE model, which we will talk about after
introducing the risk‐free, beta, market premium, cost of
debt, and WACC.
Other Factors We used 2.66% as the risk‐free rate, which is the YTM of
the 20‐year treasury. Our beta estimates range from
1.57 in 2015 to 1.32 in 2019, due to the decreasing debt
to equity ratio. Scenario analysis suggested that 0.05
increasing in beta will result in a $0.66 decreasing in
stock value. The market premium is at 5.46%, which is
0
0.5
1
1.5
Q113
Q213
Q313
Q413
Q114
Q214
Q314
Q414
Q115
Q215
Actual Estimate
Valuation
the average stock market return subtracted by risk‐free
rate. 0.05% increasing in the equity risk premium will
decrease the Delta share by 88 cents. Although, the cost
of debt is expected to decrease as Delta pay off its debt
over time because its bond is not publicly traded, there
is no available future data of its cost of debt. We used
1.92%, which is a benchmark for the airline industry.
However, the cost of debt will have a strong effect on
our model. As the scenario analysis suggests, the 0.05%
increasing in the cost of debt will only result in a 2 cents
increasing in its stock value. As beta decreases, our
WACC will be decreased from 9.39% in 2015 to 8.69% in
2019.
As of Dec 31st, 2014, our intrinsic value under DCF
model is $57.20, which does not equal to the value
under EP model, $57.06. The reason is mainly because
of the constant changing in WACC. However, after we
adjusted to the date today, Nov 16, 2015, the value is
$62.53 under both methods.
We believe that Delta will maintain a 19% payout ratio,
which is calculated by dividing continuing value growth
rate by continuing value of ROE. As evidence showing
that the Delta has ready entered into the maturity
stage, its growth rate will be as same as the national
GDP growth rate, which is 3%. Under our DDM model,
we have calculated the intrinsic value of the Delta
share, which is $43.87 as Nov 11th, 2015.
Citation:
1. Bureau of Economic Analysis; http://www.bea.gov/national/index.htm#gdp
2. Bloomberg Business;
http://www.bloomberg.com/
3. U.S. Conference Board;
https://www.conference‐
board.org/data/consumerconfidence.cfm
4. Bloomberg Business;
http://www.bloomberg.com/quote/VCR:US
5. NASDAQ Curde Oil Price;
http://www.nasdaq.com/markets/crude‐
oil.aspx?timeframe=3y
6. Seasonal Chart;
http://www.seasonalcharts.com/classics_ro
hoel.html
7. yahoo finance; http://finance.yahoo.com/
8. Consumer Confidence Index® | The Conference Board. (n.d.). Retrieved November 5, 2015, from https://www.conference-board.org/data/consumerconfidence.cfm
9. Helman, C. (2015, January 21). How Cheap Oil Has Delta Air Lines Jet Fooled. Retrieved October 17, 2015, from http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/
10. Delta Air Lines: Hedging Gone Awry. (2014, December 4). Retrieved October 17, 2015, from http://seekingalpha.com/article/2731365-delta-air-lines-hedging-gone-awry
11. 2015 Aviation Trends. (n.d.). Retrieved November 17, 2015, from http://www.strategyand.pwc.com/perspectives/2015-aviation-trends
12. (n.d.). Retrieved October 27, 2015, from https://www.iata.org/whatwedo/Documents/economics/Central-forecast-Dec-2014-Figures.pdf
13. Delta Air Lines, Company Filings, Annual Report 2014 10K
14. Delta Air Lines Inc. (n.d.). Retrieved November 11, 2015, from
http://financials.morningstar.com/competitors/industry-peer.action?t=DAL
15. Who Are Delta Airlines' Main Competitors? (DAL). (2015, September 30). Retrieved November 11, 2015, from http://www.investopedia.com/articles/markets/093015/who-are-delta-airlines-main-competitors.asp
16. The collusion delusion. (2015, July 10). Retrieved November 14, 2015, from http://www.economist.com/blogs/gulliver/2015/07/airline-competition
17. ) Delta Air Lines (DAL) Stock Gaining Today on Competitor's Positive Earnings. (2015, January 29). Retrieved November 13, 2015, from http://www.thestreet.com/story/13028450/1/delta-air-lines-dal-stock-gaining-today-on-competitors-positive-earnings.html
18. United States Fed Funds Rate | 1971-2015 | Data | Chart | Calendar. (n.d.). Retrieved November 12, 2015, from http://www.tradingeconomics.com/united-states/interest-rate
19.
Delta Air Lines Inc.
