Krause Fund Research | Fall 2014 Consumer Discretionary Delta Air Lines, Inc. (NYSE: DAL) Recommendation: BUY November 18, 2014 Analyst Current Price: $45.03 Target Price Range: $52.26 – 56.18 Quinn Watters quinn-watters@uiowa.edu Delta Soars Past Competition Company Overview Delta Air Lines, Inc. (DAL) provides scheduled air transportation for passengers and cargo throughout the United States and around the world. Delta centers its route network on a system of hub and international gateway airports in Amsterdam, Atlanta, Cincinnati, Detroit, Minneapolis-St. Paul, NY-JFK, NY-LaGuardia, Paris, Salt Lake City, and Tokyo. Since filing for bankruptcy in 2005 and merging with Northwest Airlines in 2008, Delta has emerged as the second largest domestic airline by total revenue and capacity. Through domestic and international alliances the company gathers and distributes traffic to geographical regions surrounding its hubs. DAL reports revenue in four operating segments: Mainline, Regional, Cargo, and Other. With a focus on disciplined capacity expansion and sub-inflation CASM growth, Delta achieved record revenue and net income in 2013.i Stock Performance Highlightsii. 52 Week High 52 Week Low Raw Beta (3yr weekly) Average Daily Volume $44.41 $26.40 1.303 14.44 m Share Highlights Market Capitalization Shares Outstanding EPS (2013) P/E Ratio (ttm) Dividend Yield Dividend Payout Ratio (2013) $36.49 b 836.94 m $11.57 3.78 0.82% 1.04% Company Performance Highlights ROA ROIC Sales Operating Income 6.17% 16.68% $ 37.73 b $3.4 b Industry Metrics (FY 2013) PRASM RASM CASM Load Factor Yield 14.15¢ 16.23¢ 14.77¢ 83.8% 16.89 ¢ Financial Ratios Current Ratio Debt to Equity 1 0.74 87.51% Delta is the industry leader in yield, implying a 4% price premium over the closest competitor. DAL boasts the highest RASM-CASM spread of any of the big four domestic mainline carriers. In addition, Delta trumps the competition in ROIC generation, and is the second largest domestic airline by total revenue. Also, the company generated $5.439 billion in free cash flow during 2013. Delta’s management team has put large importance on decreasing leverage and returning the company’s balance sheet to investment grade caliber. Since 2009, DAL has decrease net debt from roughly $17 billion to $7 billion currently. With annual interest expense down nearly $550 million since 2009, Delta continues to increase pre-tax income.xxxvii. Delta’s board announced a $2 billion accelerated share repurchase program to be completed by the end of 2016. In addition, DAL became the first domestic airline to pay out a dividend, in attempt to return value to shareholders.xxxviii. Delta continues to create organic growth through expanding its Pacific reach through the Seattle hub. The company also expects to have $500-$600 in new product sales, reported under other income, throughout the next three years.xxxix. DAL only trades a forward P/E ratio around 9x, relatively cheap compared to the S&P average of 15.8x. One Year Stock Performance Executive Summary The Krause Fund recommends a BUY rating for Delta Air Lines, Inc. (NYSE: DAL). Since emerging from bankruptcy in 2005 and merging with Northwest Airlines in 2008, Delta reported record revenue and EPS for the FY ended 2013. Leading the industry in operating margin efficiency, passenger price premium, and ROIC, Delta generates significant free cash flow, roughly $5 billion in 2013. This excess cash generation, compared to the industry average, has allowed DAL to successfully return cash to shareholders through an annual dividend of 36 cents/share and a $2 billion accelerated share repurchase plan. Lead by a focused management team, Delta is the only airline to wholly own a refinery, which drastically reduces fuel costs. In the first half of 2014, DAL’s average fuel cost was 10 cents below its major competitors, saving the company roughly $200 million in fuel expense. Delta provides strong organic growth through capacity expansion, increasing load factors, and new ancillary product sales. We reiterate our BUY rating on the stock, and note it can naturally hedge the portfolio, often times moving inversely with the energy sector in response to crude prices. Economic Outlook Real GDP Real GDP is the broadest measure of aggregate economic activity, encompassing the market value of all goods and services produced in a nation during a specific period of time.iii Adjusting for inflation, Real GDP accounts for price changes during the specified period to gauge economic expansion or contraction. GDP is composed of four main components: Consumption, Investment, Government Spending, and Net Exports (Imports). In addition to measuring societal wealth and predicting expected return on capital, GDP data strongly influences the Federal Reserve’s monetary policy. In Q3 2014, the first estimation of Real GDP topped consensus, growing at an annualized rate of 3.5%. Although decelerating from 4.6% in Q2 2014, current GDP growth suggests continued recovery since the financial crisis. In accordance with strong personal consumption growth and improving net exports, the US is poised to experience increasing corporate profits and personal income growth. Page | 2 The geometric average of GDP growth, from 19602010, is roughly 3.1%.iv. In the past twenty five years, Real GDP growth has slowed to a simple average growth rate of 2.85%, as pictured in the figure below. We expect moderate growth for the forecast horizon through 2023, with Real GDP growth of roughly 2.5%. v. The U.S. is a consumption economy, deriving 69% of Real GDP from household consumption expenditure.vi. Therefore, growth in consumption industries is strongly correlated to Real GDP growth. We expect moderate GDP growth throughout the forecast horizon, resulting in steady growth for the consumer discretionary sector. Real GDP growth will be attributed to an array of different drivers. The positive effects of the FED’s low interest rate environment will linger in the economy for the next several years, as corporations take advantage of lower costs of capital, resulting in higher returns on invested capital. Coupled with strong corporate returns, the Krause Fund expects personal income outlays to continue to improve. President Obama’s initiative to increase U.S. exports and executive decision to allow oil exports bodes well for GDP growth. The KF is particularly optimistic about the effects of stable GDP growth, in the next ten years, on the consumer discretionary sector. Strong consumer consumption, increasing oil exports, and improving personal income outlays prove favorable for U.S. consumer discretionary service providers. Interest Rates Under the leadership of Ben Bernanke, and presently Janet Yellen, the Federal Reserve employed quantitative easing and a low rate environment, preceding the financial crisis of 2008. Although the last phase of QE was completed in October, shortterm interest rates still remain at all-time lows. The FED Funds Rate sits at .25%. While the FED Funds Rate does not have a direct effect on corporate borrowing, it sets a benchmark for the supply and demand of debt instruments with longer maturities.vii. Due to the longevity of PP&E in the consumer discretionary companies the Krause Fund covers, we observe the 30-yr U.S. T-Bond as our benchmark interest rate. Following the financial crisis, the 30-yr T-Bond has fallen roughly 200 bps from its previous highs. The following graph illustrates the yield on the 30-yr, after the FED set the FED Funds Target Rate to .25% in January of 2009. Employment The strength of the domestic employment situation is typically gauged by two components, unemployment rate and monthly nonfarm payroll additions. Employment statistics are significant measures of the health of the overall economy, often times dictating the FED’s monetary policy. Since the ruins of the financial crisis, job creation has significantly improved and the unemployment rate has fallen, from previous highs around 10% to 5.8% in October of this year.x. Although recovery is evident, we remain hesitant to declare the jobs market is fully recovered. As illustrated from the chart below, labor force participation remains at record lows. The Krause Fund believes with current participation, the domestic unemployment rate is slightly misrepresented. Labor Force Participation Rate viii. The FED has provided guidance for moderate rate hikes in the beginning of 2015. Although no specific target has been announced, we believe a 2% FED Funds Target Rate by mid-2015 is reasonable. In accordance, the Krause Fund expects the 30-yr TBond to stand around 3.5%-4% by the end of 2015. With the current global interest rate environment and mock QE to come in the Euro zone and Japan, we expect the idea of U.S. default immunity and favorable yields to hold the 30-yr T-Bond around 4% for the forecast horizon.ix. The consumer discretionary sector has benefitted from artificially low interest rates, and we expect this trend to continue. Low interest rates have allowed companies to refinance debt and significantly reduce their cost of capital. Highly leveraged and capital intensive industries, such as airlines, have especially benefitted by lowering interest expenses. The Krause Fund expects the consumer discretionary sector to continue to capitalize on low borrowing rates, and bolster returns on invested capital. In addition, we believe global central bank manipulation will strengthen the U.S. dollar, as U.S. interest rates begin to rise, albeit still lower than pre-crisis highs. This will provide consumers with increased buying power, proving favorable for domestic companies, especially the consumer discretionary sector. xi. In accordance with stable GDP growth and a strengthening dollar, the KF expects domestic employment to continue to improve and labor force participation to begin to rebound. We estimate the unemployment rate will stabilize around 5%-5.5%, while participation rate ascends towards 65%, in the next five years, citing stronger corporate profits from economic stimulus. A strong labor-market is crucial for the consumer discretionary sector. Higher levels of domestic employment lead to increased amounts of disposable income. With oil prices trending down