Delta Air Lines, Inc. DAL Exhibits Consistent Results Krause Fund Research

Krause Fund Research
Spring 2016
Consumer
Discretionary
Delta Air Lines, Inc. (NYSE: DAL)
Recommendation: Hold
April 19, 2016
Current Price
46.55
Target Price $50 - $56
Analysts
Eric Hale
[email protected]
DAL Exhibits Consistent Results
Nick Steingreaber
[email protected]
Company Overview
Delta Air Lines, Inc. (NYSE:DAL) has proven to be a global
leader within the airline industry. Primarily, Delta provides
value through domestic flights, but also offers international
flights. Internationally, Delta segments revenue through Pacific,
Atlantic and Latin American flights. If there is capacity on the
plane, Delta will also ship cargo as an additional source of
revenue. For the fiscal year ended 12/31/15, Delta’s total
passenger revenues totaled just over $34BB and total operating
revenue rose 0.85% to $40.7BB.
Investment Thesis
Delta is known for providing reliable air travel, exceptional
customer service and convenience for consumers. The company
has solidified itself as a top player in the airline industry by
surviving various airline bankruptcies and economic downturns.
Recently, oil prices have dropped to prices that have not been
seen in over a dozen years. Though Delta’s management has
been working to renegotiate hedging contracts to have access to
cheaper fuel, Delta still has one of the worst hedging positions in
the industry. Delta will struggle to lower ticket prices and spur
demand because margins are already low, but the company will
rely on expansion efforts, customer service and infrastructural
reliability to continue to drive revenue growth into the future.
One Year Stock Performance
• Delta cannot lower ticket prices as drastically as competitors
who have better hedging positions. Therefore, Delta will
struggle to reap the full benefits of the low oil prices before
prices will likely rise again in the near future. We expect Delta
to experience temporarily decreased margins before the
industry’s cost of goods sold playing field is leveled again.
• Heavy expansion into the Latin American market as well as
optimization efforts in the Atlantic segment will drive revenue
and earnings. The increased earnings per share may allow Delta
to increase dividends, but we expect EPS to stabilize at a level
that does not generate an outstanding competitive advantage.
• The demand for airline tickets will always be present
because of the convenience that air travel provides. So, we
believe that the airline industry will eventually rebound from
low margins. While the company will inevitably last, the lack of
capitalization on current economic trends speaks to a hold rating.
Financial Ratios
Current Ratio
Debt to Equity
0.52
0.77%
Stock Performance Highlights
52 week High
52 week Low
Beta Value
Average Daily Volume
$52.77
$34.61
1.31
9.83 MM
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (FY ‘15)
P/E Ratio
Dividend Yield
Dividend Payout Ratio
$36.24 BB
$797 MM
$13.61
$5.68
8.27
1.09%
7.92%
Company Performance Highlights
ROA
ROE
Sales
8.44%
46.04%
$40.7 BB
1
Important disclosures appear on the last page of this report.
Executive Summary
We recommend a HOLD rating on Delta Air Lines, Inc.
(NYSE:DAL) as of April 19th, 2016. Evaluating Delta’s
discounted cash flows and placing heavy emphasis on the price
to equity ratios of Delta’s peers, we have concluded that Delta’s
target price is $51 - $56.
The domestic flight will continue to be the major driver of
revenue, but there will be a saturation of the domestic market
which will lead to expansion into other markets. Delta also is
able to maintain relevancy by relying on subsidiaries and joint
ventures that span over 57 countries and six continents. (21)
Further, Delta will continue to turnover the current fleet of
airplanes to provide the utmost level of efficiency and customer
satisfaction. Additionally, Delta will need to address the rise of
low cost carriers and try to maintain their favorable market
share.
Delta has sustained major industry consolidation and has
maintained industry leading on-time rates. So, we have deduced
that Delta will continue to be a top presence within the airline
industry. However, we believe that the current low oil prices will
incentivize Delta to lower ticket prices, slashing margins when
oil prices inevitably rise. Expansion into underutilized markets
will allow the company to hedge against the margin losses as a
result of rising oil price but will not be significant enough to
justify a BUY rating.
Source: Fred Economic Data (2)
Consumer Confidence
Consumer confidence, a gauge of consumer’s feelings on the
economy, political stabilization, and future outlook for their
financial health is one of the most important indicators to look at
when forecasting the future of airline ticket sales. When
consumer confidence is high, the average consumer feels that
their future financial health is stable or rising and is therefore
more likely to spend money on discretionary items. The specific
value of the consumer confidence index is not as important as
the general trend of the index. Looking at the trends of the index,
the U.S. consumer, over the last year, is near its most confident
level since Q4 2006.
Macroeconomic Outlook
Gross Domestic Product
The real gross domestic product (GDP) is a measure of the
goods and services produced in a country during a given period
of time, after adjusting for inflation. GDP is an important
statistic to look at because it reflects the state of the economy
fairly accurately. This is important because consumers are more
likely to spend money on “discretionary” items such as
automobiles, vacations, and other luxury goods when the
economy is doing well and they have excess money to spend. (1)
Since the financial crisis of 2009, parts of the economy have
been recovering rapidly, but GDP growth has been stagnant
between 1.5% and 2.5% over the last six years. Our team
believes that while Real GDP is usually a good indicator for
discretionary sales, other indicators such as consumer
confidence, interest rates, oil prices, and employment statistics
are currently better indicators because they are measurements
and indicators that are more closely related to consumers.
Going forward, our estimate for 2016 GDP growth is 1.8%
because of headwinds from rising interest rates and the
economic uncertainty that has led the S&P 500 index into a near
14% decline from its 2,100 level in October, 2015 before
rebounding in March 2016 to 2,094 as of April 18, 2016. In
addition, a global downturn has strengthened the U.S. Dollar and
hurt exports.
Source: U of Michigan, FRED Economic Data (3)
Looking at the consumer confidence levels, it should not be a
surprise that 2015 was a strong year for the airlines. When
consumers are confident that they are in a financially stable
environment they are more likely to take on risk (debt) than if
they were unsure about their job security, political instability or
future inflation rates.
We believe that the slight downtick in the consumer confidence
index in January and February were reflections of the poor
equity market performance and expect that consumer confidence
will rise to its 2015 highs in 2016. This is important to our
model because we expect North American air transportation to
remain steady.
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Important disclosures appear on the last page of this report.
Interest Rates
The US and global economies are in a peculiar time for
monetary policies. Never before has the world seen such
intervention by central banks to influence interest rates around
the world. The US Fed raised its Fed Funds rate by 0.25%, from
0.25% to 0.5%, in December 2015. Originally, the Fed stated
that it intended to raise its rates by 0.25% four times in 2016.
However, with the early volatility in the markets the Fed has
backed away from that stance and failed to raise rates in March.
Fed Chairwoman, Janet Yellen, has also seemed to take a more
dovish stance on raising rates and signaled that the Fed now
plans to do so only twice during 2016. As the graph shows, a 10year treasury note yielded about 5% before the recession but
now yields only 1.8%. This marked decrease in interest rates
have propelled the recovering economy forward, but if the Fed
waits too long, inflation could get out of control and put the U.S.
right back into a recession.
Gasoline may be one of the largest expenses a household has and
is definitely one of the most visible and volatile. We believe that
lower gasoline prices are one of the reasons that consumer
confidence has been so high over the last year. The lower gas
prices put more money into consumer’s pockets and make them
better off financially. This, in turn, raises the consumer
confidence index. With the US personal savings rate at only
5.5%, it leads us to believe that 94.5% of the money saved at the
pump is being spent in the economy. (5) Since this is excess
money that a consumer probably did not budget for, it is more
likely that they will spend it on discretionary items such as
vacations and airline tickets. We believe that the combination of
a high consumer confidence index and low jet fuel prices is a
major indication that airfare ticket sales will continue to increase
over the next year.
Oil will continue to be volatile throughout 2016, but will not
begin to make significant price movements upward until Q2
2017. We believe this because of our analysis of oil production
and demand. The below EIA graph shows this imbalance
between supply and demand.
In addition to the EIA forecast, we believe that Iranian oil
coming to market will keep oil prices around the mid-$30s to
low-$40s during 2016.
Source: FRED Economic Data (4)
Interest rates are a very important factor in the financing
decisions a company makes. Delta has new planes ordered for
the future, and lower interest rates will help keep debt levels
down for in the near future. We expect the Fed to continue to
influence interest rates upward over the next several years, but
we think that they will be much less inclined to do so during
2016.
We also take the expectation of higher interest rates into
consideration when forecasting capital expenditures. Delta has
future aircraft ordered and interest rates will affect borrowing
rates. We believe that the expectation of rising interest rates may
lead Delta to borrow and invest more now, so that they can avoid
the higher rates several years from now.
Global Oil Prices
Oil prices were in freefall from the summer of 2014 to midFebruary 2016. This sharp price decline erased $80 from a barrel
of oil when it hit its low of $26. Since mid-February oil has
rallied to as high as $40 a barrel and now sits around $42. Lower
oil has many effects on our outlook for Delta, but it mainly
affects these indicators through its production and purchase of in
gasoline and jet fuel.
Source: EIA Data (6)
In the long-run, we believe that oil will not get much higher than
$55 per barrel throughout our forecast horizon, to FY ‘20E. This
will still translate into relatively cheap gasoline prices when
compared to the $4-5 per gallon we saw when oil was more than
$100 per barrel. We forecast that oil will remain below $60 per
barrel because that is the typical break-even price for most
American fracking companies from exploration to extraction.
The slowdown in supply that people were expecting from lower
prices is not occurring because existing fracking-wells have a
break-even price of around $28 per barrel. We expect for oil
prices to remain between $30 and $60 for the foreseeable future.
Near the lower end of this price corridor, we estimate that airline
fuel costs will be at record lows in the years to come. As oil
approaches the upper-end of the corridor, airlines will still have
more breathing room and less costs than it did in the recent past.
Current Employment Statistics
As previously discussed, discretionary spending is highly-linked
to the strength of the spending environment. There are three
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Important disclosures appear on the last page of this report.
main requirements, which apply to the average consumer, for
spending money on discretionary items.
1. Employed
2. Making a fair wage
3. Confidence in their future employment status
We believe that these are the three main items that lead
consumers to spend more freely. (7)
Employed
Currently, the official unemployment rate sits at 5.0%, which is
still slightly higher than the unemployment rate before the
financial crisis, 4.6%. With interest rates remaining low for the
near future, we see the trend in unemployment continuing
downward to about 4.6% within the next two to three years.
minimum wage as a key issue in their platforms and we suspect
that this will be on of their first priorities if they become
President of the United States.
A rise in wages, whether from market-forces or political
interaction, will have positive effects on discretionary spending.
Effects from a higher national minimum wage could have a
substantial effect because these employees will have a higher
percentage increase in income (some up to 100%), which they
could spend on a nice vacation.
Confidence for the Future
The third item that is a large influencer of discretionary spending
is the consumer’s confidence in their future financial stability.
With wages rising and unemployment falling or remaining flat,
we expect that consumers will remain as confident, if not more
confident, than compared to today. Certain issues could
negatively affect confidence for the future such as political
instability, rising inflation rates, and stock market turmoil.
However, within the next two years, we believe that the only
possibility of a marked decrease in confidence is in the event of
stock market volatility.
Overall, the employment statistics and outlook are very good for
the discretionary sector and airlines. We expect that a falling
unemployment rate, higher wages, and a flat to rising confidence
in the future will positively impact Delta.
Market Outlook
Source: FRED Economic Data (8)
As the unemployment rate continues to near 4.5%, which we
believe to be the full-employment rate, the pressure on wage
growth will begin to increase America’s wages.
Making a Fair Wage
Much of this political season has revolved around families and
workers who believe that they are not being paid a fair wage.
This unfair wage could be due to a national lack of wage growth
or because the minimum wage is too low. Either way, we believe
that both will be increasing in the near future.
The national stagnation of wages has mostly occurred because
there are many people still searching for jobs, post-recession.
When there is a supply of qualified labor there is no incentive
for businesses to raise wages to attract the most-qualified.
However, now that the US is approaching full employment,
businesses are running out of qualified labor and will have to
begin to raise wages to attract qualified talent to their businesses.
We also believe that the minimum wage rising is likely to
happen. There are already cities and states that are raising the
minimum wage above the $7.25 national minimum, and we
expect this trend to continue as it becomes an even bigger issue
as the U.S. approaches the 2016 presidential elections. California
has recently raised its minimum wage to $15, and we suspect
that economists and politicians will be looking at the outcome of
this “experiment” to determine if it would be beneficial for the
entire nation. Both Democratic candidates have raising the
This year began with high market volatility and a 10.7% drop in
the S&P 500 from January 1st to February 11th. Since then,
however, stocks have rallied to post gains, up 1.96% YTD, with
the S&P 500 around 2,080. With the Fed signaling a more
dovish position on interest rate hikes we forecast that the S&P
500 will trade in the 2,000 to 2,125 range for the year as the
markets worry about interest rate hikes later in the year. We
believe that the movements of the overall market will have a
negligible effect on Delta during 2016 unless another
unexpected downturn occurs, in which Delta will be negatively
impacted due to the perceived correlation between stock market
health and economic health.