Key Assumptions of Valuation Model
Ticker Symbol DAL
Current Share Price $50.70
Current Model Date 11/13/2015
Fiscal Year End Dec. 31
Pre‐Tax Cost of Debt 1.92%
Beta 1.57
Risk‐Free Rate 2.66%
Market Return 8.12%
Equity Risk Premium 5.46%
CV Growth of NOPLAT 3%
CV Growth of EPS 3%
Current Dividend Yield 0.06%
Marginal Tax Rate 37.00%
Effective Tax Rate 38.50%
Delta Air Lines Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Domestic $ 14,050.00 $ 15,204.00 $ 17,017.00 18,429.41$ 19,922.19$ 21,237.06$ 22,511.28$ 23,861.96$
6.6% 8.2% 11.9% 8.30% 8.10% 6.60% 6.00% 6.00%
International $ 11,187.00 $ 11,330.00 $ 11,671.00 12,034.82$ 12,462.63$ 13,101.20$ 13,748.16$ 14,137.92$
Atlantic $ 5,645.00 $ 5,657.00 $ 5,826.00 6,064.87$ 6,416.63$ 6,897.88$ 7,325.54$ 7,545.31$
1.20% 0.21% 2.99% 4.10% 5.80% 7.50% 6.20% 3.00%
Pacific $ 3,645.00 $ 3,561.00 $ 3,421.00 3,284.16$ 3,185.64$ 3,185.64$ 3,281.20$ 3,363.23$
9.59% ‐2.30% ‐3.93% ‐4.00% ‐3.00% 0.00% 3.00% 2.50%
Latin America $ 1,897.00 $ 2,112.00 $ 2,424.00 2,685.79$ 2,860.37$ 3,017.69$ 3,141.41$ 3,229.37$
7.54% 11.33% 14.77% 10.80% 6.50% 5.50% 4.10% 2.80%
Mainline $ 25,237.00 $ 26,534.00 $ 28,688.00 30,464.23$ 32,384.83$ 34,338.26$ 36,259.44$ 37,999.88$
5.85% 5.14% 8.12% 6.19% 6.30% 6.03% 5.59% 4.80%
Regional affiliates $ 6,570.00 $ 6,408.00 $ 6,266.00 6,172.01$ 6,122.63$ 6,189.98$ 6,326.16$ 6,465.34$
2.43% ‐2.47% ‐2.22% ‐1.50% ‐0.80% 1.10% 2.20% 2.20%
Passenger Revenue $ 31,807.00 $ 32,942.00 $ 34,954.00 36,636.24$ 38,507.46$ 40,528.24$ 42,585.61$ 44,465.21$ 5.12% 3.57% 6.11% 4.81% 5.11% 5.25% 5.08% 4.41%
Revenue passenger miles $ 192,974.00 $ 194,998.00 $ 202,925.00 215,507.29$ 226,514.47$ 238,401.41$ 250,503.56$ 261,560.08$
0.11% 1.05% 4.07% 6.20% 5.11% 5.25% 5.08% 4.41%
Available seat miles $ 230,415.00 $ 232,740.00 $ 239,676.00 234,247.05$ 246,211.38$ 259,131.97$ 272,286.48$ 284,304.44$
‐1.81% 1.01% 2.98% ‐2.27% 5.11% 5.25% 5.08% 4.41%
passenger revenue per available seat mile $ 13.78 $ 14.15 $ 14.58 14.24$ 14.97$ 15.76$ 16.56$ 17.29$
6.90% 2.69% 3.04% ‐2.32% 5.11% 5.25% 5.08% 4.41%
passenger load factor 83.80% 83.80% 84.70% 85.20% 85.50% 83.20% 82.80% 83.50%2.07% 0.00% 1.07% 0.59% 0.35% ‐2.69% ‐0.48% 0.85%
Airport Services and Other, net $ 3,873.00 $ 3,894.00 $ 4,474.00 4,608.22$ 4,746.47$ 4,888.86$ 5,035.53$ 5,186.59$
1.10% 0.54% 14.89% 3.00% 3.00% 3.00% 3.00% 3.00%
Cargo $ 990.00 $ 937.00 $ 934.00 962.02$ 990.88$ 1,020.61$ 1,051.23$ 1,082.76$
‐3.60% ‐5.35% ‐0.32% 3.00% 3.00% 3.00% 3.00% 3.00%
Total Operating Revenue $ 36,670.00 $ 37,773.00 $ 40,362.00 42,206.48$ 44,244.81$ 46,437.71$ 48,672.36$ 50,734.57$
4.43% 3.01% 6.85% 4.57% 4.83% 4.96% 4.81% 4.24%
Delta Air Lines Inc.
Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
RevenueTotal passenger revenue 31,807$ 32,942$ 34,954$ $ 36,636 $ 38,507 $ 40,528 $ 42,586 $ 44,465
Cargo revenue 990$ 937$ 934$ $ 962 $ 991 $ 1,021 $ 1,051 $ 1,083
Other operating revenue 3,873$ 3,894$ 4,474$ $ 4,608 $ 4,746 $ 4,889 $ 5,036 $ 5,187
Total operating revenue 36,670$ 37,773$ 40,362$ $ 42,206 $ 44,245 $ 46,438 $ 48,672 $ 50,735
Operating Expense:Aircraft fuel & related taxes 10,150$ 9,397$ 11,668$ 12,018$ 12,379$ 12,750$ 13,132$ 13,526$
Salaries & related costs 7,266$ 7,720$ 8,120$ 8,282$ 8,448$ 8,617$ 8,789$ 8,965$
Contract carrier arrangements 5,647$ 5,669$ 5,237$ 5,604$ 5,996$ 6,416$ 6,865$ 7,345$
Aircraft maintenance materials & outside repairs 1,955$ 1,852$ 1,828$ 1,938$ 2,054$ 2,177$ 2,308$ 2,446$
Depreciation & amortization 1,565$ 1,658$ 1,771$ 1,699$ 1,678$ 1,671$ 1,673$ 1,680$
Contracted services 1,566$ 1,665$ 1,749$ 1,784$ 1,820$ 1,856$ 1,893$ 1,931$
Passenger commissions & other selling expenses 1,590$ 1,603$ 1,700$ 2,015$ 2,118$ 2,229$ 2,342$ 2,446$
Landing fees & other rents 1,336$ 1,410$ 1,442$ 1,475$ 1,509$ 1,544$ 1,579$ 1,616$
Profit sharing 372$ 506$ 1,085$ 1,080$ 1,050$ 1,100$ 990$ 890$
Passenger service 732$ 762$ 810$ 883$ 928$ 977$ 1,026$ 1,072$
Aircraft rent 272$ 209$ 233$ 219$ 206$ 194$ 182$ 171$
Restructuring & other items 452$ 402$ 716$ 610$ 647$ 685$ 727$ 712$
Other operating expense 2,200$ 1,922$ 2,513$ 2,588$ 2,666$ 2,746$ 2,828$ 2,913$
Total operating expense 34,495$ 34,373$ 38,156$ 40,195$ 41,498$ 42,961$ 44,335$ 45,713$
Operating income (loss) 2,175$ 3,400$ 2,206$ 2,011$ 2,747$ 3,477$ 4,338$ 5,022$
Interest expense, net (1,004)$ (852)$ (650)$ (169)$ (159)$ (161)$ (147)$ (119)$
Gain (loss) on extinguishment of debt (118)$ - (268)$ ‐$ ‐$ ‐$ ‐$ ‐$
Miscellaneous, net (27)$ (21)$ (216)$ (80)$ (80)$ (80)$ (80)$ (80)$
Total other income (expense), net (1,150)$ (873)$ (1,134)$ (249)$ (239)$ (241)$ (227)$ (199)$
Income (loss) before income taxes 1,025$ 2,527$ 1,072$ 1,762$ 2,508$ 3,236$ 4,111$ 4,822$
Income tax provision (benefit) 16$ (8,013)$ 413$ 652$ 928$ 1,197$ 1,521$ 1,784$
Net income (loss) 1,009$ 10,540$ 659$ 1,110$ 1,580$ 2,039$ 2,590$ 3,038$
Weighted average shares outstanding - basic 845 849 836 847 849 851 850 850
Net earnings (loss) per share - basic 1.20$ 12.41$ 0.79$ 1.31$ 1.86$ 2.40$ 3.05$ 3.57$
Pay Out Ratio 0.00% 0.97% 37.97% 19% 19% 19% 19% 19%
Dividends per share -$ 0.12$ 0.30$ 0.25$ 0.35$ 0.46$ 0.58$ 0.68$
Delta Air Lines Inc.
Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Cash & cash equivalents 2,416$ 2,844$ 2,088$ 661$ 967$ 2,362$ 3,247$ 4,150$
Short-term investments 958$ 959$ 1,217$ 1,243$ 1,270$ 1,298$ 1,326$ 1,354$
Accounts receivable, net 1,693$ 1,609$ 2,297$ 2,011$ 2,114$ 2,225$ 2,338$ 2,441$
Hedge margin receivable -$ -$ 925$ ‐$ ‐$ ‐$ ‐$ ‐$
Inventory (fuel and Expendable parts) 1,023$ 1,063$ 852$ 1,250$ 1,237$ 1,185$ 1,256$ 1,197$
Hedge derivatives asset -$ -$ 1,078$ ‐$ ‐$ ‐$ ‐$ ‐$
Deferred income taxes, net 463$ 1,736$ 3,275$ 3,455$ 3,644$ 3,845$ 4,056$ 4,278$
Prepaid expenses & other current assets 1,344$ 1,318$ 733$ 748$ 763$ 778$ 793$ 809$
Total current assets 8,272$ 9,651$ 12,465$ 9,368$ 9,995$ 11,692$ 13,016$ 14,230$
Property & equipment, gross 27,369$ 29,646$ 31,269$ 32,698$ 34,277$ 35,976$ 37,740$ 39,357$
Less accumulated depreciation & amortization 6,656$ 7,792$ 9,340$ 11,039$ 12,717$ 14,388$ 16,061$ 17,740$
Property & equipment, net 20,713$ 21,854$ 21,929$ 21,659$ 21,560$ 21,588$ 21,679$ 21,617$
Goodwill 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$
Indentifiable intangibles, growth 5,349$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$
Depreciation and aormotization - Indentifiable intangibles 670$ 738$ 793$ 848$ 903$ 958$ 1,013$ 1,068$
Indentifiable intangibles, net 4,679$ 4,658$ 4,603$ 4,548$ 4,493$ 4,438$ 4,383$ 4,328$
Deferred income taxes, net -$ 4,992$ 4,320$ 4,557$ 4,557$ 4,557$ 4,557$ 4,557$
Other noncurrent assets 1,092$ 1,303$ 1,010$ 1,092$ 1,181$ 1,277$ 1,381$ 1,493$
Total other assets 15,565$ 20,747$ 19,727$ 19,991$ 20,025$ 20,066$ 20,115$ 20,172$
Total assets 44,550$ 52,252$ 54,121$ 51,018$ 51,580$ 53,346$ 54,810$ 56,019$
Current maturities of long-term debt & capital leases 1,627$ 1,547$ 1,216$ 1,111$ 1,326$ 2,137$ 2,028$ 1,158$
Air traffic liability 3,696$ 4,122$ 4,296$ 4,597$ 4,918$ 5,263$ 5,631$ 6,025$
Accounts payable 2,293$ 2,300$ 2,622$ 2,456$ 2,540$ 2,627$ 2,717$ 2,811$
Accrued salaries & related benefits 1,680$ 1,926$ 2,266$ 2,153$ 2,196$ 2,240$ 2,285$ 2,331$
Hedge derivatives liability -$ -$ 2,772$ ‐$ ‐$ ‐$ ‐$ ‐$
Frequent flyer deferred revenue 1,806$ 1,861$ 1,580$ 2,132$ 2,241$ 2,359$ 2,478$ 2,588$
Taxes payable 585$ 673$ -$ ‐$ ‐$ ‐$ ‐$ ‐$
Other accrued liabilities 1,583$ 1,723$ 2,127$ 1,678$ 1,764$ 1,856$ 1,950$ 2,037$
Total current liabilities 13,270$ 14,152$ 16,879$ 14,128$ 14,986$ 16,482$ 17,091$ 16,950$
Long-term debt & Capital Lease 11,082$ 9,795$ 8,561$ 7,705$ 6,934$ 6,241$ 5,617$ 5,055$
Pension, postretirement & related benefits 16,005$ 12,392$ 15,138$ 13,776$ 12,536$ 11,408$ 10,381$ 9,447$
Frequent flyer deferred revenue 2,628$ 2,559$ 2,602$ 3,297$ 3,466$ 3,648$ 3,833$ 4,002$
Deferred income taxes, net 2,047$ -$ -$ ‐$ ‐$ ‐$ ‐$ ‐$
Other noncurrent liabilities 1,649$ 1,711$ 2,128$ 2,128$ 2,128$ 2,128$ 2,128$ 2,128$
Total noncurrent liabilities 33,411$ 26,457$ 28,429$ 26,906$ 25,064$ 23,424$ 21,958$ 20,632$
Additional paid-in capital 14,069$ 13,982$ 12,981$ 13,011$ 13,041$ 13,071$ 13,071$ 13,071$
Retained earnings (accumulated deficit) (7,389)$ 3,049$ 3,456$ 4,355$ 5,635$ 7,286$ 9,384$ 11,845$
Accumulated other comprehensive income (loss) (8,577)$ (5,130)$ (7,311)$ (7,062)$ (6,822)$ (6,590)$ (6,366)$ (6,150)$
Treasury stock, at cost (234)$ (258)$ (313)$ (318)$ (323)$ (328)$ (328)$ (329)$
Total stockholders' equity (deficit) (2,131)$ 11,643$ 8,813$ 9,985$ 11,530$ 13,439$ 15,761$ 18,438$
Delta Air Lines Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014