and an improving labor-market, we anticipate secular growth in the consumer discretionary sector throughout the forecast horizon. During 2014, we have experienced especially strong job creation, leading to an annual increase in real disposable income of roughly 2%.xii. The Krause Fund conservatively expects this trend to continue in the next five years, stimulating consumer spending. Inflation Inflation is a crucial metric of measuring buying power and real growth. In addition to tracking price Page | 3 fluctuations, inflation is also a helpful metric for gauging economic expansion. Currently, the Federal Reserve has set a target of 2% annual inflation as a key metric for monetary policy and interest rate management.xiii. The FED has demonstrated its ability to keep inflation around 2% annually. The chart of the Consumer Price Index (CPI) below, illustrates inflation hovering around 2% for the last three years. We expect inflation to remain constant throughout the forecast period, citing constant Real GDP growth, an improving labor-market, and the FED’s short track record of effective monetary policy. xiv. Stable inflation bodes well for the consumer discretionary sector, allowing companies to accurately gauge capacity growth and set a target unit cost growth more effectively. The Krause Fund expects constant inflation to permit more efficient margins, increase demand, and strong ROIC. Capital Markets Outlook Since the trough of the financial crisis of 2008, the domestic equity market has rebounded tremendously, driven by central bank support and economic expansion. After bottoming out March 5th, 2009, the Dow, S&P 500, and NASDAQ have climbed roughly 165%, 200%, and 260%, respectively.xv. The Dow and S&P 500 currently sit at all-time highs. The consumer discretionary sector traces the overall performance of the S&P 500, with greater levered gains or losses. The Vanguard Consumer Discretionary Index Fund (VCDAX) is an ETF constructed to emulate the weight and holdings of the consumer discretionary sector. Year-to-date the VDAX lags the S&P by roughly 5.5%. However, over the last five years, the consumer discretionary sector has significantly outperformed the broader Page | 4 index, outpacing the S&P 150% to 87%, as illustrated by the chart below. xvi. We believe the equity markets will continue to experience favorable returns in the next ten years. With the S&P trading at a P/E ratio of 19.8 (ttm), above the historical mean of 15.5, and all-time record highs, we still remain bullish on the domestic equity market.xvii. We estimate the S&P will return 6% annually, including dividends, coming in below the geometric average of 9.5% from 1928-2013.xviii. The Krause fund believes this in consistent with our expectations of Real GDP growth of 2.5% and inflation of 2%, along with appetite for risk, throughout our forecast period. Despite all-time highs in the market, we cite global low interest rate environments and quantitative easing, along with steady growth of corporate profits as driving factors behind favorable returns for the domestic equities. Easy money will continue to flow into the U.S. stock market in search of returns in place of low yields in fixed income. From a capital market perspective, we remain optimistic on the consumer discretionary sector. In addition to benefitting from the upward movement in the broader equity market, we expect disposable income growth to propel the sector. Industry Analysis Industry Overview The Domestic Airlines Industry provides air transportation for passengers and cargo over regulated routes, domestically and internationally. Traditionally, mainline carriers operate flight routes centered around hubs, connecting flights to various locations, creating a spoke system. Network carriers, such as Delta and American, typically report revenue in four segments: Mainline, Regional, Cargo, and Other (ancillary). Current Trends Consolidation: Since a string of bankruptcies in the early 2000’s, including American Airlines, Delta, U.S. Airways, Northwest, United, the industry has endured a period of significant consolidation. The first significant consolidation coming with the merger of Delta and Northwest, in October 2008. This was preceded by a United and Continental, Southwest and AirTran, and American and U.S. Airways merger. Prior to this period of consolidation, airlines were extremely levered with debt and focused on capacity growth as opposed to earnings growth.xix. Disciplined Capacity Growth: After almost all of the big players in the domestic airline industry filed for bankruptcy, monitoring capacity growth became a point of emphasis. Previously, the race to be the biggest, in regards to capacity, shadowed the idea of increasing optimizing load factors and producing efficient margins. Disciplined capacity growth has allowed for higher generation of free cash flow and increased ROIC. Extracting Other Revenue From Base Fares: Domestic network carriers have begun to separate inflight amenities, previously include in base fares. Charging extra for carrying on bags, cancelling flights, printing a boarding pass at the airport, etc. is a new trend to create organic revenue growth. By providing the option to purchase additional accommodations, domestic carriers have improved margins by eliminating expenses previously included by base fares. Porter’s Five Forces Industry Competition: The industry has a moderate level of concentration, with the top four players holding a combined market share of 66.5% in 2014.xx. Since significant consolidation in 2008-2013, price competition has decreased and operating margins have improved. However, customer service, affordability, and cost management are at the forefront of the competitive landscape. Barriers to Entry: The industries barriers to entry are very high, due to the capital intensity of the industry. A Boeing 737-700 cost roughly $78.3 million, on average, in 2014.xxi. At the end of 2013, Delta’s mainline fleet was 743 aircrafts.xxii. In addition, heavy route regulation and limited landing space present significant barriers for new entrants. Threat of Substitutes: There a few substitutes to the domestic airline industry. The only viable options include transportation by automobile or train. Neither provide the convenience or timeless of airline travel, therefore, we expect the industry to maintain and grow demand. Page | 5 Bargaining Power of Suppliers: Bargaining power of suppliers is moderate. Although airline travel is irreplaceable, prices are held in check by competitors. As a whole, the industry has significant bargaining power, if all major players were to increase prices proportional, due to the lack of other viable means of transportation. Bargaining Power of Consumers: Consumers have relatively low bargaining power in the domestic airline industry. In accordance with the consolidation in recent years, network carriers have established somewhat of an oligopoly. Consumers have few options for travel, none of which provide the time efficiency of flying. This leaves consumers with a low amount of bargaining power, as long as the industry remains disciplined on capacity growth. Porter’s five forces suggest a favorable investment period among domestic airlines. In accordance with the capital intensity of the industry and lack of substitutes for the service, we believe the industry presents a good investment opportunity. With recent trends and the consolidated competitive landscape, we expect the main network carriers to continue to improve operating margins and generate significant returns to shareholders. Equity Comparison Since being plagued with bankruptcy and dealing with the economic recession sparked by the financial crisis of 2008, the domestic airline industry has rebounded strongly, and so have the corresponding equities. Since 2009, the four biggest mainline carriers have experienced incredible returns in the equity market. United, Delta, Southwest, and American have observed stock price gains of 672%, 457%, 327%, and 78%, respectively, as illustrated below. xxv. Although the Krause Fund does not expect returns in the next five years proportional to the last five, we expect moderate gains of roughly 10% annually. Inline with our expectation of the broader market to observe returns of 6% per annum, with a 4% annual premium to P/E multiple expansion. We believe the domestic airline industry poses strong investment potential. In accordance with the estimated forward-year earnings of these four domestic airlines, the KF believes they are trading at a P/E multiple of 10.2x.xxvi According to Credit Suisse, the railroad industry trades at a forward P/E ratio of roughly 16.8x and the S&P 500 at 15.8x. We expect airline multiples to appreciate over the next few years, citing deleveraging and improving free cash flow generation.xxvii. Comparative Analysis The domestic airlines industry is composed of four main network players: American, Delta, Southwest, and United. The graphic below illustrates each player’s market share as a percentage of mainline passenger revenue for 2013. xxiii. However, total revenue from 2013 tells a different story of market share. AAL DAL UAL LUV 2013 Total Revenue 39.86 B 39.79 B 38.92 B 18.40 B Market Cap 31.34 B 36.22 B 20.66 B 26.52 B 2013 Net Income 284.00 M 9.85 B 1.24 B 1.16 B xxiii. From the chart above, it is apparent that market share by total revenue is closer among American, Delta, and United. At first glance, Delta appears as an obvious front-runner, trumping the others in profit margin and fractionally smaller in total revenue than the industry leader, American. Industry Metrics: Due to the unique structure of the domestic airline industry, certain metrics are utilized to measure relative performance. Increased load factors, high revenue units, and low cost units are the focus of industry performance and individual company analysis.xxiv. Available Seat Miles (ASM) – # of total seats * # total miles flown Revenue Seat Miles (RSM) – ASM * Load factor (% of seats filled) Passenger Revenue per Available Seat Mile (PRASM) – Total Passenger Revenue / ASM Yield – Total Passenger Revenue / RSM Page | 6 Total Revenue per Available Seat Mile (RASM) – Total Revenue / ASM Cost per