Industry Analysis
Overview
The airline industry provides air transportation for paying
passengers. Current product lines are regional, mainline and
cargo. Fee structures vary per product line with regional and
mainline carriers offering coach, first, and business class seating
choices. There are significant differences in passenger buying
habits between leisure and business travelers. Leisure travelers
plan out their trips and related flights far in advance, and are
extremely price sensitive. They will check daily to find the
lowest price. On the other hand, business travelers are less price
sensitive, with more precise dates and times, shorter notice, and
a larger budget, so they usually will not spend significant time
checking for lower fares. The number of leisure travelers has
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Important disclosures appear on the last page of this report.
been growing since the end of the financial recession. The graph
below illustrates this growth and we believe this will be a
continued benefit for the entire industry.
Source: Statista, Leisure Travel (9)
Revenue streams result from ticket prices, baggage and other
customer fees, beverage and inflight entertainment and cargo
services. Lower cost carriers keep ticket prices down but tack on
higher seating, baggage, and beverage costs.
Falling Oil Prices
Airlines are looking forward to more ideal margins due to falling
oil prices. Prices have fallen from over $100 a barrel to currently
in the $40 range. This price transition has propelled
administrative expenses over fuel costs to be the highest cost
category. Fuel costed airlines 32% less in 4Q 2015 compared to
a year ago. (10) Unfortunately, the airline industry hedges their
contracts with oil companies to lock in a stable price for a couple
years into the future. This has kept profits from soaring this year;
however, airlines will be reaping the benefits as the years
progress. Delta has one of the worst hedging positions in the
industry, and we believe this might keep the stock price from
moving as much as it would have otherwise.
With low oil prices comes low gas prices at the pump for
travelers. Families will have to make a decision whether or not it
is worth it to drive to their destination and benefit from $2 per
gallon gas prices. Leisure travelers may believe fares are
unreasonably high considering low jet fuel costs. This pressure
from leisure travels might end up forcing some airlines in the
industry to make price changes to reflect the low jet fuel costs to
help keep passengers flying to their destinations.
The airline industry is in the mature stage due to segmented and
stable services, fewer increases in technology, and significant
consolidation. Any new initiatives are by way of low cost fee
structures or access to new cities.
Industry Trends
Consolidation
The airline industry offers a similar service regardless of what
airline you choose to fly you are still traveling from point A to
point B. Each airline essentially provides the same function, thus
the industry is very price competitive. Major consolidation in the
past ten years has paved the way for rapid revenue growth, high
demand and less competition. Delta acquired Northwest in 2008,
United bought out Continental in 2010, and American merged
with US Airways in 2013 to form the largest airline in the world.
Less competition, with fewer global carriers, has helped to keep
prices relatively high. We believe that this will continue to
benefit Delta, as they look to remain a major player in global
aviation.
Source: Macrotrends: Five year oil price
Fewer Empty Seats
Industrywide passenger load factor, which is the percentage of
seats filled, has increased over the years and currently sits at
83.4%. (11) Higher safety records have played a crucial role in
increasing demand for airline tickets. Air incidents are at an alltime low, and recent issues have been the fault of the pilot or
training rather than complications of the aircraft. Passengers
trust the newer airplanes and more advanced technology. (12) The
rise of internet booking sites has helped airlines fill their
perishable seats with last second cheap rates. S&P Capital IQ
expects the supply-demand equation to continue to shift in favor
of the airlines. Domestic consumers are likely to face similar or
even higher industrywide airfares over the next couple of years.
(11)
Source: Company 10-K’s
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Important disclosures appear on the last page of this report.
Bureau of Transportation Statistics – Load Factor (13)
Price Sensitivity
Corporations have become more price sensitive than in the past
with cuts in corporate travel budgets and fewer employees
traveling. They also plan out and make ticket purchases further
in advance. E-commerce has increased rapidly in the recent past.
Internet airfare booking websites have helped both businesses
and leisure travelers save on ticket prices. This will continue to
be a negative for airlines as they are unable to squeeze the same
amount of profit out of their passengers. To counter this
movement in price sensitivity, airlines have updated their
business class sections to appeal to these travelers with more leg
room, comfortable seats, and in-flight services. (11) Airlines
charge more for their business section, and these prices tend to
fluctuate less than economy class ticket prices. Below is a graph
illustrating the rise in e-commerce in the United States.
Source: Statista Travel (14)
We believe online ticketing will eventually take over the entire
booking market, and that will hurt the airlines ability to charge
higher fares. Passengers will continue to search sites like Orbitz,
Travelocity and Expedia to pull up flights from every single
carrier in one simple search, locking in the lowest price.
Pilot Unions
It has not always been smooth sailing for the airline industry.
For many years, airlines were failing to turn a profit and were
forced to keep pilot wages extremely low. Pilots, flight
attendants and grounds crews suffered with low pay while the
industry was transitioning back into a profitable business. Now
that oil prices are at record lows, and ticket prices have remained
stable, pilots and other unions are demanding higher wages.
Airlines will be forced to react, and this will cut into their
bottom line. Delta struggles more in comparison to their
competition because they pay their pilots some of the lowest
salaries in the industry. (15) We believe this will be a major issue
that they will need to correct if they want to continue to attract
new pilots to fly for them. Many baby boomer generation pilots
are reaching 65 years of age, and therefore a surge of retirements
are right around the corner. Delta might just find itself with a
pilot shortage if they do not increase their salaries and
compensation. Young pilots come fresh out of a four year
university saddled with large student loans to pay in addition to
the cost of aviation schooling. They will be looking to take the
largest starting salary they can find in an already initially low
paying industry for co-pilots of regional carriers. Highly skilled
pilots help pave the way for important industry metrics such as
on time arrivals and safety records. Delta could potentially slip
in these categories that they are currently excelling in if they are
unable to corporate with the pilot union.
Competition
Domestically, the U.S. market share war, and even more so, low
cost carriers, is causing airfares to remain steady, even as
inflation is driving other prices upwards. The domestic market
has the highest yields globally after years of capacity constraint,
making it prime for expansion. Lower cost carriers are leading
the expansion charge and starting to change the market share
landscape. (16) Currently there are four major carriers in the
United States: Delta, United Continental, American, and
Southwest. The big four carriers account for 68.8% of the
market share. Low cost and regional carriers are beginning to
model themselves after Southwest and are drawing customers
away from the big four. Allegiant, Spirit Airlines, Alaskan
Airlines, Virgin America, JetBlue and Frontier are growing and
expanding their fleet and destinations. Airlines are fighting for
customers over the exact same routes as other airlines.
Internationally, the Open Skies Policy from 2008 allowed U.S.
carriers to enter into European Union Skies via flights departing
from the United States. (11) This has helped the industry recently,
however, the international outlook overseas looks weak in the
near future. Global economic growth is slowing, especially in
China and there are monetary and safety concerns in much of
Europe. Additional carriers in Asia and the Middle East have
made additions to their fleets and routes and have a loyal
customer following. Look for Delta to streamline their
international routes, optimizing their cost structure.
Comparable Companies
We gathered the data in the table below to analyze the
comparable domestic airlines. These airlines operate fairly
similarly across the board. We did not include low cost carriers
because we believe their company structures are not similar
enough, and therefore the related statistics would not be useful.
One concern that Delta is addressing is their current aging fleet,
and so the company has orders in place for new models.
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Important disclosures appear on the last page of this report.
Company
P/E
DAL
8.3
AAL
3.71
UAL
2.96
LUV
14.37
Op. Margin
WACC
Rev p/ASM
19.2%
9.7%
13.2
15.1%
8.5%
12.1
13.6%
8%
12.3
20.8%
9.5%
13.0
Domestic Market
Share
EPS
Load Factor %
16.9%
14.9%
14.7%
18%
5.63
86.8%
11.07
85.6%
19.47
85.6%
3.27
85.4%
Fleet Age
16.9
12
13.4
13.8
41.12
946
31,576
57.59
715
23,406
46.94
704
29,728
Price
46.55
Mainland Fleet
926
Dom. RPMs (m)
25,972
Source: Bloomberg Data
Porter’s Five Forces
Threat of New Entrants: Weak
The likelihood of new entrants has decreased after the
consolidation time period with smaller and more modern carriers
struggling to be profitable. (11) Small airlines that are becoming
more profitable however are looking into potential mergers.
Alaskan Airlines is in the process of buying out Virgin America.
This trend of low-cost mergers is more likely for the airline
industry rather than start-up airlines. We believe low cost
carriers will continue to put pressure on larger carriers. Delta and
other mainland carriers may have to slightly alter their models to
keep up with new trends in customer preferences. In addition to
consolidation, the world is mainly covered and airlines now
stretch across continents, leaving nearly no new available
markets for growth opportunities.
Threat of Substitution: Moderate
Major cities and routes that offer multiple flights per day have a
strong threat of substitution. Customers can simply choose the
cheapest fare. They are also able to drive a few hours to airports
that offer different carriers or potentially low cost direct flight
options to save money. Major mergers have hurt the threat of
substitution recently. Many regional carriers went out of
business or were bought out during and after the financial
recession.
Power of Buyers: Weak
The rise of e-ticketing has helped shift some of the purchasing
power onto the buyers, allowing customers to search out the
lowest fares possible. However, currently, there is high demand
for tickets, and this has kept ticket prices relatively high.
Airlines also do not offer an entirely uniform service. Customers
have specific needs in regards to destination and timing
preferences. There is potential for only one flight that works for
that customer, and thus they are stuck with whatever price the
airline has set for that day.
Competitive Rivalry: High
The level of concentration is not expected to increase
significantly in the near future. Any further mergers between
these major airlines will likely be denied. (11) The shrinking
number of competitors will likely allow for continued capacity
restraint and potential fare increases once oil prices stabilize.
Consolidation allowed airlines to redeploy and correctly size
their capacity to a set-up that is most profitable. Redundant and
unprofitable routes are likely to be streamlined. This capacity
reduction should lead to customers chasing fewer seats. With
fewer airlines out there, capacity additions during future upcycles could be more muted than in the past. (11) Airlines will
continue to fight for the same passengers, but with fewer options
out there to choose from, they are not struggling to fill their
seats.
Catalysts for Growth & Change
High Traffic & Competitive Pricing
Though increased traffic does not always indicate a direct
correlation with profitability, increased traffic does aide in
boosting revenue. With additional revenue, an airline can then
focus on minimizing cost to boost profitability. However, when
increasing traffic to spur growth, an airline must be considerate
of the yield from increased traffic to avoid spending money to
gain market share. An airline's pricing model can be a doubleedged sword. On one hand, high prices almost always generate
high yields. On the other hand, being price competitive with the
rest of the industry will likely generate more ticket sales. Finding
the balance between high-yield pricing while maintaining high
traffic is the crucial factor in growth within the airline industry.
(11)
Power of Suppliers: Moderate
Aircraft manufacturers are the main area of the supply chain and
are limited in number. Boeing and Airbus almost sweep up the
entire market for new jet airplanes. This results in poor
bargaining power for the airlines. However, with airlines placing
bulk orders for future airplanes, they have the power to bargain
with both Boeing and Airbus, and potentially Embraer, to try to
cut the best deal. Airlines also are forced to play by the airports’
rules if they want to land and operate there. Fees can be hefty
and negotiating power is small. (17)
Low Costs
Recently, labor has surpassed fuel as the largest cost for airlines.
Additionally airlines are beginning to re-hedge their contracts
with oil companies while oil trades at such a low price.
Guaranteeing access to such low oil prices into the future will
likely cut one of the industry's largest cost line item in half,
swelling the bottom line. Minimizing costs in all aspects allows
the industry to compensate for any potential loss in revenue or
air traffic. With more fuel efficient, reliable planes entering the
market, cutting costs will become easier and more accessible.
So, taking all measures to cut costs is necessary for an airline
attempting to emerge as the forerunner in the industry. (18)
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Industrywide there has been an increase in jet orders, with
airlines racing to fill their fleet with the latest safety technology
and fuel efficient planes. Long term, airlines with state of the art
aircraft will save on fuel costs. An increase in safety reports will
also boost air travel and increase demand. Below is a graph
showing the general rise in jet orders per year from the two
larger aircraft manufacturers.
Source: Delta Air Lines, Inc.
Corporate Strategy
Source: WSJ (19)
Managerial Strength
Having top management who can recognize and act on the
opportunities in the market can make a company successful. For
example, failure to recognize the long term profitability of an
investment on a newer, safer, more reliable, more efficient plane
would be detrimental to a company's bottom line. Managers who
are not driven towards profitability will likely hinder the growth
of the company. Effective management boosts employee morale
by creating efficient pilot scheduling and compensation
packages. As a company builds a reputation as the best group to
work for in the industry, the company can reasonably count on
quality employees to apply for jobs as well as great customer
service. Industry leading customer service is arguably the most
important intangible in regards to boosting a company’s revenue
and growth. (20)
Company Analysis
Company Overview
Delta Air Lines, Inc. (NYSE:DAL) has always been a global
leader within the airline industry. Primarily, Delta provides
value through domestic flights, but also offers international
flights and will ship cargo as well. Internationally, Delta
segments revenue through Pacific, Atlantic and Latin American
flights. If there is capacity on the plane, Delta will also ship
cargo as an additional source of revenue. For the fiscal year
ended 12/31/15, Delta’s total passenger revenues totaled just
over $34BB and total operating revenue rose 0.85% to $40.7BB.