Net income (loss) (1,237)$ 593$ 854$ 1,009$ 10,540$ 659$
Depreciation & amortization 1,536$ 1,511$ 1,523$ 1,565$ 1,658$ 1,771$
Amortization of debt discount (premium), net 370$ 216$ 193$ 193$ 154$ 59$
Hedge derivative contracts - - - - - 2,186$
Deferred income taxes (329)$ 9$ (2)$ 17$ (7,991)$ 414$
Pension, postretirement & postemployment expense in excess of (less than) payments 307$ (301)$ (308)$ (208)$ (624)$ (723)$
Restructuring & other items - 182$ 142$ 184$ 285$ 758$
Loss (gain) on extinguishment of debt 83$ 391$ 68$ 56$ - 268$
Equity investment loss (earnings) - - - - - 106$
SkyMiles used pursuant to advance purchase under American Express Agreements - - - (333)$ (333)$ -
Receivables 147$ (141)$ (76)$ (116)$ 90$ (302)$
Restricted cash & cash equivalents 79$ 16$ 153$ (51)$ 231$ 62$
Fuel inventory - - - (451)$ (87)$ 172$
Hedge margin - - - - - (922)$
Prepaid expenses & other current assets (61)$ (105)$ (16)$ (134)$ 28$ 58$
Air traffic liability (286)$ 232$ 174$ 216$ 426$ 174$
Frequent flyer deferred revenue (298)$ (345)$ 82$ (115)$ (121)$ (238)$
Accounts payable & accrued liabilities 143$ 516$ 303$ 899$ 213$ 228$
Other assets & liabilities - - (373)$ (66)$ (36)$ -
Other operating activities, net (167)$ 105$ (66)$ (34)$ 185$ 217$
Net cash flows from operating activities 1,379$ 2,832$ 2,834$ 2,476$ 4,504$ 4,947$ Property & equipment additions - flight equipment, including advance payments (951)$ (1,055)$ (907)$ (1,196)$ (2,117)$ (1,662)$
Property & equipment additions - ground property & equipment, including technology (251)$ (287)$ (347)$ (772)$ (451)$ (587)$
Purchase of Virgin Atlantic shares - - - - (360)$ -
Purchase of investments - (730)$ (1,078)$ (958)$ (959)$ (1,795)$
Redemption of investments - - 844$ 1,019$ 1,117$ 1,533$
Other investing activities, net (4)$ 12$ (10)$ (55)$ 14$ 48$
Net cash flows from investing activities (1,008)$ (2,026)$ (1,498)$ (1,962)$ (2,756)$ (2,463)$ Payments on long-term debt & capital lease obligations (2,891)$ (3,722)$ (4,172)$ (2,864)$ (1,461)$ (2,928)$
Repurchase of common stock - - - - (250)$ (1,100)$
Cash dividends - - - - (102)$ (251)$
Proceeds from long-term obligations 2,966$ 1,130$ 2,395$ 1,965$ 268$ 1,020$
Other financing activities, net (94)$ 71$ 2$ 48$ 78$ 19$
Net cash flows from financing activities (19)$ (2,521)$ (1,571)$ (755)$ (1,320)$ (3,240)$ Net increase (decrease) in cash & cash equivalents 352$ (1,715)$ (235)$ (241)$ 428$ (756)$ Cash & cash equivalents at beginning of year 4,255$ 4,607$ 2,892$ 2,657$ 2,416$ 2,844$
Cash & cash equivalents at end of year 4,607$ 2,892$ 2,657$ 2,416$ 2,844$ 2,088$
Cash paid for interest 867$ 1,036$ 925$ 834$ 698$ 560$
Fiscal Years Ending DAL 2015E 2016E 2017E 2018E 2019E
Cash from Operating Activities:Net Income 1,110$ 1,580$ 2,039$ 2,590$ 3,038$
Depreciation & Amortization 1,699$ 1,678$ 1,671$ 1,673$ 1,680$ Amortization of Identifiable Intangibles 55$ 55$ 55$ 55$ 55$ Total Amortization & Depreciation 1,754$ 1,733$ 1,726$ 1,728$ 1,735$ Change in Deferred Income Taxes (current) (180)$ (190)$ (200)$ (211)$ (223)$ Hedge Margin Receviable 925$ ‐$ ‐$ ‐$ ‐$ Deferred income taxes, net (non‐current) (237)$ ‐$ ‐$ ‐$ ‐$ Change in Account receivable 286$ (103)$ (111)$ (113)$ (103)$ Change in Fuel inventories (398)$ 13$ 52$ (71)$ 59$ Prepaid expenses and other current assets (15)$ (15)$ (15)$ (16)$ (16)$ Hedge derivatives assets 1,078$ ‐$ ‐$ ‐$ ‐$ Other noncurrent assets (82)$ (89)$ (96)$ (104)$ (112)$ Change in Air traffic liability 301$ 322$ 344$ 368$ 394$ Change in Acconts Payable (166)$ 84$ 87$ 90$ 94$ Change in Accrued salaries & related benefits (113)$ 43$ 44$ 45$ 46$ Change in Frequent flyer deferred revenue 552$ 109$ 118$ 120$ 109$