Available Seat Mile (CASM) – Total Operating Expenses / ASM The following table provides the industry metrics, for the fiscal year ended 2013, for American, Delta, United, and Southwest. FY 2013 ASM RSM PRASM Yield RASM CASM AAL 168,340 M 138,878 M $ 0.1338 $ 0.1622 $ 0.1533 $ 0.1505 DAL 232,740 M 194,988 M $ 0.1415 $ 0.1689 $ 0.1623 $ 0.1477 UAL 245,354 M 205,167 M $ 0.1350 $ 0.1614 $ 0.1560 $ 0.1509 LUV 130,344 M 104,348 M $ 0.1283 $ 0.1602 $ 0.1358 $ 0.1260 xxv. After examining industry metrics across the four biggest players in the domestic airline industry, Delta proves to be best in show. DAL boasts the highest yield, generating passenger revenue more efficiently with regards to revenue seat miles. This implies that Delta holds a 4% price premium for passenger revenue over the next closest competitor, American. In addition, Delta has the largest RASM-CASM spread, generating roughly 1.46 cents of operating profit per available seat mile. Southwest’s spread is second best at .98 cents, roughly 64% lower than Delta. This spread is generated by Delta’s industry leading load factor, roughly 84%. United and American come in around 83%, while Southwest lags at around 80%. We believe Delta provides the best investment opportunity of its peers, citing large scale capacity and the most efficient margins of the biggest four network airlines. We expect Delta to maintain leadership in margin management, however, we see conservative capacity growth among other players contributing to a more efficient landscape. Company Analysis Company Overview Delta Air Lines, Inc. (NYSE: DAL), was founded in 1924. The company is incorporated in Delaware and is headquartered in Atlanta, Georgia, which is also home to its largest domestic hub.xxviii. It is the second largest domestic airline in 2013 by total revenue and capacity. Revenue is reported in four segments: Mainline, Regional, Cargo, and Other. Mainline revenue accounted for roughly 70% of total revenue in 2013. Since emerging from bankruptcy in 2005 and merging with Northwest Airlines in 2008, Delta achieved record high total revenue and net income. With a continued focus on disciplined capacity growth, CASM-ex fuel growth below inflation, and improving load factors, DAL is positioned as the industry leader among domestic network airlines. We expect Delta’s operational execution to remain a significant competitive advantage, evoking a promising investment opportunity. Corporate Strategy Delta is focused on driving revenue growth through expansion into new markets and unbundling fares, while exemplifying discipline with regards to capacity growth. In addition, the company aims to compress CASM-ex fuel growth below inflation, in order to improve operating margins and free cash flow generation. Management has put a strong emphasis on returning cash to shareholders, approving a $2 billion accelerating share repurchase program to be completed by the end of 2016, and Delta is the first of the four big domestic airlines to pay a quarterly dividend.xxix. Another focal point of management’s strategy is to aggressively reduce debt and pension liabilities, improving the company’s balance sheet to investment grade quality. The Krause Fund believes Delta is an industry leader in corporate management, employing initiatives to increase net income and maximize shareholder return. We have observed progress towards meeting these corporate goals, and are confident in the management team’s ability to deliver. In 2013, DAL reduced net debt by $1.4 billion and returned $350 million to shareholders.xxx We view Delta’s focused corporate strategy as an attainable, and an investment positive. In accordance with our expectations for GDP and inflation, the KF anticipates CASM-ex growth below inflation and capacity growth below GDP growth for the forecast period. xxxi. Mainline Revenue: Mainline revenue is DAL’s most prevalent source of revenue. In 2013, mainline revenue accounted for roughly 70% of total revenues. Mainline revenue is derived from the base fare of each passenger ticket sold, multiplied by the total number of tickets. Regional Revenue: Regional revenue is generated when Delta’s purchases capacity of domestic regional carriers. Delta controls the scheduling, pricing, reservations, and ticketing of the seat inventories of the flight under the company’s “DL” designator code. DAL is entitled to all revenues associated with these flights, in return, Delta pays the airlines a specified amount in accordance with operating costs of the flight relative to the market rate. In 2013, regional revenue composed 17% of total revenues. Cargo Revenue: Cargo revenue is generating through selling space for cargo on flights, specified by pre-determined rates based on weight. Cargo revenue was 3% of total revenue in 2013. Other Revenue: Other revenue is composed of a variety of different sources of revenue. The most significant sources being bag fees/services charges, SkyMiles, and ancillary items, such as upgrading to first class. Other revenue provided 10% of Delta’s total revenue in 2013. Revenue Breakdown Delta classifies revenue under two broad categories: Passenger and Non-Passenger. Passenger revenue can be broken into two segments, mainline and regional. Non-passenger revenue can also be decomposed into two segments, cargo and other. The chart below illustrates the distribution of 2013 total revenue. Page | 7 Geographic Regions: Mainline revenue is primarily generated domestically. Delta’s mainline revenue diversification provides the company with stronger financial stability, especially in the case of one region demonstrating decreased demand during a certain time period. Delta’s breakdown of mainline revenue is provided below. xxxii . Delta’s diversified revenue structure provides for financial security, in times where certain regions underperform. We view DAL’s large concentration of domestic revenue as a positive, as we expect the U.S. economy to continue to outperform the broader global economy. Fleet Delta utilizes an older fleet strategy to preserve capital and boost ROIC. Delta’s average fleet age is roughly 17 years, while American and United sit around 13 years. The company has slowly began restructuring its fleet, with an emphasis on improving fuel efficiency and match capacity more closely with demand. Delta’s mainline fleet is pictured below. Trainer Refinery Delta purchased the Trainer refinery and its associated pipelines and terminal assets for $180 million in 2012. Owned and operated under its wholly-owned subsidiary Monroe Energy, Delta is the only airline to own a refinery. The company purchased the refinery to mitigate jet fuel costs, as global demand continues to increase. Under strategic agreements with BP and Phillips 66, the refinery produces jet fuel, gasoline, and diesel, exchanging non-jet fuel products for jet fuel. Delta estimates that the refinery is capable of producing 185,000 barrels per day. According to Credit Suisse, Delta’s fuel price was 3% cheaper, or 10 cents less, than what AAL, UAL, and LUV averaged in the first half of 2014.xxxiii. This accounted for $400 million in fuel expense savings for the first half of the year. Since becoming operating in the beginning of 2013, DAL cost premium of 10 cents turned into a discount of 5 cents, with regards to the cost of jet fuel to ULSD (ultra-low sulfur diesel). We conservatively estimate Delta to save roughly $200 million in fuel costs during 2014, compared to AAL, UAL, and LUV. We expect Delta to continue to increase profits from the Trainer Refinery and mitigate costs, making it the most promising investment in the domestic airline industry. Improving Macroeconomic Conditions xxxii. Delta’s ability to successful operate an older fleet evokes the company’s ability to execute efficiently. In addition to guiding capital expenditures significantly lower, than American and United, Delta also boasts the industry leading ROIC. Delta guides capex around $2-2.5 billion per annum, roughly half of UAL and AAL’s expected capex. Currently, DAL is generating an ROIC around 18%, beating Southwest, the closest competitor, by nearly 300 bps. The Krause Fund believes Delta’s fleet strategy is disciplined, and future restructuring will remove less fuel efficient planes, improving operating margins. We view DAL’s fleet strategy as a competitive advantage over the rest of the major network carriers, and recognize the benefit of greater ROE created for shareholders. Page | 8 We expect 2014 to conclude with a third straight quarter of strong GDP growth. Based on historical averages of Real GDP growth, the Krause Fund expects average GDP growth of 2.5% for the next ten years. This growth is driven by an improving labor market, steady inflation, and increasing disposable income per capita. The consumer discretionary sector is positively correlated with U.S. GDP growth, therefore, we expect continued revenue growth driven by increased personal consumption. Seattle Expansion Delta has identified expanding capacity in its Seattle hub as a key driver of organic growth in the Pacific market. The company reported that it saw a 2% improvement in international unit revenues during 2013. By focusing on the expansion into Asia from the Seattle hub, rather than domestic expansion, Delta can capitalize on the third biggest overseas market. U.S. citizen travel to Asia represents approximately 15% of total overseas flights. We view expansion into Seattle as a crucial component for Pacific growth. The Krause Fund believes that if Delta exemplifies discipline and does not expand capacity at a higher rate than GDP growth, the company will experience accelerated unit revenue growth of nearly 2.5% for every 1% increase in capacity. This bodes well for organic revenue growth, and will be a catalyst for shareholder value growth, assuming load factors and price premiums are similar to those of domestic flights. fuel cost/gallon, DAL saves roughly $40 million in fuel expense. Couple with its wholly-owned refinery, significant reductions in the company’s largest operating expense deem it a favorable time to invest in Delta. Margin Expansion Industry Leading Metrics A primary focus of Delta’s management team is to continue to make margins more