With large hubs in Atlanta, Cincinnati, Detroit, Memphis,
Minneapolis, New York, Salt Lake City, Amsterdam and TokyoNarita, Delta provides over 13,000 daily flights to 341 locations
in 61 countries. The majority of Delta’s service is sourced
domestically as displayed by the North American flight map
below.
Delta Air Lines, Inc. places strong emphasis on having global
reach to every major market. The company utilizes international
joint ventures with Air France-KLM, Alitalia and Virgin
Atlantic as well as alliances with AeroMexico, GOL and China
Eastern and regional carriers like SkyWest, Inc., Shuttle
America, Compass, GoJet and Endeavor Air in order to have
access to gateway hubs that provide an entry point for global
marketing.
Monroe Energy, LLC is Delta’s wholly-owned oil subsidiary
which significantly helps to mitigate the cost of the refining
margin. As northeastern refineries face the risk of closing their
doors, Monroe is solidified as a crucial component of Delta’s
strategy to guarantee adequate fuel supply to major New York
hubs at JFK and LaGuardia. The plant is capable of refining
195,000 barrels of crude oil for jet fuel as well as a variety of
non-jet fuel products. While Monroe is wholly owned by Delta,
the refinery still operates as a distinct entity under different
management teams then Delta. (21)
Delta seeks to gain a competitive advantage through customer
loyalty. The main driver of Delta’s customer loyalty success is
the Frequent Flyer Program, SkyMiles. Passengers can earn
credit through flying on any Delta flight, including subsidiaries
and participating airlines. Further, passengers may earn mileage
credit through Delta’s credit card as well as car rentals, hotel
bookings or by purchasing the mileage credit. Currently 7.2% of
revenue miles come as a result of award travel. This program
differentiates itself greatly from other airlines because the miles
never expire. In 2015 alone, Delta customers redeemed over 312
BB miles. (21)
Operational reliability is also a major component of Delta’s
corporate strategy. Among major U.S. carriers, Delta
consistently is a top-ranked company in terms of completion
factor and on-time rate. Improving 69% from 2014, Delta
operated 161 days with zero mainline flight cancellations while
posting an on-time rate of 85.9%.
A large product of Delta’s maturity as a company is significant
market share. Second behind American Airlines Group, Inc.,
Delta holds 18.4% of the market share. In part, this large market
8
Important disclosures appear on the last page of this report.
share came as a result of Delta’s 2008 acquisition of rival
Northwest Airlines.
Products
Delta segments their revenue into seven primary sections:
Domestic, Atlantic International, Pacific International, Latin
American International, Regional Carriers, Cargo and Other.
The following pie chart displays the total revenue breakdown for
Delta’s main products.
Source: IBISWorld
Cargo,
2.00%
Financial Summary
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (‘15)
P/E Ratio
Dividend Yield
Dividend Payout Ratio
$36.24 BB
$797 MM
$13.61
$5.68
8.27
1.09%
7.92%
DAL FY '15 REVENUE
Other,
12.55%
Regional
Carriers,
14.46%
Latin
American,
5.93% Pacific,
7.38%
Domestic,
44.06%
Atlantic,
13.63%
Source: Delta Air Lines, Inc. 2015 10-K
Company Performance Highlights
ROA
ROE
Sales
8.44%
46.04%
$40.7 BB
Financial Highlights for Fiscal Year ‘15
•
Total operating revenue grew just 0.85% to $40.7 BB. Many
of Delta’s revenue segments reported significant decreases
for the year, but a strong 5.38% increase in domestic
operations to just over $18 BB was able to provide a hedge
against the struggling segments.
•
Despite a very modest revenue increase, Delta experienced a
very commendable year for earnings reporting a net income
of $4.5 BB, a 587% increase from FY ’14.
•
Delta has been taking large steps towards repaying much of
the long term debt that has been on the balance sheet as a
result of the 2008 acquisition. Delta’s total debt decreased
nearly $2 BB over FY ’15 and will continue to be paid off
into the future.
•
The dividend paid to shareholder’s increased by $0.15 per
share to $0.45. Excitingly for shareholder’s, at the beginning
of FY ’16, Delta announced that the firm will raise the
annual dividend yet again to $0.54 per share. As earnings
will likely increase, look for the dividend to increase
proportionally.
Revenue Decomposition
Delta’s main source of revenue is overwhelmingly dominated by
passenger travel. In FY ’15, passenger revenue decreased 0.49%
and accounted for 85.45% of total operating revenue. The
strongest growth (14.19%) was seen in the “Other” segment of
revenue which includes SkyMiles sales, transatlantic joint
venture settlements and Monroe’s sales of non-jet fuel products
to various third parties.
Domestic
Domestic flights have always been the backbone of Delta’s
operations. This segment describes all flights that take off and
land within the United States. The airline experienced extremely
strong performance in Atlanta, New York, Seattle and Los
Angeles, but in an effort to expand into underutilized markets
while avoiding being wasteful, we expect the domestic flight to
experience modest growth and remain between 45% - 47% of
total operating revenue. The growth in this segment will slow in
relationship with the saturation of the United States market.
Atlantic International
The Atlantic International segment includes all international
flights that take passengers over the Atlantic Ocean. The
segment’s revenue fell 4.11% due to poor performance by the
African, Middle East and Russian regions. Though European
markets were strong, political turmoil in the Middle East, Russia
and now even Europe will discourage travel to these regions. We
expect revenues to fall sharply until unrest in the Atlantic
International segment settles within the coming years.
Pacific International
The Pacific International segment includes all international
flights that transport passengers over the Pacific Ocean. This
segment performed the worst of any revenue segment, with
revenues decreasing 12.25%. Delta is seeking to optimize the
Pacific region through seasonal route cancellations, seasonal
high-capacity aircraft retirements and investing in a relationship
with underrepresented China Eastern. So, while revenues will
still be decreased into the near future, the optimization strategy
will allow for higher margins coming from the Pacific region in
the near future.
Another pressing reason for the decrease in revenue is the
strength of the US Dollar to the Japanese Yen (USDJPY=X). At
the end of FY ’14 and throughout FY ’15, the USD grew in
9
Important disclosures appear on the last page of this report.
strength significantly which discouraged travel from Japan to the
US. We believe the outlook for FY ’16E is more optimistic
because the JPY has since rebounded which will ideally spur
demand for Pacific travel, as displayed by the following chart.
Other
The Other segment primarily includes SkyMiles sales,
transatlantic joint venture settlements and Monroe’s sales of
non-jet fuel products to various third parties. Strong emphasis by
management to market the never-expiring aspect of the
SkyMiles boosted revenues in this section, but high revenue
growth in this segment is relatively uncharacteristic. Customer
loyalty programs will stimulate revenue growth, but at a
reasonable level.
Significant Customers
Source: Yahoo Finance
Latin American International
The Latin American International segment describes all
international flights that transport passengers to anywhere to and
from Latin America. Latin American travel revenues decreased
$9 MM during FY ‘15, but more importantly, capacity grew
5.7%. We expect the most growth over our forecast horizon to
come in this segment as Delta optimizes their flight patterns to
divest resources away from the struggling Brazilian economy
and invest resources into more profitable and popular vacation
destination markets such as Mexico and the Caribbean.
Regional Carriers
The two segments of customers that utilize Delta’s services are
business and leisure travelers. The former is characterized by an
emphasis on being able to fly into a convenient location at a
convenient time in order to make a meeting or presentation.
They prefer to be connected at all times and expect to receive all
available amenities on flights due to their high loyalty. Leisure
travelers, on the other hand, are significantly more price
sensitive and follow the recommendations of friends and
families, rather than abiding by the schedule of colleagues. They
are enticed by travel packages or specials and prefer to have
more entertainment opportunities outside of the core function of
the airline. (23) So, if ticket prices fall with the renegotiation of
oil contracts, decreasing airline costs, demand should rise in the
leisure travelers while business travelers will remain constant.
The graph on page 5 illustrates this trend in leisure traveler
growth.
S.W.O.T. Analysis
Strengths
Cargo
Since the merger with Northwest, Delta has nearly perfected its
Maintenance, Repair and Overhaul (MRO) division, referred to
as TechOps. Without allocating any additional resources, Delta
was able to turn TechOps from a cost center to a profitable
business which is being contracted out to other airlines. TechOps
is the largest MRO group in the world and has helped Delta keep
aircraft in world-class shape. (16) We believe that the remarkable
overhaul in Delta’s MRO division has led, and will continue to
lead, to higher customer satisfaction because aircraft will always
be ready to fly. This means that even fewer flights will be
cancelled and safety ratings will continue to grow.
Cargo revenue is generated from filling the designated cargo
area of the plane on regularly scheduled domestic and
international flights. Delta does not place heavy emphasis on this
section, but in order to generate strong revenue, the company
relies on a fuel surcharge. However, during FY ’15, fuel
surcharges for cargo transport on all domestic and international
flights fell to $0.00. (22) Fuel surcharges will increase again in the
future, allowing for Delta to earn more in this segment, but
discounting this segment entirely will undeniably keep revenue
growth low.
Among traditional carriers, Delta ranks second in terms of
customer satisfaction. The metric was based on seven factors
that encompass the entirety of the flight experience from
reservations to baggage claim. (11) We believe that Delta’s
addition of the Comfort+ seating option, exceptional in-flight
amenities and reliability are generating revenue through
attracting customers who seek a comfortable and convenient
travel experience. The following graphic shows that Delta is
nearly 20 points above the segment average and has the highest
rating among the big four players in the airline industry.
Delta’s growth in revenue from regional carriers experienced a
decrease of 6.1% due to an initiative to restructure the domestic
fleet. This initiative removed 30 50-seat aircraft and thereby
decreased the regional carriers’ capacity by 4.0%. The capacity
decrease will likely continue to have an impact on revenue into
FY ’16E, but once the restructure is complete, revenues should
steady once again.
10
Important disclosures appear on the last page of this report.
Opportunities
In Q4 of FY ’15, Delta acquired six slot pairs at LondonHeathrow airport for $276 MM. (21) In a struggling Atlantic
International segment, Delta has a viable opportunity to expand
travel to Europe. Further, those who currently travel to Europe
will be provided a higher degree of convenience as a result of
the acquisition. We believe the stability and flexibility that the
acquisition brings to Delta as well as Delta’s customers present a
crucial opportunity to expand into a market that was previously
dominated by only one partnership.
Source: J.D. Power (29)
Weaknesses
In an initial effort to save money on fuel costs, many airlines,
including Delta, were burned when oil prices fell in late 2015.
Though Delta was able to exit many of the oil contracts, the
airline estimates that they could continue to lose $200 MM per
quarter while trying to lock in current low oil prices. We believe
that Delta’s operating expenses will fall but because Delta’s oil
hedges were so high to begin with, the firm will struggle to
compete with groups like American Airlines who decided not to
hedge any oil contracts and are now paying no more than $1.53
per gallon. (24)
Though Alaska Air ultimately secured the acquisition of Virgin
America, Delta was initially mentioned as a potential buyer. As
low-cost carriers are beginning to gain market share in the
airline industry, we believe that expanding Delta’s operations to
include a low-cost subsidiary like Virgin America could allow
the company to capture the benefits of both traditional and lowcost air travel. Further, acquiring a low-cost carrier could help
Delta expand its geographic reach as well as eliminate another
competitor in the market. Though Delta is not known to be
actively seeking a company to acquire, the opportunity could
prove to be quite lucrative.
Threats
Delta is in danger of being pushed out of a large portion of
market share by the rise of low cost carriers. A worldwide
representation of the growing frequency of travelers choosing
low cost carriers is displayed below.
Delta’s pilot union is seeking a 40% increase in salary, which is
said to be returning wages to 2004 levels. As displayed by the
chart below, Delta’s pilot union does have a convincing
argument for why wages need to be raised – they have a far
lower base salary than leading competitor, American. (15)
Source: OAG
Source: CNN
If this salary hike is to go through, we believe that the increased
costs will be offset by a decrease in profit sharing bonus checks
to employees because Delta’s net income will be significantly
lower. However, we view this as a major weakness because
Delta’s management will not concede easily to such a drastic
increase in wages, so employee-management synergy will be
hindered.
So, unless Delta can combat the competitive pricing advantage
that these carriers have, they will likely struggle to maintain
market share. While business travelers will still travel on major
airlines for the convenience and amenities, the younger
generations will be drawn to low cost carriers because they can
plan spontaneous trips for a remarkably low price. We believe
that these younger consumers are not nearly as concerned with
the in-flight amenities, rather they seek the opportunity to get
from point A to point B as cheaply as possible.