Change in Frequent flyer deferred revenue (non‐current) 695$ 168$ 182$ 185$ 169$
Hedge derivatives liability (2,772)$ ‐$ ‐$ ‐$ ‐$
Change in other accrued liabilities (449)$ 86$ 93$ 94$ 86$
Other noncurrent liabilities ‐$ ‐$ ‐$ ‐$ ‐$
Cash from Operating Activities 2,290$ 3,742$ 4,261$ 4,706$ 5,276$
Cash from Investing Activities PPE purchase (1,429)$ (1,579)$ (1,699)$ (1,764)$ (1,617)$
Short‐term investments (26)$ (27)$ (27)$ (28)$ (29)$
Cash from Investing Activities (1,455)$ (1,606)$ (1,726)$ (1,792)$ (1,646)$
Cash from Financing Activities Debt (long‐term and maturities of long‐term) (961)$ (555)$ 118$ (733)$ (1,432)$
Pension (1,362)$ (1,240)$ (1,128)$ (1,027)$ (934)$
Additional paid‐in capital 30$ 30$ 30$ ‐$ ‐$
Dividends Paid (211)$ (300)$ (387)$ (492)$ (577)$
Treasury Stock (5.48)$ (4.93)$ (4.43)$ (0.43)$ (0.39)$
Accumulated other comprehensive income (loss) 249$ 240$ 232$ 224$ 216$
Cash from Financing Activities (2,261)$ (1,830)$ (1,140)$ (2,028)$ (2,727)$
Net Changes in Cash (1,427)$ 306$ 1,395$ 885$ 903$
Delta Air Lines Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
RevenuePassenger - mainline 68.82% 70.25% 71.08% 72.18% 73.19% 73.94% 74.50% 74.90%
Passenger - regional carriers 17.92% 16.96% 15.52% 14.62% 13.84% 13.33% 13.00% 12.74%
Total passenger revenue 86.74% 87.21% 86.60% 86.80% 87.03% 87.27% 87.49% 87.64%
Cargo revenue 2.70% 2.48% 2.31% 2.28% 2.24% 2.20% 2.16% 2.13%
Other operating revenue 10.56% 10.31% 11.08% 10.92% 10.73% 10.53% 10.35% 10.22%
Total operating revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Operating Expense:Aircraft fuel & related taxes 27.68% 24.88% 28.91% 28.47% 27.98% 27.46% 26.98% 26.66%
Salaries & related costs 19.81% 20.44% 20.12% 19.62% 19.09% 18.56% 18.06% 17.67%
Contract carrier arrangements 20.12% 20.20% 18.66% 13.28% 13.55% 13.82% 14.10% 14.48%
Aircraft maintenance materials & outside repairs 6.97% 6.60% 6.51% 4.59% 4.64% 4.69% 4.74% 4.82%
Depreciation & amortization 5.58% 5.91% 6.31% 4.03% 3.79% 3.60% 3.44% 3.31%
Contracted services 5.58% 5.93% 6.23% 4.23% 4.11% 4.00% 3.89% 3.81%
Passenger commissions & other selling expenses 5.01% 5.05% 5.35% 4.77% 4.79% 4.80% 4.81% 4.82%
Landing fees & other rents 4.76% 5.02% 5.14% 3.50% 3.41% 3.32% 3.24% 3.18%
Profit sharing 1.01% 1.34% 2.69% 2.56% 2.37% 2.37% 2.03% 1.75%
Passenger service 2.00% 2.02% 2.01% 2.09% 2.10% 2.10% 2.11% 2.11%
Aircraft rent 0.74% 0.55% 0.58% 0.52% 0.47% 0.42% 0.37% 0.34%
Restructuring & other items 1.23% 1.06% 1.77% 1.45% 1.46% 1.48% 1.49% 1.40%
Other operating expense 6.00% 5.09% 6.23% 6.13% 6.03% 5.91% 5.81% 5.74%
Total operating expense 94.07% 91.00% 94.53% 95.23% 93.79% 92.51% 91.09% 90.10%
Operating income (loss) 5.93% 9.00% 5.47% 4.77% 6.21% 7.49% 8.91% 9.90%
Interest expense, net ‐2.74% ‐2.26% ‐1.61% ‐0.40% ‐0.36% ‐0.35% ‐0.30% ‐0.24%
Gain (loss) on extinguishment of debt ‐0.32% #VALUE! ‐0.66% 0.00% 0.00% 0.00% 0.00% 0.00%
Miscellaneous, net ‐0.07% ‐0.06% ‐0.54% ‐0.19% ‐0.18% ‐0.17% ‐0.16% ‐0.16%
Total other income (expense), net ‐3.14% ‐2.31% ‐2.81% ‐0.59% ‐0.54% ‐0.52% ‐0.47% ‐0.39%
Income (loss) before income taxes 2.80% 6.69% 2.66% 4.17% 5.67% 6.97% 8.45% 9.51%
Income tax provision (benefit) 0.04% ‐21.21% 1.02% 1.54% 2.10% 2.58% 3.12% 3.52%
Net income (loss) 2.75% 27.90% 1.63% 2.63% 3.57% 4.39% 5.32% 5.99%