efficient, by controlling variable costs and limiting fixed costs. One of the company’s most prominent goals is to keep CASM-ex fuel growth below inflation. The Krause Fund expects inflation of 2% over the forecast horizon, and views this goal as relatively attainable.xxxiv. In 2013, CASM-ex fuel grew at roughly 2.3%, only 30 bps above the expected 2% inflation rate. Although we expect CASM-ex fuel to grow slightly above 2% for 2014, due to restructuring expenses attributed to the Seattle hub, we are optimistic growth will not top inflation for the remainder of the forecast period. In addition, we expect the Trainer Refinery to contribute to fuel price reductions of roughly 10 cents/gallon annually in the near term, saving upwards of $400 million annually by the end of the forecast period. These efforts to reduce unit costs will continue to support margin expansion, and make Delta an attractive investment. Delta is the second largest domestic mainline carrier by total revenue and capacity. However, DAL boasts the highest price premium for passenger tickets in the industry. In addition, Delta’s RASM-CASM spread of 1.46 cents is 67% higher than Southwest’s second highest spread in the industry. Delta’s disciplined cost control has positioned the company as the industry’s most efficient. Higher margins support greater pre-tax profit, allowing for increased return of cash to shareholders. Investment Positives Cheaper Crude Oil In addition to Delta’s fully operational refinery and advanced hedging strategies, the price of crude oil has been trending down. This is favorable for DAL’s operating margins, as fuel costs typically account for 33% of the company’s operating revenues. As illustrated by the chart below, Brent Crude is down roughly 30% since its period highs in June. Significant Deleveraging Since 2009, Delta has decreased its net debt from $17 billion to roughly $7 billion in 2014. The company is targeting a $5 billion level of net debt by the end of 2016. This would result in Debt to EBITA leverage of approximately 2.15x. As the company continues to approach an investment grade level, it is significantly reducing its interest expense. From our estimated pre-tax cost of debt of roughly 6.5%, we expect DAL to decrease its annual interest expense by roughly $250 million annually. This is promising to shareholders, as cash flows previously used to service interest expense can now flow to them.xxxvi. Shareholder Activity Delta’s board approved a $2 billion accelerated share repurchase program to be completed by the end of 2016. Delta is also the only domestic airline to currently pay a divided, with expected dividends to be 36 cents/share in 2014. With Delta generating roughly $3 billion in free cash flow, the Krause fund expects Delta to continue to return significant cash flows to its shareholders. Investment Negatives Low Dividend Yield xxxv. We expect crude oil prices to stay relatively low in the short-term, citing oversupply in the U.S. market. In the long-run, we expect crude to fluctuate between $85-$95 a barrel. During the last quarter of 2014 into the beginning of 2015, Delta stands to significantly reduce its unit costs. For every one cent decrease in Page | 9 Although Delta is the only domestic mainline carrier to pay a divided, the current dividend yield is roughly .8%. Due to the capital intensity of the industry, DAL’s payout ratio is relatively low. If extenuated circumstances arise, such as a terrorist attack or sharp spike in the price of crude oil, it is possible the stock might experience significant capital losses, and DAL’s small dividend yield will not satisfy the appetite of investors. PRASM Growth Deceleration Since 2011, PRASM growth has decelerated nearly 7%, or 700 bps. We expect PRASM growth throughout the forecast period, albeit at a much slower rate, growing at just 50 bps by the end of 2023. If the industry slips back into undisciplined capacity races and price wars of the “old” domestic airline industry, PRASM growth would quickly diminish and turn negative. It is important for Delta’s free cash flow generation that PRASM continues to grow, in order to offset growing CASM. Competition and international capacity expansion pose significant risk of declining PRASM, ultimately destroying corporate value. Valuation Discussion Valuation Summary Utilizing several valuation methods, the Krause Fund assigns a BUY recommendation for Delta Air Lines, Inc. (NYSE: DAL). Through a discounted cash flow model (DCF), economic profit model (EP), dividend discount model (DDM), and relative valuation of forward price-to-earnings ratios (P/E), we reached a target price range of $52.26-$56.18. Our target price range was constructed utilizing our DCF and Relative P/E models. The DCF and EP models provided an intrinsic share price of $56.18, adjusted as of 11/18/14. Our forward-year P/E valuation produced an intrinsic share price of $52.26. We believe the DCF and EP models provide the best representation of the intrinsic value of Delta’s stock, due to the calculated assumptions and management guidance that went into our forecasts. For that reason, we tend to lean toward the upper bound of the target price range we have provided. Revenue Decomposition The Krause Fund expects modest total revenue growth over the 10-yr forecast horizon, accounting for annual growth of roughly 2.25%. By taking guidance for future capacity and load factor growth, we were able to calculate the total expected revenue passenger (seat) miles. Throughout the first three years of our forecasts, we expect capacity growth of roughly 6%, attributed the expansion around the Seattle hub. Over the following 7 years, available seat miles (ASMs) are only expected to grow 5% as the industry approaches steady state. By the end of 2023, load factors have grown 125 bps. Multiplying Page | 10 our annual ASMs by the load factor gives our expected revenue passenger (seat) miles (RSMs). Assuming the price premium remains constant for Delta’s passenger revenue, we assigned the same growth rate to Passenger Revenue per Available Seat Mile (PRASM) that we observed in RSMs. After growing PRASM at the forecasted rate, PRASM was multiplied by ASMs for that year, resulting in total passenger revenue. Mainline revenue and regional revenue were assigned historic 5-year weights as a percentage of total passenger revenue. Mainline and regional composing roughly 81%, and 19% of total passenger revenue, respectively. Guidance for cargo revenue called for dismal growth, so accordingly we grew cargo revenue around 1% for the first half of the forecast period, then held it constant for the remainder. Management projected other revenue to grow at roughly 2%, mostly attributable to growth in ancillary items. We expect revenue to experience significant organic growth through disciplined capacity growth, less than Real GDP growth. In addition, increasing load factors create more RSMs per ASMs. Fuel Costs Fuel costs were one of the only costs we did not hold constant as a percentage of revenue. We started by estimating the average fuel price/gallon for each year. Current oversupply in the U.S. lead us to conservatively estimate lower fuel price/gallon for 2015, 2016, and 2017 at $2.75, $2.85, $2.90. Coupled with an estimated decrease in fuel of 10 cents/gallon attributable to the Trainer refinery, we expect fuel/gallon to stabilize around $3.00, with the utilization of hedging in the forwards markets. After estimating fuel price, we found the 5-yr ratio of ASMs/gallon. Starting ASMs/gallon around the historic average of 61.5, we grew it by 10 bps each period, stabilizing at 62, signifying improved fuel efficiency on changes made to the fleet. Dividing ASMs by our yearly ASMs/gallon ratio, we were able to back out an estimate for Gallons consumed during the period. We multiplied our average fuel cost/gallon by total gallons consumed to find our estimated fuel cost for the period. We observed roughly 9% fuel growth over the forecast period, even though ASM growth was about 10%. Lower crude oil in our short-term forecasts and the constant returns from the Trainer refinery affirm the idea of fuel costs lagging capacity growth. In addition, higher load factors and more fuel efficient fleets contribute to margin expansion. Non-Fuel Operating Expenses Non-fuel operating expenses were typically forecasted as a 5-yr average percentage of total revenue. The most significant non-fuel operating expenses were salaries expense, contract carrier agreement expense, and aircraft maintenance forecasted as 21%, 15%, and 5% of total revenues, respectively. We forecasted Delta’s depreciation & amortization expense by finding the average depreciation rate and depreciation life for the last 5 years. We determined the average depreciation rate to be 7.5% and the average useful life to be 13.33. This assumption passed our sanity check, as Delta’s fleet has an average life of 17 years, and we expect ground and terminal equipment does not last as long. Taking the beginning PP&E of each year and multiplying it by our constant depreciation rate, we were able to calculate depreciation expense each year. Net PP&E is forecasted as a % of ASM, or capacity. In the early years of the forecasts, it remains around 9% of ASM, however, with an increasing cash balance, Delta is able to increase invested capital more significantly by the end of the forecast horizon. In accordance with DAL’s guidance, our model forecasts capex of $2-$2.5 billion for the first three years. Net Debt is decreased to roughly $5 billion by the end of 2016. Delta’s goal of decreasing leverage comes to fruition in 2016, reaching total debt (including operating leases)/ EBITA leverage of roughly 2.15x. We expect Delta’s free cash flow generation to allow it to significantly decrease its net debt and pension liabilities throughout the forecast horizon. By doing so, DAL will decrease its annual interest expense by $250 million annually from 2014 to 2016. Excess cash will allow for increased returns of cash to shareholders. DCF and EP Models Income Statement We believe constant revenue growth and improving cost control are reflected efficiently in our forecasts. Driven by increased load factors, CASM-ex fuel growth