With political unrest at an all-time high in the Middle East, Delta
has already seen the negative impacts of terrorism. After terrorist
attacks in Belgium, Delta’s stock price fell. Additionally, Delta
acknowledged the potential that their jet fuel supply could be cut
off due to terrorist attacks on Monroe or other oil refineries. The
11
Important disclosures appear on the last page of this report.
potential of the disruption in Delta’s fuel supply could create a
“material adverse effect” on Delta’s operations. (21) If terrorism
were to continue into airports or onto aircraft, both leisure and
business travelers would be strongly discouraged from choosing
to travel on Delta’s airlines as well as their competitors.
Key Investment Considerations
Positives
The primary investment positive is the continued strong demand
for Delta’s services. On an earnings call in mid-January of 2016,
Chief Executive Officer Richard Anderson stated that Delta was
booked through early summer in terms of their load factor. (28)
We believe that if demand is remaining high before ticket prices
have even begun to drop, margins will soar. The stock price
should benefit from the strong earnings that will be released in
late April.
The consolidation of airlines protects the current big four players
in the industry from being pushed out by a new competitor. The
current market shares of the big four players are such that their
customer bases are unlikely to become disloyal to the brand.
Delta proves itself as a mature member of the airline industry
that has survived major consolidations and never declared
bankruptcy. We see this reliability as an indicator of strength in
potential economic turmoil indefinitely past our forecast
horizon.
Airline safety is at an all-time high – per every 2.38 million
flights, there is only one fatal accident. (25) So, the segment of
the population who would rather drive as a means of travel
rather than fly due to fear or anxiety are more likely to engage in
air travel. We believe that once these customers are comfortable
with flying, Delta’s superior on-time rating and lack of
cancellations will convince those consumers to become repeat,
loyal customers. So, even if oil prices eventually drive ticket
prices up in the long haul, Delta will be able to rely on a vast
customer base.
Negatives
Low oil prices do benefit the Delta by increasing margins, but
low oil prices also benefit a consumer who wishes to travel by
car. Gasoline prices are at lows that have not been seen in years
and ticket prices have yet to drop, so traveling by car is
remarkably cost efficient. We believe the cost efficiency of low
gas prices could drive demand away from air travel if ticket
prices remain unchanged for much longer.
Consumer spending had slowed down during the Q4 2015 which
could be attributed to relatively poor economic growth. (26) With
consumers being left strapped for disposable income because the
economy is slow-growing and leisure travelers making up the
majority of Delta’s customers, we believe that Delta will
struggle to be able to convince even loyal leisure travelers to
take spontaneous vacations rather than saving money for
necessary expenses.
With the decrease in oil costs, a bidding war could occur,
slashing Delta’s margins. Because airlines have room to give if
operating expenses are significantly lower, we believe the first
airline to drastically decrease ticket prices will claim a large
portion of the market share for that time period. Over the past
three quarters, Delta has had hedging losses of nearly $2 BB,
over three times the amount of hedging losses of the next closest
loser, United. (27) Because Delta’s oil contracts keep their
operating expenses so much higher than that of their peers, we
believe that Delta will not be the first to lower prices because
they do not have as much room to give in terms of their profit
margin.
Valuation Analysis
Valuation Summary
Primarily, we utilized the Discounted Cash Flow and Economic
Profit (DCF and EP) and Relative Valuation models because
Delta has reasonably predictable future cash flows. We gave
little credence to the Dividend Discount Model (DDM) because
Delta’s dividend yield is so low that the model does little to give
an accurate representation of the intrinsic value of the stock.
We assigned a 50% weight to our DCF and EP models’ average
intrinsic value of $51.54, a 30% weight to the Relative PE
model’s intrinsic value of $57.99 and just a 20% weight to the
DDM’s intrinsic value of $33.77 to reach an indicated intrinsic
stock price of $50.06. This is just under five dollars higher than
close on 4/18/2016.
The following analysis describes in detail the key assumptions
that drive our model.
Income Statement Assumptions
Revenue Decomposition
We decomposed our revenue as per the breakdown found in
Delta’s 10-K. Revenue was broken into the following seven
categories: Domestic, Atlantic, Pacific, Latin America, Regional,
Cargo and Other. The following analysis describes how we
reached our forecast conclusions regarding these segments.
The model is consistent with Delta’s reliance on passenger
revenue as the primary driver of total operating revenues.
Passenger revenue includes revenues sourced from all Domestic,
Atlantic, Pacific, Latin American and Regional Carrier flights.
Taking into consideration the guidance provided in a recent
Delta earnings report, we are forecasting total passenger
revenues to decrease by 1.78% in FY ‘16E. While the industry is
experiencing increased demand for airline travel, Delta will
likely not reap the full benefits of the increased demand because
of their projected lack of ability to decrease prices and remain
competitive. Further, we believe that even if Delta can drop
ticket prices, other airlines will be able to do so as well which
means Delta is not expected to increase the number of tickets
sold, rather revenues will decline due to the same number of
tickets being sold at a discounted price.
We do not expect the drop in revenue to be made up for by nonpassenger revenues, Cargo and Other, creating a forecasted
0.94% decrease in total operating revenues for FY ‘16E.
12
Important disclosures appear on the last page of this report.
Regardless, we believe that Delta will regain revenue
performance as other airlines will have to raise ticket prices
when oil prices increase. So, operating revenues are projected to
grow positively in FY ‘17E and reach terminal value at a growth
rate of 2.91% in FY ‘20E.
Non-passenger revenue is expected to increase as a result of
revenues stemming from the Other segment. Because oil is
trading at such low levels, the demand for non-jet fuel products
is also high. So, we forecasted the 5.00% growth for FY ‘16E
and 2.00% terminal value growth in the production and sales of
non-jet fuel products by Monroe, Delta’s wholly-owned oil
refining subsidiary. We anticipate another negative performance
from the Cargo segment in FY ‘16E because of non-existent fuel
surcharges. However, due to the cyclical nature of such
surcharges, we analyzed historical performance to determine that
cargo revenues will increase at a terminal value of 2.00% as
well.
Cost of Goods Sold (COGS)
Over the past eight years, Delta’s COGS averaged just under
78% of total revenues. However, in FY ‘15, COGS fell to
65.72% largely as a result of the falling oil prices which
decreased Delta’s fuel expense by nearly 44%. Overall, we
expect fuel expenses to continue to be volatile in FY ‘16E, but
the rising costs in nearly all other areas of operation will
overwhelm the potential savings, thus eventually increasing
COGS again. So, we forecasted COGS to remain at 66% for FY
’16E and grow to 70% in FY ’17E before rising back to terminal
value of 77% in FY ’18E.
Aircraft Fuel and Related Taxes
While Delta has been able to renegotiate many of the hedging
contracts, there are still many concrete contracts that cause Delta
to be unable to take full advantage of current low oil prices.
Regardless, Delta’s fuel expense is still expected to decrease into
FY ‘16E due to renegotiated hedging contracts. The major
savings as a result of these renegotiated contracts is the primary
justification for the stagnation in COGS for FY ‘16E. Moving
forward, we do not expect oil prices to return to levels that
caused Delta’s COGS to be over 78% of revenues. However, we
do expect oil prices to gradually rise and thus drive a gradual
increase in COGS over the forecast period to eventually reach a
constant 77%.
Regional Carriers Expense
Regional carriers expense is the third largest component of
COGS and moves in relation to the cost of fuel. So, as fuel
expenses decreased over the past year, regional carriers expense
decreased 19% as well. We utilized the relationship between fuel
expense and regional carriers expense to identify an additional
barrier from other rising operating expenses, allowing us to
forecast COGS at a slowly increasing percentage of total
revenues.
Landing Fees and Other Rents
Next, Delta recently acquired additional terminal space at
London-Heathrow. This has a few important implications on
Delta’s landing fees and other rents that also mitigate the
decreased fuel expense. First, the additional spaces will result in
additional rental expenses for the airline. Further, having
increased terminal space indicates an increase in traffic, and so
as landing fees become more expensive, the accrual more
landing fees will mitigate fuel savings.
Depreciation and Amortization
Depreciation expense was determined by using an eight year
historical average of depreciation expense as a percentage of
gross Plants, Property & Equipment (PPE). Depreciation
expense was forecasted as 5% of gross PPE, and depreciation
expense is forecasted to continue to rise throughout the forecast
period as Delta continues to make additional capital
expenditures. As per Delta’s annual report, we forecasted
amortization of intangible assets to be consistent with the
company’s expectation of $17 MM per year through our
terminal value year of FY ‘20E.
Selling, General & Administrative Expense (SG&A)
Delta’s primary SG&A expenses include passenger commissions
and advertising expense. We forecasted the account as 4.3% of
sales based on historical levels over the past eight years. Delta’s
annual report indicates that these expenses increase in relation to
sales, and the market will become increasingly competitive with
decreasing ticket prices, so advertising expenses will likely
increase in order to allow Delta to maintain market share.
Balance Sheet Assumptions
Salaries and Related Costs
Cash
Further, for the first time in Delta’s history, FY ‘15 salaries and
related costs surpassed fuel expense. The ongoing negotiations
over increasing pilots’ salaries will likely reach resolution and
full implementation within the next fiscal year, which will lead
to rising salary expenses. Independent of the current
negotiations, effective as of December 1, 2015, base pay rates
increased 14.5% for eligible employees excluding pilots. So, the
full effect of the base pay increase will be reflected in the FY
’16E financial statements. The rising cost of salaries is expected
to be the largest factor that mitigates the cost-savings coming
from fuel expense.
Cash was forecasted as a plug account using the forecasted cash
flow sheet to identify the forecasted change in cash over each
year. Utilizing the account as a plug allowed our forecasted
assets to equal our forecasted shareholders’ equity and liability.
The largest change in cash is expected to come in FY ‘16E as a
result of Delta’s aggressive share repurchasing plan that will be
highlighted later in the report.
13
Important disclosures appear on the last page of this report.
Capital Expenditures
Weighted Average Cost of Capital (WACC)
Capital expenditures were fundamental in determining our target
price range because of the extremely high value of Delta’s
aircraft. Delta’s guidance regarding purchases of new aircraft for
FY ‘16E indicated that the company is planning to purchase 57
new aircraft. This level of buying is consistent with an average
of close to 55 new aircraft each year. So, we assume maintaining
the consistent 5% growth rate in PPE to continue throughout the
forecast period.
In order to account for the changing capital structure as a result
of large debt repayments, our model utilizes a variable WACC
calculation to determine the implied constant WACC for each
year of our forecast. In order to find beginning values for each
component of our variable WACC calculation, we computed the
constant WACC for FY ’15.
Pension, Postretirement and Related Benefits
During FY ’15, Delta decreased the underfunded pension,
postretirement and related benefits liability by 8.5%. This
contribution was identified as making more than the minimum
payment of less than $500 MM. Delta’s management provided
insight that contributions towards the underfunded pensions
would total at least $1 BB. Our model is consistent with this
guidance but moving forward into FY ‘17E, we do not expect
Delta to be able to make payments as far in excess of the
minimum requirement because of decreasing profit margins as
COGS rise again. So, we forecasted the funding payments to be
8% per year. Delta has until FY ’31 to fully fund the pensions.
Debt
Over the past six years, Delta has reduced their principal amount
of debt by $9.8 BB. This alludes to the aggressive policy to
repay outstanding debt that lingers from the acquisition of
Northwest in order to drastically reduce the high interest expense
that is negatively impacting the bottom line. We forecasted Delta
to repay 10% of their debt annually in order to compensate for
the additional debt being issued in order to finance the continual
capital expenditures for updating the airline’s fleet. We expect
Delta to continue repaying the debt at a high rate so we kept the
debt repayment forecast constant over the forecast period.
Treasury Stock
A large increase in treasury stock is seen in FY ‘16E as the result
of management’s announcement in May of FY ’15 to repurchase
$5 BB worth of stock by the end of FY ’17E. We identified the
value of the shares yet to be repurchased is $1.975 BB worth of
shares per year over FY ’16E and FY ‘17E. Using the current
stock price as a proxy for FY ‘16E, we determined that roughly
42.4 MM shares will be purchased in FY ‘16E. Growing the
stock price by the cost of equity, we determined that 39.2 MM
shares will be repurchased in FY ‘17E, leaving 716.5 BB shares
outstanding at year end. Though we cannot forecast future stock
repurchase plans, we continued to forecast the growth in shares
outstanding by dividing the options outstanding (5.3 MM shares)
by the average time to maturity (ten years).
The repurchase plan also aided in mitigating a rapid fluctuation
in the model’s cash plug. Further, Delta’s forecasted retained
earnings account is also kept in a reasonable level due to the
large cash outflows in order to return capital to investors.
Delta did not provide any guidance regarding the direction of the
capital structure. Our forecast is based on the strong initiative to
continue repaying short term debt, long term debt and leases. For
the variable WACC calculation, we forecasted a decrease in the
market value of Delta’s debt of 1% per year. Through FY ‘20E,
we forecast market value of debt to decrease 5% as a part of the
capital structure from 35% to 29%. Likewise, market value
equity increased 5% from 66% to 71%.