Weighted average shares outstanding - basic 2.30% 2.25% 2.07% 2.01% 1.92% 1.83% 1.75% 1.68%
Delta Air Lines Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Cash & cash equivalents 6.59% 7.53% 5.17% 1.57% 2.19% 5.09% 6.67% 8.18%
Short-term investments 2.61% 2.54% 3.02% 2.95% 2.87% 2.79% 2.72% 2.67%
Accounts receivable, net 4.62% 4.26% 5.69% 4.77% 4.78% 4.79% 4.80% 4.81%
Hedge margin receivable 0.00% 0.00% 2.29% 0.00% 0.00% 0.00% 0.00% 0.00%
Inventory (fuel and Expendable parts) 2.79% 2.81% 2.11% 2.96% 2.80% 2.55% 2.58% 2.36%
Hedge derivatives asset 0.00% 0.00% 2.67% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred income taxes, net 1.26% 4.60% 8.11% 8.19% 8.24% 8.28% 8.33% 8.43%
Prepaid expenses & other current assets 3.67% 3.49% 1.82% 1.77% 1.72% 1.68% 1.63% 1.60%
Total current assets 22.56% 25.55% 30.88% 22.20% 22.59% 25.18% 26.74% 28.05%
Property & equipment, gross 74.64% 78.48% 77.47% 77.47% 77.47% 77.47% 77.54% 77.57%
Less accumulated depreciation & amortization 18.15% 20.63% 23.14% 26.16% 28.74% 30.98% 33.00% 34.97%
Property & equipment, net 56.48% 57.86% 54.33% 51.32% 48.73% 46.49% 44.54% 42.61%
Goodwill 26.71% 25.93% 24.27% 23.20% 22.14% 21.09% 20.12% 19.30%
Indentifiable intangibles, growth 14.59% 14.29% 13.37% 12.78% 12.20% 11.62% 11.09% 10.64%
Depreciation and aormotization - Indentifiable intangibles 1.83% 1.95% 1.96% 2.01% 2.04% 2.06% 2.08% 2.11%
Indentifiable intangibles, net 12.76% 12.33% 11.40% 10.78% 10.15% 9.56% 9.01% 8.53%
Deferred income taxes, net 0.00% 13.22% 10.70% 10.80% 10.30% 9.81% 9.36% 8.98%
Other noncurrent assets 2.98% 3.45% 2.50% 2.59% 2.67% 2.75% 2.84% 2.94%
Total other assets 42.45% 54.93% 48.88% 47.37% 45.26% 43.21% 41.33% 39.76%
Total assets 121.49% 138.33% 134.09% 120.88% 116.58% 114.88% 112.61% 110.42%
Current maturities of long-term debt & capital leases 4.44% 4.10% 3.01% 2.63% 3.00% 4.60% 4.17% 2.28%
Air traffic liability 10.08% 10.91% 10.64% 10.89% 11.12% 11.33% 11.57% 11.88%
Accounts payable 6.25% 6.09% 6.50% 5.82% 5.74% 5.66% 5.58% 5.54%
Accrued salaries & related benefits 4.58% 5.10% 5.61% 5.10% 4.96% 4.82% 4.70% 4.59%
Hedge derivatives liability 0.00% 0.00% 6.87% 0.00% 0.00% 0.00% 0.00% 0.00%
Frequent flyer deferred revenue 4.93% 4.93% 3.91% 5.05% 5.07% 5.08% 5.09% 5.10%
Taxes payable 1.60% 1.78% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other accrued liabilities 4.32% 4.56% 5.27% 3.98% 3.99% 4.00% 4.01% 4.01%
Total current liabilities 36.19% 37.47% 41.82% 33.47% 33.87% 35.49% 35.11% 33.41%
Long-term debt & Capital Lease 30.22% 25.93% 21.21% 18.26% 15.67% 13.44% 11.54% 9.96%
Pension, postretirement & related benefits 43.65% 32.81% 37.51% 32.64% 28.33% 24.57% 21.33% 18.62%
Frequent flyer deferred revenue 7.17% 6.77% 6.45% 7.81% 7.83% 7.85% 7.87% 7.89%
Deferred income taxes, net 5.58% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other noncurrent liabilities 4.50% 4.53% 5.27% 5.04% 4.81% 4.58% 4.37% 4.19%
Total noncurrent liabilities 91.11% 70.04% 70.44% 63.75% 56.65% 50.44% 45.11% 40.67%
Additional paid-in capital 38.37% 37.02% 32.16% 30.83% 29.47% 28.15% 26.86% 25.76%
Retained earnings (accumulated deficit) ‐20.15% 8.07% 8.56% 10.32% 12.74% 15.69% 19.28% 23.35%
Accumulated other comprehensive income (loss) ‐23.39% ‐13.58% ‐18.11% ‐16.73% ‐15.42% ‐14.19% ‐13.08% ‐12.12%
Treasury stock, at cost ‐0.64% ‐0.68% ‐0.78% ‐0.75% ‐0.73% ‐0.71% ‐0.67% ‐0.65%
Total stockholders' equity (deficit) ‐5.81% 30.82% 21.83% 23.66% 26.06% 28.94% 32.38% 36.34%
Delta Air Lines Inc.