below expected inflation of 2%, and fuel price control, we expect Delta to grow pre-tax operating income to roughly $5 billion by the end of 2023. Delta’s operating margin creeps up towards 11% in the middle of our forecasts, in accordance with lower fuel prices, however, descends and stabilizes at roughly 10.5% in steady state growth. EPS is inflated during 2014, 2015, and 2016, due to a Net Operating Loss carryover balance of $15 billion offsetting operating income, and not requiring Delta to pay income taxes during these years. We expect DAL to produce healthy operating results as it approaches steady state. Balance Sheet The Krause Fund expects total asset growth around 20% from the beginning of the forecast period until the end. Primarily driven by strong operating and free cash flow generation, Delta’s cash and retained earnings grow significantly. All balance sheet accounts, with the exception of a few, are forecasted at a constant percent of revenues, derived from the 5-yr average. Cash is a plug account linked to the ending cash balance for each respective year. Page | 11 The DCF and EP models produced a target stock price of $56.18, representing 24.7% upside from the current stock price. Increasing NOPLAT, throughout the forecast horizon, is primarily driven by disciplined capacity growth, CASM-ex fuel growth below inflation, and fuel cost mitigation. Invested capital lags NOPLAT growth throughout the middle of the forecast period, as management has a capital expenditure guideline of $2-2.5 billion annually. After achieving peak ROIC at 20.31% in the middle of the forecast, ROIC continues to decrease until it stabilizes around 17% in steady state. We believe a few new players will enter the industry around 2020, absorbing niche travelers and slightly driving down Delta’s ROIC. We estimate CV growth as our expected inflation rate of 2%, plus an annual revenue growth – cost spread of 25 bps. This gave us a total CV growth rate of 2.25% Dividend Discount Model Our Dividend Discount Model produced an adjusted stock price of $31.23. Due to the capital intensity of the airline industry, Delta’s payout ratio is very small. After guiding annual dividends of 36 cents a share for 2014, at our current EPS prediction of 3.29, it leaves DAL with a payout ratio of 11%. We raised the payout ratio by 5% each year, due to the substantial free cash flow, even after capital expenditures. However, this model is not the best method for valuating Delta, due to the short life of its dividend policy and lack of guidance. Relative Forward P/E Valuation Our Relative P/E model produced a stock price of $52.26. There are only three other large cap, domestic mainline carriers. Therefore, we used expected 2015 earnings and current prices, to calculate a P/E 15 ratio of 10.5 for the industry. We multiplied our expected EPS for 2015 of $4.99 by our multiple of 10.5 to come up with our intrinsic value. WACC We estimated our weighted average cost of capital (WACC) to be 7.53%. Equity Beta: When coming up with a suitable equity beta for Delta, we observed the three year weekly raw beta. It did not make sense to use the five year, since it was so close to the Northwest Airlines merger. The beta we utilized for our valuation models was 1.303. Changing beta was extremely sensitive in price of our stock. Increasing beta by intervals of .1 caused large swings in our target stock price. Due to the fact that almost 70% of Delta’s enterprise value is equity changing beta drastically affects Delta’s cost of equity and ultimately WACC. Price is very sensitive to change in beta, ranging from $51-61 in a .1 move in either direction. Cost of Equity: We utilized the capital asset pricing model (CAPM) to estimate our cost of equity. Our equity risk premium was 4.64%, the historical geometric average from 1928-2013. Also, we established our risk-free rate as 3.07%, which was the 30-yr T-Bond yield on 11/13/14. Our equity beta was 1.303, the three year weekly beta for Delta. Plugging in our estimated variables, we calculated a cost of equity of 9.12%. The market value of equity comprised roughly 67.3% of Delta’s enterprise value. WACC: The two biggest components of WACC are the cost of equity and the cost of debt. We did a sensitivity analysis and found calculating the correct cost of equity is more crucial to an accurate WACC calculation, because Delta’s capital structure is composed on 70% equity. From the analysis, raising the cost of equity 1% and keeping the cost of debt constant resulted in a .50% premium in WACC. Cost of Debt: Delta does not have long-term bonds outstanding. Therefore, to calculate the pre-tax cost of debt, we took the 5-yr average of interest expense/total balance sheet debt. This provided the Krause Fund with a pre-tax cost of debt of 6.54%. The market value of debt comprised roughly 32.7% of Delta’s enterprise value. Risk-free Rate: Selecting the correct risk-free rate is crucial for finding a cost of equity that aligns with the forecast period. We utilized the 30-yr T-Bond as our risk-free rate, because we were forecasting out past ten years. Using the current yield on the 10-yr would leave Delta with a target price of $69, dramatically high compared to consensus estimates. Risk-free assumptions display extreme sensitivity in regard to price movement, a 1% decrease in the risk-free rate results in stock appreciation of roughly 24%. Sensitivity Analysis We utilized sensitivity analysis to measure the influence of key assumptions on the target price of our DCF and EP models, and the effects on WACC. CV Growth Rate: CV growth rate was are most influential assumption put into our DCF model. Since it calculates the perceived value of the operating assets after the year a company reaches its steady state, it generates a majority of the firm’s value. We assumed a 2.25% CV growth rate, associated with 2% inflation plus a .25% rasm – casm growth rate in steady state. Altering CV growth rate between 1.5%-3% with regards to a constant equityrisk premium and cost of equity, produces similar target prices ranges of roughly $52-$62. Due to the fact that Delta’s CV growth rate is relatively small, driven heavy competition, it implies CV growth is not very sensitive at such a low range. Page | 12 xvii. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) 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. i. Delta Air Lines, Company Filings, Annual Report 2013 10K ii. Yahoo! Finance, 2014 iii. Bloomberg Economic Calendar, bloomgberg.com iv. Applied Equity Reference Guide, p. 131, Fall 2014 v. Statista, Annual growth rate of the Real GDP 19902013,http://www.statista.com/statistics/188165/annua l-gdp-growth-of-the-united-states-since-1990/ vi. The World Bank, Household final consumption (% of GDP) http://data.worldbank.org/indicator/NE.CON.PETC. ZS vii. Bloomberg Economic Calendar, bloomgberg.com viii. St. Louis Fed, 30-yr Treasury, http://research.stlouisfed.org/fred2/series/DGS30 ix. St. Louis Fed, Quantitative Easing in Japan, http://research.stlouisfed.org/publications/es/article/ 10024 x. Bloomberg Economic Calendar, bloomgberg.com xi. Bureau of Labor Statistics, Labor Force Participation,http://data.bls.gov/timeseries/LNS11300 000 xii. Bloomberg Economic Calendar, Personal Income Outlays, bloomgberg.com xiii. Federal Reserve, Current FAQ’s – Inflation, http://www.federalreserve.gov/faqs/economy_14400. htm xiv. Bloomberg Economic Calendar, CPI, bloomberg.com xv. Yahoo! Finance, 2014 xvi. Google Finance, 2014 Page | 13 S&P 500 PE Ratio, Shiller PE, http://www.multpl.com/ xviii. Stern-NYU, Annual Returns, http://pages.stern.nyu.edu/~adamodar/New_Home_P age/datafile/histretSP.html xix. CNN, The Runway to the Final Four, http://money.cnn.com/infographic/news/companies/ai rline-merger/ xx. IBIS World, Domestic Airlines, Competitive Landscape, http://clients1.ibisworld.com/reports/us/industry/com petitivelandscape.aspx?entid=1125 xxi. Boeing, Commercial Airplanes, http://www.boeing.com/boeing/commercial/prices/ xxii. Delta Air Lines, Company Filings, Annual Report 2013 10K xxiii. Yahoo! Finance, 2014 xxiv. Investopedia, Airline Industry Handbook, http://www.investopedia.com/features/industryhandb ook/airline.asp xxv. Google Finance, 2014 xxvi. Yahoo! Finance, 2014 xxvii. Credit Suisse, Delta Air Lines, Inc – Initial Coverage, Julie Yates, 9/8/14 xxviii. Delta Air Lines, Company Filings, Annual Report 2013 10K xxix. Delta Air Lines, Company Filings, Annual Report 2013 10K xxx. Delta Air Lines, Investor Day Presentation 2013 xxxi. Delta Air Lines, Company Filings, Annual Report 2013 10K xxxii. Delta Air Lines, Company Filings, Annual Report 2013 10K xxxiii. Credit Suisse, Delta Air Lines, Inc – Initial Coverage, Julie Yates, 9/8/14 xxxiv. Delta Air Lines, Company Filings, Annual Report 2013 10K xxxv. NASDAQ, Crude Oil Brent, http://www.nasdaq.com/markets/crude-oilbrent.aspx?timeframe=6m xxxvi. Delta Air Lines, Investor Day Presentation 2013 xxxvii. Delta Air Lines, Company Filings, Annual Report 2013 10K xxxviii. Delta Air Lines, Company Filings, Annual Report 2013 10K xxxix. Delta Air Lines, Investor Day Presentation 2013 DELTA AIR LINES Inc Key Assumptions of Valuation Model Ticker Symbol Current Share Price Fiscal Year End DAL 45.03 Dec. 31 Current Dividend Yield Pre-Tax Cost of Debt Beta Risk-Free Rate Equity Risk-Premium Cost of Equity CV Growth of NOPLAT Marginal Tax Rate Normal Cash as % of sales WACC 0.80% 6.54% 1.303 3.07% 4.64% 9.12% 2.25% 35.00% 1.00% 7.53% Shares Outstanding 837 Salary Expense % of Revenues 21% DELTA AIR LINES Inc Revenue Decomposition & Operating Statistics (in millions, except for per share data) Fiscal Years Ending Dec. 31 Passenger Revenue: Available Seat Miles (ASM) Passenger Load Factor Revenue Passenger Miles Passenger Revenue per Available Seat Mile (PRASM) Total Passenger Revenue Yield Mainline Regional 2011 2014E 2013 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023CV 234,656 230,415 232,740 238,559 243,330 246,371 248,835 251,323 253,837 255,106 256,381 257,663 258,952 0.85% -1.81% 1.01% 2.50% 2.00% 1.25% 1.00% 1.00% 1.00% 0.50% 0.50% 0.50% 0.50% 82.10% 83.80% 83.80% 84.25% 84.50% 84.75% 85.00% 85.00% 85.00% 85.50% 85.50% 85.50% 85.50% -0.90% 1.70% 0.00% 0.54% 0.30% 0.30% 0.29% 