Cost of Equity (Re)
Our model uses the Capital Asset Pricing Model (CAPM) to
determine the appropriate cost of equity. So, we forecasted the
risk-free rate, market risk premium and beta for each year of the
variable WACC calculation. We determined the risk-free rate by
using the 2.73% yield-to-maturity on the 30-Year Treasury Bond
as a proxy for an investment with the no risk.
Because we are not able to determine an absolute value to
forecast the market risk premium, we used the approximation
constructed by Aswath Damodaran, a professor at New York
University. We believe that this is the most effective market risk
premium because the 4.57% serves as a reasonable compromise
near The Street’s consensus.
Finally, we calculated the initial beta value of 1.2152 by taking
the five year average of Delta’s raw, unadjusted weekly betas
from Bloomberg. We believe that as Delta pays off outstanding
debt, their operational risks will decline, so we forecasted beta to
decrease by 0.01 each year in the variable WACC calculation.
We believe that in FY ‘20E, a beta of 1.18 is consistent with the
risks of a company with a 71%/29% D/E capital structure.
Cost of Debt (Rd)
To determine the most accurate pretax cost of debt, we used the
yield-to-maturity on the longest outstanding debt available.
Thus, we used the 3.47% yield-to-maturity on Delta’s 22-year
corporate bond as the pretax cost of debt for each year of the
variable WACC calculation.
WACC
Combining the aforementioned assumptions, we determined our
WACC to range from 6.24% in FY’ 16E to 6.31% in FY ‘20E.
The implied constant WACC increased by an average of 0.014%
per year. We used these costs of capital as discount factors
throughout the model.
14
Important disclosures appear on the last page of this report.
Discounted Cash Flows (DCF) and Economic Profit
(EP)
The DCF and EP models generated slightly different intrinsic
stock prices as a result of utilizing the variable WACC. So, we
determined the intrinsic value to be $51.81, the average of the
two models’ outputs, adjusted for the price on 4/19/2016. In
comparison to Delta’s closing price on 4/18/2016 of $46.55, the
models indicate just an 11.3% upside potential for capital gains.
We believe that the moderate upside potential is due to the
following three reasons. First, the likelihood for a future spike in
COGS puts Delta in a tough position generate high free cash
flows. Second, Delta reinvests a significant portion of revenues
into turning over aircraft inventory, limiting free cash flows.
Finally, Delta struggles to maintain high ROIC as a result of low
profit margins while maintaining consistent capital expenditures.
Dividend Discount Model (DDM)
The DDM provides an intrinsic stock value of $33.77, adjusted
for 4/19/2016. Clearly, this intrinsic value is an anomaly – not
only in comparison to the other models, but industry competitors
as well. Valuing Delta based on the DDM is inherently
problematic because Delta’s dividend payout ratio is so low. As
of 4/19/2016, Delta’s dividend payout ratio was only 0.967%.
We are not in a position to forecast any dramatic increases in
Delta’s dividend, so the DDM will likely continue to be a poor
indicator of Delta’s stock value.
Relative P/E
The Relative P/E ratio generates an intrinsic stock value of
$57.99. After removing the clear outliers in Allegiant Travel
Company and JetBlue Airways Corporation, we compared the
P/E ratios for American Airlines Group Inc., United Continental
Holdings, Inc., Southwest Airlines Co. and Spirit Airlines. For
FY ‘16E and FY ‘17E, the average P/E ratio among competitors
as determined by their respective earnings per share (EPS) was
9.1 and 8.4, respectively.
We applied the P/E multiple of 9.1 to our forecasted EPS for FY
‘16E of $6.40 which generated the intrinsic value of $57.99. We
believe that this model is credible representation of the stock
value because all airlines operate in very similar spaces. There is
little room for differentiation within the airline industry, so the
P/E multiples that other major airlines are trading at serve as a
reasonable proxy for Delta’s stock value.
Beta vs Market Risk Premium %
The assumption of the market risk premium can be widely
controversial depending on the type of analyst. Bullish analysts
will have a greater risk premium and thus a higher cost of equity.
A more bearish outlook lowers the cost of equity and therefore
the discount rate, raising the share price in our model. Changes
in Delta’s beta will also have a substantial effect on the discount
rate in each of our valuation models. The risker the company
becomes, the lower the intrinsic value of the firm.
COGS CV (as a percentage of sales) vs SG&A CV (as a
percentage of sales)
The sensitivity comparison between two key cost assumptions
will show the major valuation differences in various cost
percentages. Fuel prices have historically been the highest cost
for airlines. Forecasting cost of goods sold represents our beliefs
on where oil prices are heading. Even a slight 2% increase in
COGS will decrease the stock price by about $20. Changes in
selling, general and administrative costs as a percentage of sales
will have less of a dramatic impact on the valuation.
PPE (as a percentage of sales) vs Marginal Tax Rate
Forecasting property plant and equipment factors in future
aircraft orders and terminal slots. Delta has a consistent number
of planes being delivered in the next five years. Pressure from
other airlines who are completely renovating their fleet causes
Delta to do the same and look towards newer, more fuel efficient
aircraft. Future government regulations could change our
forecasted marginal tax rate, but we do not look for this to have
a significant effect on our valuation models.
Revenue Growth Rate CV vs Risk Free Rate
Our most important assumption in the model is the continuing
value revenue growth rate. It is also the variable that has the
highest chance of changing in five years and is the most difficult
to forecast. Recent growth for Delta has been tremendous for the
company, but difficult to maintain. The global growth outlook
for air travel may change if terrorist threats, such as ISIS,
continue to grow. This would hurt all competitors in the aviation
industry. The long term risk free also fluctuates greatly.
Decisions the FED will make in the coming years about whether
or not to raise the Federal Funds rate will have an immense
impact on the risk free rate.
2016 Dividend vs Cost of Debt
Sensitivity Analysis
Constructing the complex model that we have, there are multiple
key assumptions that have been mentioned. In order to
understand the impact that these assumptions have on our
intrinsic stock value as produced by our DCF and EP models,
the following analysis regarding our sensitivity tables will
display the monumental influence that seemingly miniscule
changes in various assumptions can have on the intrinsic stock
value.
Our dividend discount valuation model mistakenly indicates
Delta’s current stock price is severely overvalued. This is due to
the extremely low dividend yield. Delta has been paying more
back to their shareholders in recent years by increasing their
dividend. If low jet fuel costs allow the aviation industry to reap
favorable margins, look for dividends to increase across the
board. The cost of debt will likely not waiver considerably, so
the primary driver of this sensitivity analysis is Delta’s
executives’ decisions to manipulate dividends in 2016 and
beyond.
15
Important disclosures appear on the last page of this report.
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16
Important disclosures appear on the last page of this report.
Important Disclaimer
This report was created by students enrolled in the Applied
Equity Valuation (FIN:4250) class at the University of Iowa.
The report was originally created to offer an internal
investment recommendation for the University of Iowa
Krause Fund and its advisory board. The report also provides
potential employers and other interested parties an example
of the students’ skills, knowledge and abilities. Members of
the Krause Fund are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment advice contained in this report does not represent
an offer or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the University
of Iowa, its faculty, staff, students, or the Krause Fund may
hold a financial interest in the companies mentioned in this
report.
17
Important disclosures appear on the last page of this report.
Delta Air Lines, Inc.
Revenue Decomposition
Fiscal Years Ending Dec. 31
Passenger Revenue (MM)
By Geography
Domestic
% of Total Operating Revenue
% Growth
Atlantic
% of Total Operating Revenue
% Growth
Pacific
% of Total Operating Revenue
% Growth
Latin America
% of Total Operating Revenue
% Growth
Total Mainline
% of Total Operating Revenue
% Growth
Regional Carriers
% of Total Operating Revenue
% Growth
Total Passenger Revenue
% of Total Operating Revenue
% Growth
Other Operating Revenue
Cargo
% of Total Operating Revenue
% Growth
Other
% of Total Operating Revenue
% Growth
Total Operating Revenue
% of Total Operating Revenue
% Growth
Other Financial/Statistical Data
Available Seat Miles (MM)
% Growth
Load Factor
% Growth
Revenue Passenger Miles (MM)
% Growth
Passgr Rev per Avail Seat Mile (Cents)
% Growth
2013
2014
2015
2016E
2017E
2018E
$ 15,204
40.25%
7.57%
$ 5,657
14.98%
2.59%
$ 3,561
9.43%
-1.60%
$ 2,112
5.59%
10.81%
$ 26,534
70.25%
5.41%
$ 6,408
16.96%
-2.63%
$ 32,942
87.21%
3.74%
$ 17,017
42.16%
11.92%
$ 5,826
14.43%
2.99%
$ 3,421
8.48%
-3.93%
$ 2,424
6.01%
14.77%
$ 28,688
71.08%
8.12%
$ 6,266
15.52%
-2.22%
$ 34,954
86.60%
6.11%
$ 17,933
44.06%
5.38%
$ 5,548
13.63%
-4.77%
$ 3,002
7.38%
-12.25%
$ 2,415
5.93%
-0.37%
$ 28,898
71.00%
0.73%
$ 5,884
14.46%
-6.10%
$ 34,782
85.45%
-0.49%
$ 18,125
44.95%
1.07%
$ 5,079
12.60%
-8.46%
$ 2,718
6.74%
-9.47%
$ 2,475
6.14%
2.49%
$ 28,396
70.43%
1.23%
$ 5,766
14.30%
-2.01%
$ 34,162
84.73%
-1.78%
$ 18,533
45.43%
2.25%
$ 4,903
12.02%
-3.46%
$ 2,660
6.52%
-2.14%
$ 2,596
6.36%
4.87%
$ 28,691
70.33%
1.04%
$ 5,823
14.27%
1.00%
$ 34,514
84.60%
1.03%
$ 19,154
45.63%
3.35%
$ 5,017
11.95%
2.33%
$ 2,733
6.51%
2.75%
$ 2,725
6.49%
5.00%
$ 29,629
70.58%
3.27%
$ 5,940
14.15%
2.00%
$ 35,569
84.74%
3.06%
$ 19,805
45.86%
3.40%
$ 5,125
11.87%
2.15%
$ 2,811
6.51%
2.88%
$ 2,848
6.60%
4.50%
$ 30,589
70.84%
3.24%
$ 6,059
14.03%
2.00%
$ 36,648
84.87%
3.03%
$
$
$
$
$
$
$
937
2.48%
-5.35%
$ 3,894
10.31%
-0.82%
$ 37,773
100.00%
3.01%
232,740
1.01%
83.8%
0.00%
194,988
1.04%
14.15
2.69%
934
2.31%
-0.32%
$ 4,474
11.08%
14.89%
$ 40,362
100.00%
6.85%
239,676
2.98%
84.7%
1.07%
202,925
4.07%
14.58
3.04%
813
2.00%
-12.96%
$ 5,109
12.55%
14.19%
$ 40,704
100.00%
0.85%
794
1.97%
-2.31%
$ 5,364
13.30%
5.00%
$ 40,321
100.00%
-0.94%
810
1.99%
2.00%
$ 5,472
13.41%
2.00%
$ 40,796
100.00%
1.18%
826
1.97%
2.00%
$ 5,581
13.30%
2.00%
$ 41,976
100.00%
2.89%
2019E CV 2020E
843
1.95%
2.00%
$ 5,693
13.18%
2.00%
$ 43,184
100.00%
2.88%
2021E
2022E
$ 20,488
46.10%
3.45%
$ 5,235
11.78%
2.15%
$ 2,896
6.52%
3.01%
$ 2,976
6.70%
4.50%
$ 31,596
71.09%
3.29%
$ 6,180
13.91%
2.00%
$ 37,775
85.00%
3.08%
$ 21,195
46.34%
3.45%
$ 5,348
11.69%
2.15%
$ 2,983
6.52%
3.01%
$ 3,110
6.80%
4.50%
$ 32,636
71.35%
3.29%
$ 6,303
13.78%
2.00%
$ 38,939
85.13%
3.08%
$ 21,926
46.57%
3.45%
$ 5,463
11.60%
2.15%
$ 3,073
6.53%
3.01%
$ 3,250
6.90%
4.50%
$ 33,712
71.61%
3.30%
$ 6,429
13.66%
2.00%
$ 40,141
85.27%
3.09%
$
$
$
860
1.93%
2.00%
$ 5,807
13.07%
2.00%
$ 44,442
100.00%
2.91%
877
1.92%
2.00%
$ 5,923
12.95%
2.00%
$ 45,739
100.00%
2.92%
894
1.90%
2.00%
$ 6,041
12.83%
2.00%
$ 47,077
100.00%
2.93%
246,764 254,062 261,683 269,534 277,620 285,949 294,527 303,363
2.96%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
84.9%
85.15%
85.41%
85.67%
85.92%
86.18%
86.44%
86.70%
0.24%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
209,625 213,818 218,094 222,456 226,905 231,443 236,072 240,793
3.30%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
14.10
14.24
14.38
14.67
14.96
15.26
15.57
15.88
-3.29%
1.00%
1.00%
2.00%
2.00%
2.00%
2.00%
2.00%
Delta Air Lines, Inc.