Weighted Average Cost of Capital (WACC) Estimation
2014 2015 2016 2017 2018 2019
Risk Free 2.66% 2.66% 2.66% 2.66% 2.66% 2.66%
Risk Premium 5.46% 5.46% 5.46% 5.46% 5.46% 5.46%
Beta 1.57 1.52 1.47 1.42 1.37 1.32
Cost of Equity 11.25% 10.96% 10.69% 10.41% 10.14% 9.87%
Pre-Tax Cost of Debt 1.92% 1.92% 1.92% 1.92% 1.92% 1.92%
Tax Rate 37% 37% 37% 37% 37% 37%
After-Tax Cost of Debt 1.21% 1.21% 1.21% 1.21% 1.21% 1.21%
Cost of Preferred 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
MV of the firm $52,057.20 $51,962.90 $52,096.72 $51,390.12 $49,893.85 $49,881.20
MV Weight of Equity 81% 83% 83% 84% 86% 86%
MV Weight of Debt 19% 17% 17% 16% 14% 14%
MV Weight of Pfd 0% 0% 0% 0% 0% 0%
Forward WACC 9.39% 9.26% 9.04% 8.93% 8.93% 8.69%
Discount Factor 1.09 1.19 1.30 1.41 1.54
Implied Constant WACC 9.26% 9.15% 9.08% 9.04% 8.97%
Growth Rate 0.03
Delta Air Lines Inc. 2011 2012 2013 2014 WACC 8.00%
Value Driver Estimation 36.30% 38.30% 38.30% 37.00% Cost of Debt 6.00%
Normal Cash 8%Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
NOPLAT Computation
Net Sales $ 36,670 $ 37,773 $ 40,362 42,206$ 44,245$ 46,438$ 48,672$ 50,735$
cost of good sold $ 34,495 $ 34,373 $ 38,156 37,607$ 38,832$ 40,215$ 41,506$ 42,800$
Implied Interest on Operating Lease $ 740 $ 619 $ 688 591$ 631$ 657$ 601$ 577$
EBITA $ 1,435 $ 2,781 $ 1,518 4,008$ 4,782$ 5,566$ 6,565$ 7,357$
Provision for Income Taxes $ 16 $ (8,013) $ 413 652$ 928$ 1,197$ 1,521$ 1,784$
Tax shield on Interest Expense(+) $ (385) $ (326) $ (241) (63)$ (59)$ (60)$ (54)$ (44)$
Tax shield on Implied Lease Interest(+) $ 283 $ 237 $ 255 219$ 234$ 243$ 223$ 214$
Tax on Miscellaneous $ 10 $ 8 $ 80 30$ 30$ 30$ 30$ 30$
(Minus) Adjusted Taxes (85)$ (8,102)$ 427$ 808$ 1,103$ 1,381$ 1,689$ 1,954$
DT Liablities 585$ 673$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$
DT Current Assets(‐) 463$ 1,736$ 3,275$ 3,455$ 3,644$ 3,845$ 4,056$ 4,278$
DT Long‐term Assets(‐) ‐$ 4,992$ 4,320$ 4,557$ 4,557$ 4,557$ 4,557$ 4,557$
Net DT Liabilities 122$ (6,055)$ (1,045)$ (1,102)$ (913)$ (713)$ (502)$ (279)$
(Plus )Net change in DT Liabilities (6,177)$ 5,010$ (57)$ 190$ 200$ 211$ 223$ 279$
NOPLAT (4,656)$ 15,893$ 1,034$ 3,390$ 3,879$ 4,396$ 5,098$ 5,683$
Invested Capital Computation
Operating Current Assets:
Normal Cash 2,416$ 2,844$ 2,088$ 661$ 967$ 2,362$ 3,247$ 4,059$
Accounts Receivable, Net 1,693$ 1,609$ 2,297$ 1,353$ 1,456$ 1,563$ 1,693$ 1,609$
Prepaid expenses & other current assets 1,344$ 1,318$ 733$ 748$ 763$ 778$ 793$ 809$
Inventory 1,023$ 1,063$ 852$ 1,250$ 1,237$ 1,185$ 1,256$ 1,197$
Operating Current Assets 6,476$ 6,834$ 5,970$ 4,012$ 4,423$ 5,888$ 6,990$ 7,674$
Operating Current Liabilities:
Accounts Payable 2,293$ 2,300$ 2,622$ 2,456$ 2,540$ 2,627$ 2,717$ 2,811$
Air traffic liability 3,696$ 4,122$ 4,296$ 4,597$ 4,918$ 5,263$ 5,631$ 6,025$
Defferred Revenue 1,806$ 1,861$ 1,580$ 2,132$ 2,241$ 2,359$ 2,478$ 2,588$
Accrued Expenses 1,680$ 1,926$ 2,266$ 2,153$ 2,196$ 2,240$ 2,285$ 2,331$
Other Liabilities 1,583$ 1,723$ 2,127$ 1,678$ 1,764$ 1,856$ 1,950$ 2,037$
Operating Current Liabilities 11,058$ 11,932$ 12,891$ 13,017$ 13,660$ 14,345$ 15,063$ 15,792$
Net Operating Working Capital (4,582)$ (5,098)$ (6,921)$ (9,005)$ (9,237)$ (8,458)$ (8,073)$ (8,118)$
Plus: Net PPE 20,713$ 21,854$ 21,929$ 21,659$ 21,560$ 21,588$ 21,679$ 21,617$
Indentifiable intangibles, net 4,679$ 4,658$ 4,603$ 4,548$ 4,493$ 4,438$ 4,383$ 4,328$
Plus: PV of Operating Leases 12,329$ 10,320$ 11,464$ 9,857$ 10,521$ 10,954$ 10,023$ 9,624$
Other noncurrent assets $ 1,092 $ 1,303 $ 1,010 1,092$ 1,181$ 1,277$ 1,381$ 1,493$
Less: Other Operating Liabilities $ 3,696 $ 4,122 $ 4,296 4,597$ 4,918$ 5,263$ 5,631$ 6,025$
Invested Capital 30,535$ 28,915$ 27,789$ 23,555$ 23,599$ 24,536$ 23,762$ 22,918$
ROIC ‐14.98% 52.05% 3.58% 12.20% 16.47% 18.63% 20.78% 23.91%
EP (7,143)$ 13,450$ (1,681)$ 815$ 1,750$ 2,288$ 2,908$ 3,617$