0.00% 0.00% 0.59% 0.00% 0.00% 0.00% 192,767 192,974 194,988 200,986 205,614 208,800 211,510 213,625 215,761 218,115 219,206 220,302 221,404 -0.21% 0.11% 1.04% 3.08% 2.30% 1.55% 1.30% 1.00% 1.00% 1.09% 0.50% 0.50% 0.50% $ 0.1289 $ 0.1378 $ 0.1415 $ 0.1459 $ 0.1492 $ 0.1515 $ 0.1535 $ 0.1550 $ 0.1566 $ 0.1583 $ 0.1591 $ 0.1599 $ 0.1607 10.08% 6.90% 2.69% 3.08% 2.30% 1.55% 1.30% 1.00% 1.00% 1.09% 0.50% 0.50% 0.50% 34,794 36,307 37,331 38,194 38,961 39,744 40,379 40,784 41,193 41,606 30,257 31,807 32,942 11.00% 5.12% 3.57% 5.62% 4.35% 2.82% 2.31% 2.01% 2.01% 1.60% 1.00% 1.00% 1.00% $ 0.1570 $ 0.1648 $ 0.1689 $ 0.1731 $ 0.1766 $ 0.1788 $ 0.1806 $ 0.1824 $ 0.1842 $ 0.1851 $ 0.1861 $ 0.1870 $ 0.1879 11.23% 5.01% 2.50% 2.47% 2.00% 1.25% 1.00% 1.00% 1.00% 0.50% 0.50% 0.50% 0.50% 23,864 25,237 26,534 28,079 29,336 30,201 30,937 31,559 32,193 32,707 33,035 33,366 33,701 11.47% 5.75% 5.14% 5.82% 4.48% 2.95% 2.44% 2.01% 2.01% 1.60% 1.00% 1.00% 1.00% 6,393 6,570 6,408 6,715 6,971 7,130 7,257 7,403 7,551 7,672 7,749 7,827 7,905 9.28% 2.77% -2.47% 4.80% 3.81% 2.28% 1.78% 2.01% 2.01% 1.60% 1.00% 1.00% 1.00% Non-Passenger Revenue: Cargo Other Total Operating Revenue Revenue per Available Seat Mile (RASM) $ Cost per Available Seat Mile (CASM) $ CASM-Ex Fuel $ Assumed Fuel Price/Gallon ASMs/Gallon Mainline % of Fuel Cost Gallons Consumed Fuel Cost 2012 1,027 20.82% 3,831 5.05% 35,115 10.58% 0.1496 $ 9.65% 990 -3.60% 3,873 1.10% 36,670 4.43% 0.1591 $ 6.35% 937 -5.35% 3,894 0.54% 37,773 3.01% 0.1623 $ 1.98% 950 1.39% 3,972 2.00% 39,716 5.14% 0.1665 $ 2.58% 960 1.05% 4,051 2.00% 41,319 4.03% 0.1698 $ 2.00% 970 1.04% 4,132 2.00% 42,433 2.70% 0.1722 $ 1.43% 980 1.03% 4,194 1.50% 43,368 2.20% 0.1743 $ 1.19% 990 1.02% 4,257 1.50% 44,209 1.94% 0.1759 $ 0.93% 1,000 1.01% 4,321 1.50% 45,066 1.94% 0.1775 $ 0.93% 1,000 0.00% 4,364 1.00% 45,743 1.50% 0.1793 $ 1.00% 1,000 0.00% 4,408 1.00% 46,192 0.98% 0.1802 $ 0.48% 1,000 0.00% 4,452 1.00% 46,645 0.98% 0.1810 $ 0.48% 1,000 0.00% 4,497 1.00% 47,102 0.98% 0.1819 0.48% 0.1412 $ 11.25% 0.0887 $ -5.92% 0.1497 $ 6.00% 0.0936 $ 5.51% 0.1477 $ -1.35% 0.0958 $ 2.32% 0.1514 $ 2.53% 0.0994 $ 3.73% 0.1501 $ -0.87% 0.1012 $ 1.85% 0.1531 $ 1.99% 0.1027 $ 1.53% 0.1553 $ 1.41% 0.1041 $ 1.37% 0.1564 $ 0.73% 0.1052 $ 1.03% 0.1576 $ 0.77% 0.1061 $ 0.89% 0.1591 $ 0.98% 0.1076 $ 1.34% 0.1607 $ 1.00% 0.1084 $ 0.81% 0.1615 $ 0.47% 0.1091 $ 0.64% 0.1623 0.47% 0.1098 0.64% $ 3.00 $ 61.5 82% 3,879 9,542 2.75 $ 61.6 82% 3,950 8,908 2.85 $ 61.7 82% 3,993 9,332 2.90 $ 61.8 82% 4,026 9,575 2.90 $ 61.9 82% 4,060 9,655 2.95 $ 62 82% 4,094 9,904 2.95 $ 62 82% 4,115 9,953 3.00 $ 62 82% 4,135 10,173 3.00 $ 62 82% 4,156 10,223 3.00 62 82% 4,177 10,275 9,730 10,150 9,397 DELTA AIR LINES Inc Income Statement (in millions, except per share data) Fiscal Years Ending Dec. 31 Operating Revenue: Passenger: Mainline Regional Carriers Total passenger revenue Cargo Other Total operating revenue Operating Expense: Aircraft fuel & related taxes Salaries & related costs Contract carrier arrangements Aircraft maintenance materials & outside repairs Contracted services Depreciation & amortization Passenger commissions & other selling expenses Landing fees & other rents Passenger service Profit sharing Aircraft rent Impairment of goodwill & other intangible assets Restructuring & other items Other Total operating expense Operating income (loss) Other Expense: Interest expense, net Amortization of debt discount, net Loss (gain) on extinguishment of debt Miscellaneous, net Total other expense (income), net Income (loss) Before Income Taxes Income Tax Provision (Benefit) Net income (loss) Net earnings (loss) per share - Basic Dividends per share Shares Outstanding 2011 $23,864 6,393 30,257 1,027 3,831 35,115 9,730 6,894 5,470 1,765 1,642 1,523 1,682 1,281 721 264 298 242 1,628 33,140 1,975 901 193 68 44 1,206 769 (85) $854 1.02 845 2012 $25,237 6,570 31,807 990 3,873 36,670 10,150 7,266 5,647 1,955 1,566 1,565 1,590 1,336 732 372 272 - 2013 $ 26,534 6,408 32,942 937 3,894 37,773 9,397 7,720 5,669 1,852 1,665 1,658 1,603 1,410 762 506 209 - 452 1,592 34,495 2,175 402 1,520 34,373 3,400 812 193 118 27 1,150 1,025 16 $1,009 698 154 21 873 2,527 (8,013) $10,540 1.20 851 12.41 0.12 851 $ 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 28,079 $ 6,715 34,794 950 3,972 39,716 29,336 $ 6,971 36,307 960 4,051 41,319 30,201 $ 7,130 37,331 970 4,132 42,433 30,937 $ 7,257 38,194 980 4,194 43,368 31,559 $ 7,403 38,961 990 4,257 44,209 32,193 $ 7,551 39,744 1,000 4,321 45,066 32,707 $ 7,672 40,379 1,000 4,364 45,743 33,035 $ 7,749 40,784 1,000 4,408 46,192 33,366 $ 7,827 41,193 1,000 4,452 46,645 2023CV 33,701 7,905 41,606 1,000 4,497 47,102 9,542 8,340 5,957 1,986 1,787 1,639 1,688 1,489 794 516 298 397 1,688 36,123 3,593 0.0904677 742 80 20 842 2,751 0 $2,751 8,908 8,677 6,198 2,066 1,859 1,628 1,756 1,549 826 578 310 413 1,756 36,525 4,793 0.1160124 558 73 21 651 4,142 0 $4,142 9,332 8,911 6,365 2,122 1,909 1,654 1,803 1,591 849 636 318 424 1,803 37,719 4,715 0.1111074 479 67 21 567 4,147 0 $4,147 9,575 9,107 6,505 2,168 1,952 1,692 1,843 1,626 867 694 325 434 1,843 38,632 4,736 0.1092081 451 58 22 531 4,205 -54 $4,259 9,655 9,284 6,631 2,210 1,989 1,707 1,879 1,658 884 752 332 442 1,879 39,302 4,906 0.1109793 469 47 22 538 4,369 1529 $2,840 9,904 9,464 6,760 2,253 2,028 1,798 1,803 1,690 901 811 338 451 1,803 40,003 5,063 0.1123395 443 58 23 523 4,539 1589 $2,950 9,953 9,606 6,861 2,287 2,058 1,871 1,830 1,715 915 869 343 457 1,830 40,597 5,146 0.1125021 403 23 426 4,720 1652 $3,068 10,173 9,700 6,929 2,310 2,079 1,936 1,848 1,732 924 924 346 462 1,848 41,209 4,982 0.10786 409 23 432 4,550 1592 $2,957 10,223 9,795 6,997 2,332 2,099 2,002 1,866 1,749 933 933 350 466 1,866 41,611 5,034 0.1079127 415 23 439 4,595 1608 $2,987 10,275 9,891 7,065 2,355 2,120 2,068 1,884 1,766 942 942 353 471 1,884 42,016 5,086 0.1079722 421 24 445 4,641 1624 $3,016 3.29 0.36 837 4.99 0.75 830 5.06 1.01 820 5.20 1.30 820 3.46 1.04 820 3.61 1.26 818 3.76 1.32 815 3.64 1.27 813 3.69 1.48 810 3.73 1.49 810 DELTA AIR LINES Inc Balance Sheet (in millions, except per share data) Fiscal Years Ending Dec. 31 2011 2012 2013 Assets Current Assets: Cash & cash equivalents $2,657 $2,416 $2,844 $ Short-term investments 958 958 959 Restricted cash, cash equivalents & short-term investments 305 375 122 1,563 1,693 1,609 Accounts receivable, net Hedge margin receivable 0 619 706 Fuel inventory 367 404 357 Expendable parts & supplies inventories, net 1,418 1,344 1,318 Prepaid expenses & other current assets 7,268 7,809 7,915 Total current assets Property & Equipment: 21,001 21,481 23,373 Flight equipment 3,490 4,254 4,596 Ground property & equipment 1,127 1,381 1,296 Flight & ground equipment under capital leases 77 253 381 Advance payments for equipment 5,472 6,656 7,792 Less: accumulated depreciation & amortization 20,223 20,713 21,854 Property & equipment, net Other Assets: 9,794 9,794 9,794 Goodwill 4,751 4,679 4,658 Indentifiable intangibles, net 1,002 1,092 1,303 Other noncurrent assets 15,547 15,565 15,755 Total other assets $43,038 $44,087 $45,524 Total Assets Liabilities and Stockholders' Equity Current Liabilities: $1,944 $1,627 $1,547 Current maturities of long-term debt & capital leases 3,480 3,696 4,122 Air traffic liability 1,600 2,293 2,300 Accounts payable 1,367 1,680 1,926 Accrued salaries & related benefits 1,849 1,806 1,861 Frequent flyer deferred revenue Hedge derivatives liability 594 585 673 Taxes payable 455 602 Fuel card obligation 1,867 1,128 1,121 Other accrued liabilities 12,701 13,270 14,152 Total current liabilities Noncurrent Liabilities: 11,847 11,082 9,795 Long-term debt & capital leases 14,200 16,005 12,392 Pension, postretirement & related benefits 2,700 2,628 2,559 Frequent flyer deferred revenue 1,567 1,584 (6,728) Deferred income taxes, net Other noncurrent liabilities 1,419 1,649 1,711 Total noncurrent liabilities 31,733 32,948 19,729 Stockholders' Equity: Additional paid-in capital 13,999 14,069 13,982 Retained earnings (accumulated deficit) (8,398) (7,389) 3,049 (6,766) (8,577) (5,130) Accumulated other comprehensive income (loss) 231 234 258 Treasury stock, at cost (1,396) (2,131) 11,643 Total stockholders' equity (deficit) $43,038 $44,087 $45,524 Total Liabilities and Stockholders' Equity (Deficit) 2014E 2015E 2016E 2017E 2018E 2019E 748 $ 983 300 1,787 713 358 1,390 6,279 2,438 $ 1,017 300 1,859 720 365 1,446 8,146 2,553 $ 1,053 300 1,909 727 370 1,485 8,398 3,905 $ 1,095 300 1,952 735 373 1,518 9,878 3,892 $ 1,139 300 1,989 742 377 1,547 9,987 3,654 $ 4,156 $ 4,512 $ 4,630 $ 5,520 1,184 1,232 1,281 1,332 1,386 300 300 300 300 300 2,028 2,058 2,079 2,099 2,120 749 757 764 772 780 381 383 385 386 388 1,577 1,601 1,617 1,633 1,649 9,874 10,487 10,938 11,153 12,142 2020E 2021E 2022E 2023CV 24,601 4,982 1,246 311 9,431 21,709 26,088 5,351 1,338 334 11,059 22,052 27,788 5,700 1,425 356 12,713 22,556 29,286 6,007 1,502 375 14,405 22,766 31,583 6,479 1,620 405 16,112 23,973 33,769 6,927 1,732 433 17,910 24,951 35,925 7,369 1,842 461 19,782 25,815 38,137 7,823 1,956 489 21,718 26,687 40,408 8,289 2,072 518 23,719 27,567 42,332 8,683 2,171 543 25,787 27,942 9,794 4,611 1,300 15,705 $43,693 9,794 4,565 1,300 15,659 $45,858 9,794 4,520 1,300 15,614 $46,567 9,794 4,474 1,300 15,568 $48,212 9,794 4,430 1,300 15,524 $49,484 9,794 4,385 1,300 15,479 $50,304 9,794 4,342 1,300 15,436 $51,738 9,794 4,298 1,300 15,392 $53,017 9,794 4,255 1,300 15,349 $54,069 9,794 4,213 1,300 15,307 $55,391 $1,656 4,170 2,184 1,835 1,986 $1,247 4,338 2,273 1,909 2,066 $1,615 4,455 2,334 1,960 2,122 $2,290 4,554 2,385 2,004 2,168 $2,213 4,642 2,431 2,042 2,210 $1,500 4,732 2,479 2,082 2,253 $1,500 4,803 2,516 2,113 2,287 $1,500 4,850 2,541 2,134 2,310 695 606 1,200 14,332 723 612 1,200 14,368 743 618 1,200 15,047 759 624 1,200 15,984 774 631 1,200 16,144 789 637 1,200 15,671 801 643 1,200 15,863 808 650 1,200 15,992 $1,500 4,898 2,565 2,155 2,332 816 656 1,200 16,123 6,871 11,600 3,177 (7,691) 1,700 15,658 6,079 12,600 3,305 (9,141) 1,700 14,543 5,282 11,900 3,395 (10,592) 1,700 11,684 4,874 11,200 3,469 (12,118) 1,700 9,125 4,559 10,500 3,537 (12,118) 1,700 8,178 4,665 9,800 3,605 (12,118) 1,700 7,652 4,758 9,100 3,659 (12,118) 1,700 7,100 4,851 8,400 3,695 (12,118) 