Income Statement
Fiscal Years Ending Dec. 31
Sales
COGS
Gross Profit
Depreciation
Amortization of Intangibles
Gross Income
SG&A Expense
Other Operating Expense
EBIT (Operating Income)
Nonoperating Interest Income
Other Income (Expense)
Interest Expense
Unusual Expense - Net
Pretax Income
Income Tax Expense
Net Income
2013
2014
2015
37,638 40,204 40,506
29,177 30,172 26,621
8,461 10,032 13,885
1,588 1,716 1,817
70
55
18
6,803 8,261 12,050
1,603 1,700 1,672
2,026 1,797 1,998
3,174 4,764 8,380
0
0
0
114
45
8
852
619
481
(91) 3,118
750
2,527 1,072 7,157
(8,013)
413 2,631
10,540
659 4,526
Earnings Per Share
Basic
Dividends per share
12.41
0.12
0.79
0.30
849
836
Weighted Average Shares Outstanding
Basic
2016E
40,321
26,612
13,709
1,382
17
12,310
1,734
1,814
8,761
289
806
7,666
2,837
4,830
2017E
40,796
28,557
12,239
1,420
17
10,801
1,754
1,836
7,211
260
816
6,136
2,270
3,866
2018E
41,976
32,322
9,655
1,458
17
8,180
1,805
1,889
4,486
234
840
3,413
1,263
2,150
2019E
43,184
33,251
9,932
1,496
17
8,419
1,857
1,943
4,619
210
864
3,545
1,312
2,233
2020E
44,442
34,220
10,222
1,536
17
8,669
1,911
2,000
4,758
189
889
3,680
1,362
2,318
2021E
45,739
35,219
10,520
1,577
16
8,927
1,967
2,058
4,902
170
915
3,817
1,412
2,405
2022E
47,077
36,249
10,828
1,620
16
9,192
2,024
2,118
5,049
153
942
3,954
1,463
2,491
5.68
0.45
6.40
0.54
5.40
0.59
3.00
0.60
3.11
0.61
3.23
0.61
3.35
0.62
3.46
0.62
797
755
716
717
718
718
719
719
Delta Air Lines, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31
Operating Activities
Net Income / Starting Line
Depreciation, Depletion & Amortization
Deferred Taxes & Investment Tax Credit
Other Funds
Funds from Operations
Changes in Working Capital
Receivables
Inventories
Accounts Payable
Other Assets/Liabilities
Net Operating Cash Flow
Investing Activities
Capital Expenditures
Net Assets from Acquisitions
Sale of Fixed Assets & Businesses
Purchase of Investments
Sale/Maturity of Investments
Other Funds
Net Investing Cash Flow
Financing Activities
Cash Dividends Paid
Repurchase of Common & Preferred Stk.
Sale of Common & Preferred Stock
Issuance/Reduction of Debt, Net
Change in Current Debt
Change in Long-Term Debt
Issuance of Long-Term Debt
Reduction in Long-Term Debt
Other Funds
Net Financing Cash Flow
Net Change in Cash
2008
2009
2010
2011
2012
2013
2014
2015
593
854
(8,922) (1,237)
1,523
1,511
1,266
1,536
(119)
(329)
9
(2)
7,910
720
441
302
2,554
2,677
135
690
(1,842)
689
278
157
(100)
(416)
147
(141)
----(1,073)
143
516
303
(46)
(97)
(353)
399
2,834
2,832
(1,707) 1,379
1,009 10,540
659
4,526
1,565
1,658
1,771
1,835
2,581
17 (7,991)
414
(263)
(447) 2,654 (2,357)
2,328
3,760
5,498
6,585
148
513
(613) 1,335
750
(116)
90 (1,224)
(451)
(87)
172
155
899
213
228
(201)
631
(184)
297
211
7,920
2,476
4,273
4,885
(1,202) (1,342) (1,254)
-100
36
1,078
-730
157
844
(63)
10
(10)
(1,008) (2,026) (1,498)
(1,968) (2,568) (2,249) (2,945)
-(276)
----1,498
1,795
958
1,319
1,019
1,117
1,533
739
(55)
14
48
25
(1,962) (2,756) (2,463) (3,955)
(1,522)
-154
92
-3,058
1,598
192
75 (2,592)
536
(300)
836
75 (2,592)
2,966
1,130
2,132
(1,296) (2,891) (3,722)
988
(94)
71
1,716
(19) (2,521)
1,607
352 (1,715)
(1,777)
(940)
(1,777)
(940)
2,395
1,924
(4,172) (2,864)
206
185
(1,571)
(755)
(235)
(241)
(102)
(250)
(1,193)
(1,193)
268
(1,461)
225
(1,320)
197
(251)
(1,100)
(1,908)
-(1,908)
1,020
(2,928)
19
(3,240)
(818)
(359)
(2,200)
(1,520)
-(1,520)
1,038
(2,558)
(9)
(4,088)
(123)
Delta Air Lines, Inc.
Balance Sheet
Fiscal Years Ending Dec. 31
Assets
Cash
Total Short Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
Property, Plant & Equipment
(Accumulated Depreciation)
PPE, net
Total Investments and Advances
Net Goodwill
Net Other Intangibles
Deferred Tax Assets
Other Assets
Total Assets
2,966
959
1,609
1,063
3,054
9,651
29,646
7,792
21,854
9,794
4,658
12,134
1,303
59,394
2,088
2,295
3,222
852
4,008
12,465
31,269
9,340
21,929
118
9,794
4,603
4,320
892
54,121
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Accrued Salaries & Benefits
Air Traffic Liability
Frequent Flyer Deferred Revenue
Other Accrued Liabilities
Fuel Card Obligations
Hedge Derivatives Liability
Total Current Liabilities
Long-Term Debt
Pension, Postretirement and Related Benefits
Deferred Tax Liabilities
Other Liabilities
Frequent Flyer Deferred Revenue
Total Liabilities
1,547
2,300
673
1,926
4,122
1,861
1,121
602
14,152
9,795
12,392
7,142
1,711
2,559
47,751
13,982
3,049
Common Equity and Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Other Appropriated Reserves (Pension)
Treasury Stock
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
2013
(5,130)
(258)
11,643
59,394
2016E
2017E
2018E
2019E
2020E
2021E
2022E
1,972
3,452
2,139
697
796
9,056
33,910
10,871
23,039
155
9,794
4,861
4,956
1,273
53,134
809
3,474
2,016
806
2,016
9,121
35,926
12,253
23,673
121
9,794
4,844
5,006
1,210
53,768
645
3,496
2,040
816
2,040
9,037
37,966
13,674
24,292
122
9,794
4,827
5,056
1,224
54,352
1,039
3,518
2,099
840
2,099
9,594
40,065
15,131
24,933
126
9,794
4,810
5,106
1,259
55,622
1,582
3,540
2,159
864
2,159
10,303
42,224
16,627
25,597
130
9,794
4,793
5,157
1,296
57,069
2,275
3,562
2,222
889
2,222
11,170
44,446
18,163
26,283
133
9,794
4,776
5,209
1,333
58,698
3,108
3,585
2,287
915
2,287
12,181
46,733
19,740
26,993
137
9,794
4,760
5,261
1,372
60,498
4,076
3,607
2,354
942
2,354
13,332
49,087
21,360
27,727
141
9,794
4,744
5,314
1,412
62,465
1,216
2,622
2,266
4,296
1,580
2,127
2,772
16,879
8,561
15,138
2,128
2,602
45,308
1,563
2,743
3,195
4,503
1,635
1,306
2,581
17,526
6,766
13,855
1,891
2,246
42,284
1,401
2,621
2,167
4,435
1,814
1,411
1,814
15,664
6,089
12,747
2,822
2,419
39,742
1,261
2,652
2,193
4,488
1,836
1,428
1,836
15,692
5,480
11,727
2,856
2,448
38,203
1,134
2,728
2,256
4,617
1,889
1,469
1,889
15,984
4,932
10,789
2,938
2,519
37,162
1,021
2,807
2,321
4,750
1,943
1,511
1,943
16,297
4,439
9,926
3,023
2,591
36,276
919
2,889
2,389
4,889
2,000
1,555
2,000
16,640
3,995
9,132
3,111
2,667
35,544
827
2,973
2,458
5,031
2,058
1,601
2,058
17,007
3,596
8,401
3,202
2,744
34,950
744
3,060
2,530
5,178
2,118
1,648
2,118
17,398
3,236
7,729
3,295
2,825
34,483
12,981
3,456
(16)
(7,295)
(313)
8,813
54,121
10,875
7,623
(61)
(7,214)
(373)
10,850
53,134
10,883
12,045
(61)
(6,493)
(2,348)
14,026
53,768
10,891
15,485
(61)
(5,843)
(4,323)
16,149
54,352
10,899
17,205
(61)
(5,259)
(4,323)
18,461
55,622
10,907
19,004
(61)
(4,733)
(4,323)
20,793
57,069
10,915
20,882
(61)
(4,260)
(4,323)
23,153
58,698
10,923
22,843
(61)
(3,834)
(4,323)
25,548
60,498
10,931
24,885
(61)
(3,450)
(4,323)
27,982
62,465
2014
2015
Delta Air Lines, Inc.
Cash Flow Statement
Fiscal Years Ending Dec. 31
Operating Activities
Net income
Depreciation & amort
Receivables
Inventories
Other Current Assets
Accounts Payable
Other Accrued Liabilities
Accrued Salaries & Benefits
Air Traffic Liability
Other Liabilities
Frequent Flyer Deferred Revenue
LT Frequent Flyer Deferred Revenue
Deferred Tax Assets
Pension, Postretirement and Related Benefits
Net Operating Cash Flow
2017E
2018E
2019E
2020E
2021E
2022E
4,830 3,866
1,399 1,437
123
(24)
(109)
(10)
(1,220)
(24)
(122)
31
105
17
(1,028)
26
(68)
52
931
33
179
21
173
29
(50)
(50)
(1,108) (1,020)
4,036 4,385
2,150
1,475
(59)
(24)
(59)
77
41
63
130
83
53
71
(51)
(938)
3,012
2,233
1,513
(60)
(24)
(60)
78
42
65
133
85
54
72
(51)
(863)
3,217
2,318
1,553
(63)
(25)
(63)
82
44
68
138
88
57
75
(52)
(794)
3,426
2,405
1,593
(65)
(26)
(65)
84
45
70
143
91
58
78
(52)
(731)
3,629
2,491
1,636
(67)
(27)
(67)
87
47
72
147
94
60
80
(53)
(672)
3,829
Investing Activities
Short Term Investments
CapEx
Other Assets
Total Investments and Advances
Net Investing Cash Flow
(22)
(22)
(22)
(22)
(22)
(22)
(23)
(2,016) (2,040) (2,099) (2,159) (2,222) (2,287) (2,354)
63
(14)
(35)
(36)
(38)
(39)
(40)
34
(1)
(4)
(4)
(4)
(4)
(4)
(1,940) (2,077) (2,160) (2,221) (2,286) (2,352) (2,421)
Financing Activities
ST Debt & Curr. Portion LT Debt
Long-Term Debt
Hedge Derivatives Liability
Common Equity and Additional Paid-In Capital
Treasury Stock
Dividends Paid
Other Appropriated Reserves (Pension)
Net Financing Cash Flow
(162)
(140)
(677)
(609)
(767)
21
8
8
(1,975) (1,975)
(408)
(426)
721
649
(3,259) (2,471)
Net Change in Cash
(1,163)
2016E
(164)
(126)
(548)
53
8
(430)
584
(459)
(113)
(493)
54
8
(435)
526
(453)
(102)
(444)
57
8
(439)
473
(448)
(92)
(400)
58
8
(444)
426
(443)
(83)
(360)
60
8
(449)
383
(440)
393
543
693
833
968
Delta Air Lines, Inc.
Common Size Income Statement
Fiscal Years Ending Dec. 31
Sales
COGS
Gross Profit
Depreciation
Amortization of Intangibles
Gross Income
SG&A Expense
Other Operating Expense
EBIT (Operating Income)
Nonoperating Interest Income
Other Income (Expense)
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Net Income
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
77.52% 75.05% 65.72% 66.00% 70.00% 77.00% 77.00% 77.00% 77.00% 77.00%
22.48% 24.95% 34.28% 34.00% 30.00% 23.00% 23.00% 23.00% 23.00% 23.00%
4.22%
4.27%
4.49%
3.43%
3.48%
3.47%
3.46%
3.46%
3.45%
3.44%
0.19%
0.14%
0.04%
0.04%
0.04%
0.04%
0.04%
0.04%
0.03%
0.03%
18.07% 20.55% 29.75% 30.53% 26.48% 19.49% 19.50% 19.51% 19.52% 19.53%
4.26%
4.23%
4.13%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
4.30%
5.38%
4.47%
4.93%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
8.43% 11.85% 20.69% 21.73% 17.68% 10.69% 10.70% 10.71% 10.72% 10.73%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.30%
0.11%
0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.49%
0.43%
0.37%
0.33%
2.26%
1.54%
1.19%
0.72%
0.64%
0.56%
-0.24%
7.76%
1.85%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
6.71%
2.67% 17.67% 19.01% 15.04%
8.13%
8.21%
8.28%
8.34%
8.40%
3.04%
3.06%
3.09%
3.11%
-21.29%
1.03%
6.50%
7.03%
5.56%
3.01%
28.00%
1.64% 11.17% 11.98%
9.48%
5.12%
5.17%
5.22%
5.26%
5.29%
Delta Air Lines, Inc.