FCF (4,112)$ 17,512$ 2,160$ 7,624$ 3,834$ 3,458$ 5,873$ 6,526$
CV Growth 3.00%Fiscal Years Ending Dec. 31 2014A 2015E 2016E 2017E 2018E 2019E
Implied Constant WACC 9.26% 9.15% 9.08% 9.04% 8.97%
Cost of Equity 11.25% 10.96% 10.69% 10.41% 10.14% 9.87%
FCF to Discount $ 7,624 $ 3,834 $ 3,458 $ 5,873 $ 83,237
CV $ 83,237
Discount period 1 2 3 4 4
Discount Factor 1.09 1.19 1.30 1.41 1.41
PV of FCF 6,977.71$ 3,218.53$ 2,664.79$ 4,154.27$ 59,030.50$
Sum PV 76,046$
Adjustment
Add: ST Investments 1,217$
Add: Excess Cash 1,921$
Less: Total Debt (9,777)$
Less: PV of Operating Lease (11,464)$
Less: PV of ESOP (272)$
Less: Underfunded Pension (7,315)$
Value of Equity 50,356$
Share of Outstanding 845
Intrinsic Value of Stock 59.59$
EP Model
NOPLAT 3,390$ 3,879$ 4,396$ 5,098$ 5,683$
Beg. IC 27,789$ 23,555$ 23,599$ 24,536$ 23,762$
End IC 23,555$ 23,599$ 24,536$ 23,762$ 22,918$
Change in IC (4,234)$ 44$ 937$ (775)$ (843)$
ROIC 12.2% 16.5% 18.6% 20.8% 23.9%
EP 815$ 1,724$ 2,254$ 2,880$ 3,551$
EP to discount $ 815 $ 1,724 $ 2,254 $ 2,880
CV $ 59,475
Beg IC $ 27,789
Discount Period 1 2 3 4 4
Discount Factor 1.09 1.19 1.30 1.41 1.41
PV of EP 746$ 1,447$ 1,736$ 2,037$ 42,179$
Sum PV 75,934$
Adjestment:
Add: ST Investments 1,217$
Add: Excess Cash 1,921$
Less: Total Debt (9,777)$
Less: PV of Operating Lease (11,464)$
Less: PV of ESOP (272)$
Less: Underfunded Pension (7,315)$
Value of Equity 50,244$
Share of Outstanding 845
Intrinsic Value of Stock 59.46$
EP DCF
Adjected Price as Nov 16,2014 65.16$ 65.16$
Delta Air Lines Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
EPS 1.31$ 1.86$ 2.40$ 3.05$ 3.57$
Key Assumptions CV growth 3.00%
CV ROE 17.77%
Cost of Equity 10.96% 10.69% 10.41% 10.14% 9.87%
Future Cash Flows P/E Multiple (CV Year) 12.1032
EPS (CV Year) 3.57$
Future Stock Price 43.24$
Dividends Per Share
Future Cash Flows 0.25$ 0.35$ 0.46$ 0.58$ 0.68$
1 2 3 4 4
Discounted Cash Flows 0.28 0.35 0.46 0.58 43.24
Intrinsic Value 12/31/2014 44.63$
Price as of Today (11/13/2015) 48.65$
Delta Air Lines Inc.Relative Valuation Models
EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16
AAL American Airlines $46.50 $9.39 $6.05 5.0 7.7 8.2 0.60 0.94
ALK Alaska Airlines $77.68 $1.18 $1.48 65.8 52.5 18.9 3.49 2.78
JBLU JetBlue Airways $25.41 $0.91 $1.08 27.9 23.5 53.5 0.52 0.44
LUV Southwest Airlines $46.96 $0.59 $0.91 79.6 51.6 28.9 2.76 1.79
SAVE Spirit Airlines $35.36 $0.72 $1.03 49.1 34.3 16.1 3.06 2.14 ALGT Allegiant Air $195.56 $1.90 $2.07 102.9 94.5 32.9 3.13 2.87
Average 55.1 44.0 2.3 1.8
DAL Delta Air Lines Inc. $50.70 $ 4.63 $ 5.73 11.0 8.8 0.4 31.1 25.1
Implied Value:
Relative P/E (EPS15) $ 254.91
Relative P/E (EPS16) 252.22$
Delta Air Lines Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Liquidity RatiosCurrent Ratio (C.A./C.L.) 0.61 0.62 0.68 0.74 0.66 0.67 0.71 0.76 0.84
Cash Ratio ((Cash + S.T.)/C.L.) 0.28 0.25 0.27 0.20 0.13 0.15 0.22 0.27 0.32
Operating Cash Flows/ Current L 0.22 0.19 0.32 0.29 0.16 0.25 0.26 0.28 0.31
Activity or Asset‐Management RatiosReceivables Turnover (Rev./Ave. Assets) 23.26 22.52 22.88 20.67 19.59 21.45 21.40 21.33 21.23
Asset Turnover Ratio (Rev./ Ave. Rec.) 0.81 0.83 0.78 0.76 0.80 0.86 0.89 0.90 0.92
Fixed Asset Turnover (Rev./ Ave. PPE) 1.81 2.17 3.99 3.39 11.88 17.32 21.61 29.55 42.10
Financial Leverage RatiosDebt/Equity Ratio (Total Lib./ Total E.) ‐32.16 ‐21.91 3.49 5.14 4.11 3.47 2.97 2.48 2.04
Debt Ratio (A./L.) 0.97 0.95 1.29 1.19 1.24 1.29 1.34 1.40 1.49
Interest Coverage Ratio (operating income/ interest exp.) 1.81 2.17 3.99 3.39 11.88 17.32 21.61 29.55 42.10
Profitability RatiosROE ( NI/AVE. E.) ‐342.28% ‐57.22% 221.61% 6.44% 11.81% 14.69% 16.33% 17.74% 17.77%
ROA (NI/ Ave. A.) 1.97% 2.29% 21.78% 1.24% 2.11% 3.08% 3.89% 4.79% 5.48%
EBIT Margin 5.31% 5.53% 8.95% 4.27% 4.58% 6.03% 7.31% 8.75% 9.74%
Payout Policy RatiosPayout Ratio 0.00% 0.00% 0.97% 37.97% 19.00% 19.00% 19.00% 19.00% 19.00%