1,700 6,528 4,944 7,700 3,732 (12,118) 1,700 5,957 4,987 7,000 3,768 (12,118) 1,700 5,337 14,154 5,499 (5,000) 950 13,703 $43,693 14,326 9,020 (5,000) 1,400 16,946 $45,858 14,499 12,338 (5,000) 2,000 19,836 $46,567 14,671 15,532 (5,000) 2,100 23,103 $48,212 14,843 17,520 (5,000) 2,200 25,163 $49,484 14,843 19,438 (5,000) 2,300 26,980 $50,304 14,843 21,432 (5,000) 2,500 28,775 $51,738 14,843 23,354 (5,000) 2,700 30,497 $53,017 14,843 25,146 (5,000) 3,000 31,989 $54,069 14,843 26,956 (5,000) 3,000 33,799 $55,391 - - - - - - - - $1,500 4,946 2,591 2,176 2,355 824 663 1,200 16,255 DELTA AIR LINES Inc Cash Flow Statement (in millions) Fiscal Years Ending Dec. 31 Cash Flows From Operating Activities: Net income (loss) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization Amortization of debt discount (premium), net Loss (gain) on extinguishment of debt Fuel hedge derivative instruments Deferred income taxes Pension, postretirement & postemployment expense in excess of (less than) payments Equity-based compensation expense Impairment of goodwill & other intangible assets Restructuring & other items SkyMiles used pursuant to advance purchase under American Express Agreements Short-term investments, net Changes in certain assets and liabilities: Receivables Hedge margin receivables Restricted cash & cash equivalents Fuel inventory Prepaid expenses & other current assets Air traffic liability Frequent flyer deferred revenue Accounts payable & accrued liabilities Other assets & liabilities Other, net Net cash flows from operating activities Cash Flows From Investing Activities: Property and equipment additions: Flight Equipment, Including Advance Payments Ground Property & Equipment, Including Technology Decrease (increase) in restricted cash & cash equivalents Decrease (increase) in short-term investments Purchase of Virgin Atlantic shares Purchase of investments Redemption of investments Increase in cash in connection with the merger Proceeds from sales of flight equipment Proceeds from sales of investments Other, net Net Cash Flows From Investing Activities Cash Flows From Financing Activities: Payments on long-term debt & capital lease obligations Cash dividends Proceeds from long-term obligations Repurchase of common stock Fuel card obligation Debt issuance costs Restricted cash & cash equivalents Proceeds from american express agreement Proceeds from (payment of) short-term obligations, net Proceeds from sale of treasury stock, net of commissions Other, net Net Cash Flows From Financing Activities Net Increase (Decrease) in Cash & Cash Equivalents Cash & cash equivalents at beginning of year Cash & cash equivalents at end of year Supplemental Disclosure of Cash Paid for Interest 2007 2008 2009 $314 ($8,922) ($1,237) 778 1,266 (30) 211 (604) 50 (119) (278) 7,296 892 36 22 (111) (585) (359) 175 334 (416) 320 (18) (444) (1,073) (247) (1,707) (643) (185) 129 84 83 4 (528) (1,281) (241) 609 (92) 2,441 154 8 1,598 473 $742 2011 2012 2013 $593 $854 $1,009 $10,540 1,536 370 83 (148) (329) 307 108 - 1,511 216 391 (136) 9 (301) 89 182 - 1,523 193 68 135 (2) (308) 72 142 - 1,565 193 56 (209) 17 (208) 54 184 (333) - 147 1,132 79 (141) 16 (105) 232 (345) 516 105 2,832 (76) (24) 153 (16) 174 82 303 (373) (66) 2,834 (116) (51) (451) (134) 216 (115) 899 (66) (34) 2,476 231 (87) 28 426 (121) 213 (36) 185 4,504 (951) (1,055) (907) (1,196) (251) (287) (347) (772) (59) (2) 142 (730) (1,078) (958) 844 1,019 100 36 15 (4) 12 (10) (55) (1,008) (2,026) (1,498) (1,962) (2,117) (451) (360) (959) 1,117 14 (2,756) (61) (286) (298) 143 (167) 1,379 (1,314) (1,296) (2,891) 2,005 2,132 2,966 - 1,000 (300) 192 (19) (12) (94) 672 1,716 (19) 478 1,607 352 2,170 2,648 4,255 $2,648 $4,255 $4,607 $363 2010 (3,722) (4,172) (2,864) 1,130 2,395 1,965 318 137 (63) (41) (51) 71 2 48 (2,521) (1,571) (755) (1,715) (235) (241) 4,607 2,892 2,657 $2,892 $2,657 $2,416 $867 $1,036 $925 $834 1,658 154 (114) (7,991) (624) 285 (333) 90 (1,461) (102) 268 (250) 147 78 (1,320) 428 2,416 $2,844 $698 DELTA AIR LINES Inc Cash Flow Statement (in millions) Fiscal Years Ending Dec. 31 Cash Flows From Operating Activities: Net income (loss) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization Change in Deferred Tax Liabilities Pension, postretirement & related benefits (Increase) Decrease in Operating Assets: Accounts Receivable Fuel inventory Other Inventory Prepaid expenses Increase (Decrease) in Operating Liabilities: Air traffic liability Accounts payable Accrued salaries & related benefits Frequent flyer deferred revenue Taxes payable Fuel card obligation Other Accrued Liabilities Cash Provided by Operating Activities Cash Flows From Investing Activities: (Increase) Decrease in Short-Term Investments Capital Expenditues Capitalization of Intangible Assets (Increase) Decrease in Other Assets Increase (Decrease) in Other Liabilities Cash Provided by Investing Activities Cash Flows From Financing Activites: Proceeds (Payments) of Short-Term Debt Proceeds (Payments) of Long-Term Debt Payment of Dividends Proceeds from Issuance of Common Stock (ESOP) Repurchases of Common Stock Change in Accumulated Other Comprehensive Loss Cash Provided by Financing Activities Net Increase (Decrease) in Cash & Cash Equivalents Cash & Cash Equivalents at beginning of year Cash & Cash Equivalents at end of year 2014E $2,751 2015E 2016E 2017E 2018E $2,840 2019E $2,950 2020E $3,068 2021E $2,957 2022E $2,987 2023CV $4,142 $4,147 $4,259 $3,016 1,639 (963) (792) 1,628 (1,450) 1,000 1,654 (1,452) (700) 1,692 (1,526) (700) 1,707 0 (700) 1,798 0 (700) 1,871 0 (700) 1,936 0 (700) 2,002 0 (700) 2,068 0 (700) (178) (7) (1) (72) (72) (7) (7) (56) (50) (7) (5) (39) (42) (7) (4) (33) (38) (7) (4) (29) (39) (7) (4) (30) (31) (7) (2) (24) (20) (8) (2) (16) (20) (8) (2) (16) (21) (8) (2) (16) 48 (116) (91) 743 22 4 79 $3,067 168 88 74 208 28 6 0 $5,751 117 61 51 145 20 6 0 $3,949 98 51 43 122 16 6 0 $3,976 88 46 39 109 15 6 0 $4,072 90 47 40 111 15 6 0 $4,278 71 37 31 88 12 6 0 $4,422 47 25 21 58 8 6 0 $4,313 48 25 21 59 8 6 0 $4,409 48 25 21 59 8 7 0 $4,506 (202) (1,494) 47 3 (11) (1,657) (34) (1,971) 46 0 0 (1,960) (36) (2,158) 46 0 0 (2,148) (42) (1,902) 45 0 0 (1,899) (44) (2,915) 45 0 0 (2,914) (46) (2,775) 44 0 0 (2,777) (47) (2,736) 44 0 0 (2,739) (49) (2,808) 43 0 0 (2,814) (51) (2,881) 43 0 0 (2,890) (53) (2,442) 43 0 0 (2,453) $109 (2,924) -301.498 172 (692) 130 ($3,506) ($2,096) $2,844 $748 ($409) (793) -621.322 172 (450) 0 ($2,101) $1,691 $748 $2,438 $368 (797) -829.466 172 (600) 0 ($1,686) $115 $2,438 $2,553 $675 (408) -1064.8 172 (100) 0 ($726) $1,352 $2,553 $3,905 ($77) (315) -851.88 172 (100) 0 ($1,171) ($13) $3,905 $3,892 ($713) 106 -1032.67 0 (100) 0 ($1,740) ($238) $3,892 $3,654 $0 93 -1073.83 0 (200) 0 ($1,181) $502 $3,654 $4,156 $0 92 -1035.09 0 (200) 0 ($1,143) $356 $4,156 $4,512 $0 93 -1194.68 0 (300) 0 ($1,401) $118 $4,512 $4,630 $0 43 -1206.59 0 0 0 ($1,163) $890 $4,630 $5,520 DELTA AIR LINES Inc Common Size Income Statement Fiscal Years Ending Dec. 31 Operating Revenue: Passenger: Mainline Regional Carriers Total passenger revenue Cargo Other Total operating revenue Operating Expense: Aircraft fuel & related taxes Salaries & related costs Contract carrier arrangements Aircraft maintenance materials & outside repairs Contracted services Depreciation & amortization Passenger commissions & other selling expenses Landing fees & other rents Passenger service Profit sharing Aircraft rent Impairment of goodwill & other intangible assets Restructuring & other items Other Total operating expense Operating income (loss) Other Expense: Interest expense, net Amortization of debt discount, net Gain (loss) on extinguishment of debt Miscellaneous, net Total other income (expense), net Income (loss) Before Income Taxes Income Tax Benefit (Provision) Net income (loss) 2013 5YR AVG 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023CV 67.96% 68.82% 70.25% 68.09% 18.21% 17.92% 16.96% 18.07% 86.17% 86.74% 87.21% 86.16% 2.92% 2.70% 2.48% 2.72% 10.91% 10.56% 10.31% 11.12% 100.00% 100.00% 100.00% 100.00% 70.70% 16.91% 87.61% 2.39% 10.00% 100.00% 71.00% 16.87% 87.87% 2.32% 9.81% 100.00% 71.17% 16.80% 87.98% 2.29% 9.74% 100.00% 71.34% 16.73% 88.07% 2.26% 9.67% 100.00% 71.39% 16.74% 88.13% 2.24% 9.63% 100.00% 71.44% 16.76% 88.19% 2.22% 9.59% 100.00% 71.50% 16.77% 88.27% 2.19% 9.54% 100.00% 71.52% 16.78% 88.29% 2.16% 9.54% 100.00% 71.53% 16.78% 88.31% 2.14% 9.54% 100.00% 71.55% 16.78% 88.33% 2.12% 9.55% 100.00% 24.03% 21.00% 15.00% 5.00% 4.50% 4.13% 4.25% 3.75% 2.00% 1.30% 0.75% 1.00% 4.25% 90.95% 9.05% 0.00% 1.87% 0.20% 0.05% 2.12% 6.93% 0.00% 6.93% 21.56% 21.00% 15.00% 5.00% 4.50% 3.94% 4.25% 3.75% 2.00% 1.40% 0.75% 1.00% 4.25% 88.40% 11.60% 0.00% 1.35% 0.18% 0.05% 1.58% 10.02% 0.00% 10.02% 21.99% 21.00% 15.00% 5.00% 4.50% 3.90% 4.25% 3.75% 2.00% 1.50% 0.75% 1.00% 4.25% 88.89% 11.11% 0.00% 1.13% 0.16% 0.05% 1.34% 9.77% 0.00% 9.77% 22.08% 21.00% 15.00% 5.00% 4.50% 3.90% 4.25% 3.75% 2.00% 1.60% 0.75% 1.00% 4.25% 89.08% 10.92% 0.00% 1.04% 0.13% 0.05% 1.22% 9.70% -0.12% 9.82% 21.84% 21.00% 15.00% 5.00% 4.50% 3.86% 4.25% 3.75% 2.00% 1.70% 0.75% 1.00% 4.25% 88.90% 11.10% 0.00% 1.06% 0.11% 0.05% 1.22% 9.88% 3.46% 6.42% 21.98% 21.00% 15.00% 5.00% 4.50% 3.99% 4.00% 3.75% 2.00% 1.80% 0.75% 1.00% 4.00% 88.77% 11.23% 0.00% 0.98% 0.13% 0.05% 1.16% 10.07% 3.53% 6.55% 21.76% 21.00% 15.00% 5.00% 4.50% 4.09% 4.00% 3.75% 2.00% 1.90% 0.75% 1.00% 4.00% 88.75% 11.25% 0.00% 0.88% 0.05% 0.93% 10.32% 3.61% 6.71% 22.02% 21.00% 15.00% 5.00% 4.50% 4.19% 4.00% 3.75% 2.00% 2.00% 0.75% 1.00% 4.00% 89.21% 10.79% 0.00% 0.89% 0.05% 0.94% 9.85% 3.45% 6.40% 21.92% 21.00% 15.00% 5.00% 4.50% 4.29% 4.00% 3.75% 2.00% 2.00% 0.75% 1.00% 4.00% 89.21% 10.79% 0.00% 0.89% 0.05% 0.94% 9.85% 3.45% 6.40% 21.81% 21.00% 15.00% 5.00% 4.50% 4.39% 4.00% 3.75% 2.00% 2.00% 0.75% 1.00% 4.00% 89.20% 10.80% 0.00% 0.89% 0.05% 0.94% 9.85% 3.45% 6.40% 2011 27.71% 19.63% 15.58% 5.03% 4.68% 4.34% 4.79% 3.65% 2.05% 0.75% 0.85% 0.69% 4.64% 94.38% 5.62% 0.00% 2.57% 0.55% 0.19% 0.13% 3.43% 2.19% -0.24% 2.43% 2012 27.68% 24.88% 19.81% 20.44% 15.40% 15.01% 5.33% 4.90% 4.27% 4.41% 4.27% 4.39% 4.34% 4.24% 3.64% 3.73% 2.00% 2.02% 1.01% 1.34% 0.74% 0.55% 1.23% 1.06% 4.34% 4.02% 94.07% 91.00% 5.93% 9.00% 0.00% 0.00% 2.21% 1.85% 0.53% 0.41% 