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
Assets
Cash
Total Short Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
Property, Plant & Equipment
(Accumulated Depreciation)
PPE, net
Total Investments and Advances
Net Goodwill
Net Other Intangibles
Deferred Tax Assets
Other Assets
Total Assets
2.01%
1.58%
2.47%
3.66%
5.12%
6.79%
8.66%
7.88%
5.19%
4.87%
7.66%
7.84%
8.62%
8.57%
8.38%
8.20%
8.02%
2.55%
5.71%
8.52%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
8.01%
5.28%
4.27%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.12%
1.72%
2.82%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
8.11%
9.97%
1.97%
23.86%
25.13%
26.63%
28.32%
22.62%
22.15%
22.85%
25.64% 31.00% 22.36%
78.77% 77.78% 83.72% 89.10% 93.06% 95.45% 97.78% 100.01% 102.17% 104.27%
20.70% 23.23% 26.84% 30.39% 33.52% 36.05% 38.50% 40.87% 43.16% 45.37%
58.26% 57.31% 58.44% 58.71% 59.55% 59.40% 59.27% 59.14% 59.01% 58.90%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.30%
0.38%
0.00%
0.29%
26.02% 24.36% 24.18% 24.29% 24.01% 23.33% 22.68% 22.04% 21.41% 20.80%
12.38% 11.45% 12.00% 12.01% 11.83% 11.46% 11.10% 10.75% 10.41% 10.08%
32.24% 10.75% 12.24% 12.41% 12.39% 12.16% 11.94% 11.72% 11.50% 11.29%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.14%
3.46%
2.22%
157.80% 134.62% 131.18% 133.35% 133.23% 132.51% 132.15% 132.08% 132.27% 132.69%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Accrued Salaries & Benefits
Air Traffic Liability
Frequent Flyer Deferred Revenue
Other Accrued Liabilities
Fuel Card Obligations
Hedge Derivatives Liability
Total Current Liabilities
Long-Term Debt
Pension, Postretirement and Related Benefits
Deferred Tax Liabilities
Other Liabilities
Frequent Flyer Deferred Revenue
Total Liabilities
4.11%
3.02%
3.86%
6.11%
6.52%
6.77%
1.79%
0.00%
0.00%
5.12%
5.64%
7.89%
10.95% 10.69% 11.12%
4.94%
3.93%
4.04%
2.98%
5.29%
3.22%
1.60%
0.00%
0.00%
0.00%
6.89%
6.37%
37.60% 41.98% 43.27%
26.02% 21.29% 16.70%
32.92% 37.65% 34.20%
18.98%
0.00%
0.00%
4.55%
5.29%
4.67%
6.80%
6.47%
5.54%
126.87% 112.70% 104.39%
Common Equity and Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Other Appropriated Reserves
Treasury Stock
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
37.15% 32.29% 26.85% 26.99% 26.70% 25.96% 25.26% 24.56% 23.88% 23.22%
8.10%
8.60% 18.82% 29.87% 37.96% 40.99% 44.01% 46.99% 49.94% 52.86%
0.00% -0.04% -0.15% -0.15% -0.15% -0.15% -0.14% -0.14% -0.13% -0.13%
-13.63% -18.14% -17.81% -16.10% -14.32% -12.53% -10.96% -9.59% -8.38% -7.33%
-0.69% -0.78% -0.92% -5.82% -10.60% -10.30% -10.01% -9.73% -9.45% -9.18%
30.93% 21.92% 26.79% 34.79% 39.58% 43.98% 48.15% 52.10% 55.86% 59.44%
157.80% 134.62% 131.18% 133.35% 133.23% 132.51% 132.15% 132.08% 132.27% 132.69%
2013
2014
2015
2016E
3.47%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
38.85%
15.10%
31.61%
0.00%
7.00%
6.00%
98.56%
2017E
3.09%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
38.46%
13.43%
28.75%
0.00%
7.00%
6.00%
93.64%
2018E
2.70%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
38.08%
11.75%
25.70%
0.00%
7.00%
6.00%
88.53%
2019E
2.36%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
37.74%
10.28%
22.98%
0.00%
7.00%
6.00%
84.00%
2020E
2.07%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
37.44%
8.99%
20.55%
0.00%
7.00%
6.00%
79.98%
2021E
1.81%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
37.18%
7.86%
18.37%
0.00%
7.00%
6.00%
76.41%
2022E
1.58%
6.50%
0.00%
5.38%
11.00%
4.50%
3.50%
0.00%
4.50%
36.96%
6.87%
16.42%
0.00%
7.00%
6.00%
73.25%
Delta Air Lines, Inc.
Weighted Average Cost of Capital (WACC) Estimation
WACC = Re * (E/V) + Rd * (1-t) * (D/V) + Rpfd * (PFD/V)
Cost of Equity
Re = Rf + B * (E[Rm] - Rf)
Beta (Bloomberg)
Weekly
Rf
2.73%
1 Year
1.148
Beta
Re
4.57%
1.2152
8.28%
2 Years
3 Years
4 Years
5 Years
1.26
1.292
1.234
1.142
Cost of Debt
Rd (22 yr. DAL Corporate Bond)
Average
1.2152
3.47%
Cost of Preferred Stock
Rpfd
0.00%
Market Value of Equity
Shares Outstanding
Share Price
E
778.51
$46.55
$36,240
E[Rm] - Rf
Market Value of Debt
Short-Term Debt
Long-Term Debt
Operating Leases
D
$
$
$
$
Market Value of Preferred Stock
Pfd
$
DAL Market Value
V = E + D + Pfd
Weight of Equity (E/V)
Weight of Debt (D/V)
Weight of Pref. Stock (Pfd/V)
Marginal Tax Rate
WACC
1,563
6,766
10,624
18,953
-
$55,193
65.66%
34.34%
0
37.00%
6.19%
Delta Air Lines, Inc.
Variable Weighted Average Cost of Capital (WACC) Estimation
Fiscal Year Ended Dec. 31
Risk Free
Risk Premium
Beta
Cost of Equity
2015
2.73%
4.57%
1.22
8.28%
2016E
2.73%
4.57%
1.21
8.24%
2017E
2.73%
4.57%
1.20
8.19%
2018E
2.73%
4.57%
1.19
8.15%
2019E
2.73%
4.57%
1.18
8.10%
2020E
2.73%
4.57%
1.18
8.12%
Debt Rating
Pre-Tax Cost of Debt
Tax Rate
After-Tax Cost of Debt
AA
3.47%
37%
2.18%
AA
3.47%
37%
2.18%
AA
3.47%
37%
2.18%
AA
3.47%
37%
2.18%
AA
3.47%
37%
2.18%
AA
3.47%
37%
2.18%
65.66% 67.00%
34.34% 33.00%
0%
0%
68.00%
32.00%
0%
69.00%
31.00%
0%
70.00%
30.00%
0%
71.00%
29.00%
0%
6.27%
6.30%
6.33%
6.40%
MV Weight of Equity
MV Weight of Debt
MV Weight of Pfd
Forward WACC
Discount Factor
Implied Constant WACC
Discount Period
6.19%
6.24%
1.0624
6.24%
1
1.129008676 1.20011473
6.25%
2
6.27%
3
1.27603072 1.357702644
6.28%
4
6.31%
5
Delta Air Lines, Inc.
Value Driver Estimation
Fiscal Years Ending Dec. 31
Assumptions:
Marginal Tax Rate
WACC
Normal Cash
Cost of Debt
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
37.60%
6.24%
5.00%
3.47%
40.90%
6.24%
5.00%
3.47%
37.00%
6.24%
5.00%
3.47%
37%
6.24%
5.00%
3.47%
37%
6.25%
5.00%
3.47%
37%
6.27%
5.00%
3.47%
37%
6.28%
5.00%
3.47%
37%
6.31%
5.00%
3.47%
37%
6.31%
5.00%
3.47%
37%
6.31%
5.00%
3.47%
NOPLAT Computation
EBITA
Net Sales
-COGS
-SG&A
-Depreciation
-Amortization
-Other Op. Expenses
+Implied Interest on Op Leases
EBITA
$ 37,638
$ (29,177)
$ (1,603)
$ (1,588)
$
(70)
$ (2,026)
$
392
$ 3,566
$ 40,204
$ (30,172)
$ (1,700)
$ (1,716)
$
(55)
$ (1,797)
$
330
$ 5,094
$ 40,506
$ (26,621)
$ (1,672)
$ (1,817)
$
(18)
$ (1,998)
$
367
$ 8,747
$ 40,321 $ 40,796 $ 41,976 $ 43,184 $ 44,442 $ 45,739 $ 47,077
$ (26,612) $ (28,557) $ (32,322) $ (33,251) $ (34,220) $ (35,219) $ (36,249)
$ (1,734) $ (1,754) $ (1,805) $ (1,857) $ (1,911) $ (1,967) $ (2,024)
$ (1,382) $ (1,420) $ (1,458) $ (1,496) $ (1,536) $ (1,577) $ (1,620)
(17) $
(17) $
(16) $
(16)
(17) $
(17) $
$
(17) $
$ (1,814) $ (1,836) $ (1,889) $ (1,943) $ (2,000) $ (2,058) $ (2,118)
$
378 $
388 $
399 $
409 $
420 $
432 $
443
$ 9,140 $ 7,600 $ 4,885 $ 5,028 $ 5,178 $ 5,334 $ 5,493
-Adjusted Taxes:
Total Tax Provision
+Tax Shield on Interest Expense
+Tax Shied on Implied Lease Interest
+Tax Shield on Unusual Expense
-Tax Other Income (Expense)
-Tax on Non-Operating Interest Income
Total Adjusted Taxes
$
$
$
$
$
$
$
(8,013)
320
147
(34)
43
(7,623)
$
$
$
$
$
$
$
413
253
135
1,275
18
2,058
$
$
$
$
$
$
$
2,631
178
136
278
3
3,219
$
$
$
$
$
$
$
2,837
107
140
298
3,382
$
$
$
$
$
$
$
2,270
96
144
302
2,812
$
$
$
$
$
$
$
1,263
86
147
311
1,807
$
$
$
$
$
$
$
1,312
78
151
320
1,860
$
$
$
$
$
$
$
1,362
70
155
329
1,916
$
$
$
$
$
$
$
1,412
63
160
338
1,973
$
$
$
$
$
$
$
1,463
57
164
348
2,032
+Change in Deferred Taxes
Deferred Tax Assets
Deferred Tax Liabilities
Deferred Tax, net
Net Change in Deferred Taxes
$ 12,134
$ 7,142
$ (4,992)
$ (7,039)
$
$
$
$
4,320
(4,320)
672
$
$
$
$
4,956
(4,956)
(636)
$
$
$
$
5,006
(5,006)
(50)
$
$
$
$
5,056
(5,056)
(50)
$
$
$
$
5,106
(5,106)
(51)
$
$
$
$
5,157
(5,157)
(51)
$
$
$
$
5,209
(5,209)
(52)
$
$
$
$
5,261
(5,261)
(52)
$
$
$
$
5,314
(5,314)
(53)
NOPLAT
$
4,149
$
3,708
$
4,892
$
5,709
$
4,738
$
3,027
$
3,117
$
3,211
$
3,308
$
3,408
Invested Capital Computation
Operating Current Assets:
Normal Cash
Accounts Receivable, net
Inventory
Other Current Assets
Total Operating Current Assests
$
$
$
$
$
148
1,609
1,063
3,054
5,874
$
$
$
$
$
104
3,222
852
4,008
8,186
$
$
$
$
$
99
2,139
697
796
3,731
$
$
$
$
$
40
2,016
806
2,016
4,879
$
$
$
$
$
32
2,040
816
2,040
4,928
$
$
$
$
$
52
2,099
840
2,099
5,089
$
$
$
$
$
79
2,159
864
2,159
5,261
$
$
$
$
$
114
2,222
889
2,222
5,447
$
$
$
$
$
155
2,287
915
2,287
5,644
$
$
$
$
$
204
2,354
942
2,354
5,853
Operating Current Liabilities
Less: Accounts Payable
Income Taxes Payable
Accrued Salaries & Benefits
Air Traffic Liability
Frequent Flyer Deferred Revenue
Other Accrued Liabilities
Fuel Card Obligations
Total Operating Current Liabilities
$ 2,300
$
673
$ 1,926
$ 4,122
$ 1,861
$ 1,723
$
602
$ 13,207
Net Operating Working Capital
$
+PPE, net
+PV of Operating Lease Obligations
+Net Other Intangibles
+Other Assets
-Frequent Flyer Deferred Revenue
-Other Liabilities
Invested Capital
$ 21,854
$ 9,506
$ 4,658
$ 1,303
$ 2,559
$ 1,711
$ 25,718
ROIC Computation
NOPLAT
/Beginning Invested Capital
ROIC
$ 4,149 $ 3,708 $ 4,892 $
$ 26,061 $ 25,718 $ 28,566 $
15.92%
14.42%
17.12%
5,709 $
26,009 $
21.95%
4,738 $
27,100 $
17.48%
3,027 $
27,962 $
10.82%
3,117 $
28,830 $
10.81%
3,211 $
29,735 $
10.80%
3,308 $
30,678 $
10.78%
3,408
31,660
10.76%
Economic Profit Computation
Beginning Invested Capital
* (ROIC - WACC)
Economic Profit
$ 26,061 $ 25,718 $ 28,566 $
9.7%
8.2%
10.9%
$ 2,523 $ 2,103 $ 3,109 $
26,009 $
15.7%
4,086 $
27,100 $
11.2%
3,043 $
27,962 $
4.6%
1,274 $
28,830 $
4.5%
1,305 $
29,735 $
4.5%
1,335 $
30,678 $
4.5%
1,373 $
31,660
4.5%
1,411
Free Cash Flow Computation
NOPLAT
- Change in Invested Capital
Free Cash Flow
$
$
$
$ 2,622
$
$ 2,266
$ 4,296
$ 1,580
$ 2,127
$
$ 12,891
(7,333) $
(4,705) $
$ 21,929
$ 10,576
$ 4,603
$
892
$ 2,602
$ 2,128
$ 28,566
4,149 $
(342) $
4,492 $
$ 2,743
$
$ 3,195
$ 4,503
$ 1,635
$ 1,306
$
$ 13,382
3,708
2,848
860
(9,651) $
$ 23,039
$ 10,624
$ 4,861
$ 1,273
$ 2,246
$ 1,891
$ 26,009
$
$
$
$
2,621
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,260
(8,381) $
$ 23,673
$ 10,916
$
4,861
$
1,273
$
2,419
$
2,822
$ 27,100
4,892 $
(2,557) $
7,449 $
$
2,652
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,291
5,709
1,092
4,617
(8,363) $
$ 24,292
$ 11,202
$
4,861
$
1,273
$
2,448
$
2,856
$ 27,962
$
$
$
$
2,728
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,367
4,738
861
3,877
(8,278) $
$ 24,933
$ 11,498
$
4,861
$
1,273
$
2,519
$
2,938
$ 28,830
$
$
$
$
2,807
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,446
3,027
868
2,159
(8,185) $
$ 25,597
$ 11,803
$
4,861
$
1,273
$
2,591
$
3,023
$ 29,735
$
$
$
$
2,889
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,528
3,117
906
2,211
(8,081) $
$ 26,283
$ 12,120
$
4,861
$
1,273
$
2,667
$
3,111
$ 30,678
$
$
$
$
2,973
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,612
3,211
943
2,268
(7,968) $
$ 26,993
$ 12,447
$
4,861
$
1,273
$
2,744
$
3,202
$ 31,660
$
$
$
$
3,060
$
$
3,195
$
4,503
$
1,635
$
1,306
$
$ 13,699
3,308
982
2,326
(7,846)
$ 27,727
$ 12,786
$
4,861
$
1,273
$
2,825
$
3,295
$ 32,681
$
$
$
3,408
1,021
2,387
Delta Air Lines, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
2.91%
10.80%
6.19%
8.28%
Fiscal Years Ending Dec. 31
2016E
2017E
2018E
2019E
2020E
DCF Model
NOPLAT
Beginning Invested Capital
Ending Invested Capital
CapEx
Free Cash Flow
ROIC
5,709
26,009
27,100
1,092
4,617
21.95%
4,738
27,100
27,962
861
3,877
17.48%
3,027
27,962
28,830
868
2,159
10.82%
3,117
28,830
29,735
906
2,211
10.81%
3,211
29,735
30,678
943
2,268
10.80%
4,617
3,877
2,159
2,211
4,346
3,434
1,799
1,733
2,268
71,526
56,054
5,709
26,009
27,100
21.95%
4,086
4,738
27,100
27,962
17.48%
3,043
3,027
27,962
28,830
10.82%
1,274
3,117
28,830
29,735
10.81%
1,305
3,846
2,695
1,061
1,023
FCF
Continuing Value
PV of FCF
Value of Operating Assets
+ST Investments
+Excess Cash
-Total Debt
-PV of Operating Leases
-PV of ESOP
-Underfunded Pension
Value of Equity
Shares Outstanding
Intrinsic Value 12/31/2015
Price Today (4/19/2016)
EP Model
NOPLAT
Beginning Invested Capital
Ending Invested Capital
ROIC
Economic Profit
Continuting Value
PV of EP Discounted by WACC
PV of EP
+Beginning Invested Capital
Value of Operating Assets
+ST Investments
+Excess Cash
-Total Debt
-PV of Operating Leases
-PV of ESOP
-Underfunded Pension
Value of Equity
Shares Outstanding
Intrinsic Value 12/31/2015
Price Today (Date)
67,365
3,452
1,873
(8,329)
(10,624)
(173)
(13,855)
39,709
778.51
$
51.01
$
52.09
40,932
26,009
66,941
3,452
1,873
(8,329)
(10,624)
(173)
(13,855)
39,286
778.51
$
50.46
$
51.54
3,211
29,735
30,678
10.80%
1,335
41,225
32,307
Delta Air Lines, Inc.
Dividend Discount Model (DDM)
Fiscal Years Ending Dec. 31
EPS
2016E
$
6.40 $
2017E
5.40 $
2018E
3.00 $
2019E
2020E
3.11 $
Key Assumptions
CV growth
CV ROE
Cost of Equity
2.91%
10.55%
8.28%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
Discounted Cash Flows
Intrinsic Value
Price Adjustment for 4/19/16
3.23
0.54
0.59
0.60
0.61
13.48
3.23
43.51
0.61
0.50 $
0.51 $
0.47 $
0.44 $
31.65
$
$
$
$ 33.07
$ 33.77
Delta Air Lines, Inc.
Relative Valuation Models
Industry Competitors
Ticker
AAL
UAL
LUV
SAVE
Company
American Airlines Group Inc.
United Continental Holdings, Inc.
Southwest Airlines Co.
Spirit Airlines
Price
$40.92
$56.98
$47.10
$50.05
DAL
Delta Air Lines, Inc.
$46.55
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
EPS
2016E
$6.07
$8.70
$4.27
$4.19
$
EPS
2017E
$6.42
$9.04
$4.67
$4.54
Average
6.40 $
$ 57.99
$ 45.57
5.40
P/E 16
6.7
6.5
11.0
11.9
9.1
7.3
P/E 17
6.4
6.3
10.1
11.0
8.4
8.6
Delta Air Lines, Inc.
Key Management Ratios
Fiscal Years Ending Dec. 31
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
Current Assets/Current Liabilities
(CA-Inventories)/CL
(Cash + Marketable Sec)/CL
Activity or Asset-Management Ratios
Air Line Inventory Turnover
Passenger CoGS/Avg. Inventory
Receivables Turnover
Sales/Avg. A/R
Total Asset Turnover
Sales/Avg. Total Assets
Financial Leverage Ratios
Debt to Equity Ratio
Debt Ratio
Interest Coverage Ratio
Total Debt/Shareholder's Equity
Total Liabilities/Total Assets
Operating Income/Interest Expense
Profitability Ratios
Return on Equity Ratio
Return on Assets
Cash Flow Margin
Net Income/Avg.Shareholders Equity
Net Income/Avg. Total Assets
Net Op. Cash Flow/Passenger Revenue
Payout Policy Ratios
Payout Ratio
Dividend Coverage Ratio
Dividends Per Share/EPS
EPS/Dividends Per Share
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
0.68
0.61
0.28
0.74
0.69
0.26
0.52
0.48
0.31
0.58
0.53
0.27
0.58
0.52
0.26
0.60
0.55
0.29
0.63
0.58
0.31
0.67
0.62
0.35
0.72
0.66
0.39
0.77
0.71
0.44
27.97
22.80
0.72
31.51
16.64
0.71
34.37
15.11
0.76
35.40
19.41
0.75
35.21
20.12
0.75
39.05
20.29
0.76
39.05
20.28
0.77
39.05
20.29
0.77
39.05
20.29
0.77
39.06
20.29
0.77
0.97
0.80
3.73
1.11
0.84
7.70
0.77
0.80
17.42
0.53
0.74
30.34
0.42
0.70
27.77
0.33
0.67
19.20
0.26
0.64
21.96
0.21
0.61
25.13
0.17
0.58
28.77
0.14
0.55
32.93
221.61% 6.44% 46.04% 38.83% 25.62% 12.42% 11.38% 10.55%
20.28% 1.16% 8.44% 9.04% 7.15% 3.91% 3.96% 4.01%
12.97% 13.98% 22.77% 11.82% 12.70% 8.47% 8.78% 9.07%
9.87%
4.03%
9.32%
9.31%
4.05%
9.54%
0.97% 37.97%
103.4
2.6
7.92%
12.6
8.44% 11.01% 20.01% 19.47% 18.96% 18.47% 18.02%
11.8
9.1
5.0
5.1
5.3
5.4
5.5
Risk Prem
SGA CV
Tax Rate
$52.09
4.47%
4.52%
4.57%
4.62%
4.67%
1.0152
70.97
69.66
68.39
67.15
65.94
1.1152
61.72
60.56
59.42
58.32
57.24
Beta
1.2152
54.16
53.11
52.09
51.09
50.12
1.3152
47.87
46.92
45.98
45.07
44.19
1.4152
42.55
41.67
40.82
39.98
39.17
$52.09
3.90%
4.10%
4.30%
4.50%
4.70%
72%
102.52
100.54
98.56
96.58
94.60
75%
74.64
72.66
70.68
68.70
66.71
COGS CV
77%
56.05
54.07
52.09
50.11
48.13
79%
37.47
35.49
33.50
31.52
29.54
81%
18.88
16.90
14.92
12.93
10.95
0.04
60.54
59.14
57.74
56.34
54.93
PPE % of Sales
0.05
54.83
53.46
52.09
50.72
49.35
0.06
49.13
47.79
46.44
45.10
43.76
0.07
43.42
42.11
40.80
39.49
38.17
$52.09
35.00%
36.00%
37.00%
38.00%
39.00%
0.03
66.25
64.82
63.38
61.95
60.52
Rf rate
Rd rate
$52.09
2.53%
2.63%
2.73%
2.83%
2.93%
1.91%
44.04
43.03
42.05
41.10
40.18
$ 33.77
2.467%
2.967%
3.467%
3.967%
4.467%
0.34
33.39
33.11
32.84
32.56
32.28
CV Revenue Growth
2.41%
2.91%
48.82
55.13
47.59
53.58
46.41
52.09
45.26
50.66
44.15
49.29
0.44
33.86
33.58
33.30
33.03
32.75
Dividend 2016
0.54
34.32
34.05
33.77
33.50
33.22
3.41%
63.82
61.77
59.82
57.96
56.18
3.91%
76.55
73.66
70.94
68.37
65.94
0.64
34.79
34.51
34.24
33.96
33.69
0.74
35.26
34.98
34.71
34.43
34.15
Present Value of Operating Lease Obligations (2015)
Fiscal Years Ending Dec. 31
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
1583
1440
1307
1158
1053
6220
12761
2137
10624
Present Value of Operating Lease Obligations (2014)
Fiscal Years Ending Dec. 31
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
1707
1493
1323
1120
929
6169
12741
2165
10576
Present Value of Operating Lease Obligations (2013)
Fiscal Years Ending 60.5561510448647
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
1429
1356
1186
1026
831
5666
11494
1988
9506
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares):
Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
5,300,000
10.00
530,000
$
15.05
8.28%
$46.55
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
2016E
2017E
2018E
2019E
2020E
2021E
2022E
530,000
530,000
530,000
530,000
530,000
530,000
530,000
15.05 $
15.05 $
15.05 $
15.05
$
15.05 $
15.05 $
15.05 $
7,976,500
7,976,500
7,976,500
7,976,500
7,976,500
7,976,500
7,976,500
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
1,975,000,000 1,975,000,000
$
46.55 $
50.41 $
39,181,880
42,427,497
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
797,000,000
530,000
42,427,497
755,102,503
0
54.58 $
-
0
59.10 $
-
0
64.00 $
-
0
69.30 $
-
0
75.04
-
755,102,503 716,450,622 716,980,622 717,510,622 718,040,622 718,570,622
530,000
530,000
530,000
530,000
530,000
530,000
39,181,880
716,450,622 716,980,622 717,510,622 718,040,622 718,570,622 719,100,622
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Total
Average
Number
Exercise
of Shares
Price
5,300,000
15.05
5,300,000 $
15.05
DAL
$46.55
2.73%
0.97%
38.80%
Average
Remaining
Life (yrs)
10.00 $
10.00 $
B-S
Value
Option
of Options
Price
Granted
32.57 $ 172,608,833
36.66 $ 172,608,833