0.32% 0.07% 0.06% 3.14% 2.31% 2.80% 6.69% 0.04% -21.21% 2.75% 27.90% 26.10% 21.10% 14.63% 5.06% 4.78% 4.65% 4.63% 3.93% 2.09% 0.82% 1.01% 0.00% 1.17% 4.75% 94.72% 5.28% 0.00% 2.83% 0.43% 0.41% 0.02% 3.69% 1.59% -4.52% 6.11% DELTA AIR LINES Inc Common Size Balance Sheet Fiscal Years Ending Dec. 31 Assets Current Assets: Cash & cash equivalents Short-term investments Restricted cash, cash equivalents & short-term investments Accounts receivable, net Hedge margin receivable Fuel inventory Expendable parts & supplies inventories, net Prepaid expenses & other current assets Total current assets Property & Equipment: Flight equipment Ground property & equipment Flight & ground equipment under capital leases Advance payments for equipment Less: accumulated depreciation & amortization Property & equipment, net Other Assets: Goodwill Indentifiable intangibles, net Other noncurrent assets Total other assets Total Assets Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt & capital leases Air traffic liability Accounts payable Accrued salaries & related benefits Frequent flyer deferred revenue Hedge derivatives liability Taxes payable Fuel card obligation Other accrued liabilities Total current liabilities Noncurrent Liabilities: Long-term debt & capital leases Pension, postretirement & related benefits Frequent flyer deferred revenue Deferred income taxes, net Other noncurrent liabilities Total noncurrent liabilities Stockholders' Equity Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Treasury stock, at cost Total stockholders' equity (deficit) Total Liabilities and Stockholders' Equity (Deficit) 2011 2012 2013 5YR AVG 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023CV 7.57% 2.73% 0.87% 4.45% 0.00% 1.05% 4.04% 20.70% 6.59% 2.61% 1.02% 4.62% 1.69% 1.10% 3.67% 21.30% 7.53% 2.54% 0.32% 4.26% 1.87% 0.95% 3.49% 20.95% 9.44% 2.08% 1.00% 4.55% 0.00% 0.71% 1.05% 3.57% 22.41% 1.88% 2.47% 0.76% 4.50% 1.80% 0.90% 3.50% 15.81% 5.90% 2.46% 0.73% 4.50% 1.74% 0.88% 3.50% 19.72% 6.02% 2.48% 0.71% 4.50% 1.71% 0.87% 3.50% 19.79% 9.00% 2.53% 0.69% 4.50% 1.69% 0.86% 3.50% 22.78% 8.80% 2.58% 0.68% 4.50% 1.68% 0.85% 3.50% 22.59% 8.11% 2.63% 0.67% 4.50% 1.66% 0.84% 3.50% 21.91% 9.09% 2.69% 0.66% 4.50% 1.65% 0.84% 3.50% 22.93% 9.77% 2.77% 0.65% 4.50% 1.66% 0.83% 3.50% 23.68% 9.93% 2.86% 0.64% 4.50% 1.66% 0.83% 3.50% 23.91% 11.72% 2.94% 0.64% 4.50% 1.66% 0.82% 3.50% 25.78% 59.81% 9.94% 3.21% 0.22% 15.58% 57.59% 58.58% 11.60% 3.77% 0.69% 18.15% 56.48% 61.88% 12.17% 3.43% 1.01% 20.63% 57.86% 62.75% 10.80% 3.21% 0.55% 15.58% 61.74% 61.94% 12.54% 3.14% 0.78% 23.75% 54.66% 63.14% 12.95% 3.24% 0.81% 26.77% 53.37% 65.49% 13.43% 3.36% 0.84% 29.96% 53.16% 67.53% 13.85% 3.46% 0.87% 33.22% 52.50% 71.44% 14.65% 3.66% 0.92% 36.45% 54.23% 74.93% 15.37% 3.84% 0.96% 39.74% 55.37% 78.54% 16.11% 4.03% 1.01% 43.24% 56.44% 82.56% 16.94% 4.23% 1.06% 47.02% 57.78% 86.63% 17.77% 4.44% 1.11% 50.85% 59.10% 89.87% 18.44% 4.61% 1.15% 54.75% 59.32% 27.89% 26.71% 25.93% 29.25% 13.53% 12.76% 12.33% 14.16% 2.85% 2.98% 3.45% 3.04% 44.27% 42.45% 41.71% 46.45% 122.56% 120.23% 120.52% 130.59% 24.66% 11.61% 3.27% 39.54% 110.01% 23.70% 11.05% 3.15% 37.90% 110.99% 23.08% 10.65% 3.06% 36.80% 109.74% 22.58% 10.32% 3.00% 35.90% 111.17% 22.15% 10.02% 2.94% 35.11% 111.93% 21.73% 9.73% 2.88% 34.35% 111.62% 21.41% 9.49% 2.84% 33.74% 113.10% 21.20% 9.31% 2.81% 33.32% 114.78% 21.00% 9.12% 2.79% 32.91% 115.92% 20.79% 8.94% 2.76% 32.50% 117.60% 5.54% 9.91% 4.56% 3.89% 5.27% 1.69% 5.32% 36.17% 4.44% 10.08% 6.25% 4.58% 4.93% 1.60% 1.24% 3.08% 36.19% 4.10% 10.91% 6.09% 5.10% 4.93% 1.78% 1.59% 2.97% 37.47% 5.21% 10.45% 5.35% 4.32% 5.24% 0.10% 1.75% 0.57% 3.13% 36.12% 4.17% 10.50% 5.50% 4.62% 5.00% 1.75% 1.53% 3.02% 36.09% 3.02% 10.50% 5.50% 4.62% 5.00% 1.75% 1.48% 2.90% 34.77% 3.81% 10.50% 5.50% 4.62% 5.00% 1.75% 1.46% 2.83% 35.46% 5.28% 10.50% 5.50% 4.62% 5.00% 1.75% 1.44% 2.77% 36.86% 5.01% 10.50% 5.50% 4.62% 5.00% 1.75% 1.43% 2.71% 36.52% 3.33% 10.50% 5.50% 4.62% 5.00% 1.75% 1.41% 2.66% 34.77% 3.28% 10.50% 5.50% 4.62% 5.00% 1.75% 1.41% 2.62% 34.68% 3.25% 10.50% 5.50% 4.62% 5.00% 1.75% 1.41% 2.60% 34.62% 3.22% 10.50% 5.50% 4.62% 5.00% 1.75% 1.41% 2.57% 34.57% 3.18% 10.50% 5.50% 4.62% 5.00% 1.75% 1.41% 2.55% 34.51% 33.74% 40.44% 7.69% 4.46% 4.04% 90.37% 30.22% 25.93% 43.65% 32.81% 7.17% 6.77% 4.32% -17.81% 4.50% 4.53% 89.85% 52.23% 37.44% 38.99% 8.35% 0.29% 4.23% 89.30% 17.30% 29.21% 8.00% -19.36% 4.28% 39.42% 0.00% 35.64% 13.85% -12.59% 2.39% 34.50% 110.01% 14.71% 30.49% 8.00% -22.12% 4.11% 35.20% 0.00% 34.67% 21.83% -12.10% 3.39% 41.01% 110.99% 12.45% 28.04% 8.00% -24.96% 4.01% 27.54% 0.00% 34.17% 29.08% -11.78% 4.71% 46.75% 109.74% 11.24% 25.83% 8.00% -27.94% 3.92% 21.04% 0.00% 33.83% 35.81% -11.53% 4.84% 53.27% 111.17% 10.31% 23.75% 8.00% -27.41% 3.85% 18.50% 0.00% 33.57% 39.63% -11.31% 4.98% 56.92% 111.93% 10.35% 21.75% 8.00% -26.89% 3.77% 16.98% 0.00% 32.94% 43.13% -11.09% 5.10% 59.87% 111.62% 10.40% 19.89% 8.00% -26.49% 3.72% 15.52% 0.00% 32.45% 46.85% -10.93% 5.47% 62.90% 113.10% 10.50% 18.19% 8.00% -26.23% 3.68% 14.13% 0.00% 32.13% 50.56% -10.82% 5.85% 66.02% 114.78% 10.60% 16.51% 8.00% -25.98% 3.64% 12.77% 0.00% 31.82% 53.91% -10.72% 6.43% 68.58% 115.92% 10.59% 14.86% 8.00% -25.73% 3.61% 11.33% 0.00% 31.51% 57.23% -10.62% 6.37% 71.76% 117.60% 39.87% 38.37% 37.02% 41.67% -23.92% -20.15% 8.07% -20.04% -19.27% -23.39% -13.58% -16.04% 0.66% 0.64% 0.68% 0.65% -3.98% -5.81% 30.82% 4.95% 122.56% 120.23% 120.52% 130.37% DELTA AIR LINES Inc Value Driver Estimation NOPLAT Fiscal Years Ending Dec. 31 Net Sales Less: Aircraft Fuel & Related Salaries & Related Contract Carrier Arrangements Aircraft Maintenance Contracted Services Depreciation & Amortization Passenger Commissions Landing Fees Passenger Services Profit sharing Aircraft rent Restructuring Implied Interest on Operating Leases EBITA Provision for (Benefit from) Income Taxes Tax Shield on Interest Expense Tax Shield on Implied Interest on Operating Leases Tax Shield on Other Non-Operating Expenses Tax Shield on Amortization of Debt Discount Tax Shield on Loss on Extinguishment of Debt Total Adjusted Taxes Net Change in Deferred Tax Liabilities NOPLAT 2011 35,115 9,730 6,894 5,470 1,765 1,642 1,523 1,682 1,281 721 264 298 242 668 4,271 (85) 315 234 585 68 24 1,141 (2) 3,128 2012 36,670 10,150 7,266 5,647 1,955 1,566 1,565 1,590 1,336 732 372 272 452 651 4,418 16 284 228 567 68 41 1,203 17 3,231 2013 37,773 9,397 7,720 5,669 1,852 1,665 1,658 1,603 1,410 762 506 209 402 627 5,547 (8,013) 244 219 539 54 0 (6,956) (8,312) 4,191 2014E 39,716 9,542 8,340 5,957 1,986 1,787 1,639 1,688 1,489 794 516 298 397 530 5,811 0 260 186 598 28 0 1,071 (963) 3,777 2015E 41,319 8,908 8,677 6,198 2,066 1,859 1,628 1,756 1,549 826 578 310 413 539 7,088 0 195 189 622 26 0 1,031 (1,450) 4,607 2016E 42,433 9,332 8,911 6,365 2,122 1,909 1,654 1,803 1,591 849 636 318 424 551 7,069 0 168 193 639 23 0 1,023 (1,452) 4,595 2017E 43,368 9,575 9,107 6,505 2,168 1,952 1,692 1,843 1,626 867 694 325 434 556 7,136 (54) 158 195 653 20 0 972 (1,526) 4,638 2018E 44,209 9,655 9,284 6,631 2,210 1,989 1,707 1,879 1,658 884 752 332 442 586 7,371 1,529 164 205 665 16 0 2,580 0 4,791 2019E 45,066 9,904 9,464 6,760 2,253 2,028 1,798 1,803 1,690 901 811 338 451 610 7,475 1,589 155 213 639 20 0 2,616 0 4,859 2020E 45,743 9,953 9,606 6,861 2,287 2,058 1,871 1,830 1,715 915 869 343 457 631 7,607 1,652 141 221 648 0 0 2,662 0 4,944 2021E 46,192 10,173 9,700 6,929 2,310 2,079 1,936 1,848 1,732 924 924 346 462 652 7,482 1,592 143 228 655 0 0 2,619 0 4,863 2022E 46,645 10,223 9,795 6,997 2,332 2,099 2,002 1,866 1,749 933 933 350 466 674 7,573 1,608 145 236 661 0 0 2,651 0 4,922 2023CV 47,102 10,275 9,891 7,065 2,355 2,120 2,068 1,884 1,766 942 942 353 471 683 7,653 1,624 148 239 668 0 0 2,678 0 4,974 Invested Capital Fiscal Years Ending Dec. 31 Normal Cash Accounts Receivable Fuel Inventory Other Inventory Prepaid Expenses Operating Current Assets 2011 351 1,563 0 367 1,418 3,699 2012 367 1,693 619 404 1,344 4,427 2013 378 1,609 706 357 1,318 4,368 2014E 397 1,787 713 358 1,390 4,645 2015E 413 1,859 720 365 1,446 4,804 2016E 424 1,909 727 370 1,485 4,916 2017E 434 1,952 735 373 1,518 5,011 2018E 442 1,989 742 377 1,547 5,098 2019E 451 2,028 749 381 1,577 5,186 2020E 457 2,058 757 383 1,601 5,256 2021E 462 2,079 764 385 1,617 5,306 2022E 466 2,099 772 386 1,633 5,357 2023CV 471 2,120 780 388 1,649 5,407 Accounts Payable Air Traffic Liability Accrued Salaries Frequent Flyer Deferred Revenue Taxes Payable Fuel Card Obligation Other Accrued Liabilities Operating Current Liabilities Net Operating Working Capital 1,600 3,480 1,367 1,849 594 0 1,867 10,757 (7,058) 2,293 3,696 1,680 1,806 585 455 1,128 11,643 (7,216) 2,300 4,122 1,926 1,861 673 602 1,121 12,605 (8,237) 2,184 4,170 1,835 1,986 695 606 1,200 12,676 (8,031) 2,273 4,338 1,909 2,066 723 612 1,200 13,121 (8,317) 2,334 4,455 1,960 2,122 743 618 1,200 13,432 (8,516) 2,385 4,554 2,004 2,168 759 624 1,200 13,694 (8,683) 2,431 4,642 2,042 2,210 774 631 1,200 13,931 (8,833) 2,479 4,732 2,082 2,253 789 637 1,200 14,171 (8,985) 2,516 4,803 2,113 2,287 801 643 1,200 14,363 (9,107) 2,541 4,850 2,134 2,310 808 650 1,200 14,492 (9,186) 2,565 4,898 2,155 2,332 816 656 1,200 14,623 (9,266) 2,591 4,946 2,176 2,355 824 663 1,200 14,755 (9,347) Property, Plant & Equipment, net 20,223 20,713 21,854 21,709 22,052 22,556 22,766 23,973 24,951 25,815 26,687 27,567 27,942 Net Intangible Assets Capitalized PV of Operating Leases Net Other Operating Assets 4,751 9,948 14,699 4,679 9,582 14,261 4,658 8,165 12,823 4,611 8,111 12,722 4,565 8,239 12,804 4,520 8,428 12,947 4,474 8,506 12,980 4,430 8,957 13,387 4,385 9,322 13,708 4,342 9,645 13,987 4,298 9,971 14,269 4,255 10,300 14,555 4,213 10,440 14,652 Deferred Revenue Other Operating Liabilities 2,700 2,700 2,628 2,628 2,559 2,559 3,177 3,177 3,305 3,305 3,395 3,395 3,469 3,469 3,537 3,537 3,605 3,605 3,659 3,659 3,695 3,695 3,732 3,732 3,768 3,768 Invested Capital 25,164 25,130 23,881 23,223 23,234 23,593 23,594 24,991 26,068 27,036 28,075 29,124 29,479 ROIC Fiscal Years Ending Dec. 31 NOPLAT Beginning Invested Capital ROIC 2011 3,128 26,436 11.83% 2012 3,231 25,164 12.84% 2013 4,191 25,130 16.68% 2014E 3,777 23,881 15.82% 2015E 4,607 23,223 19.84% 2016E 4,595 23,234 19.78% 2017E 4,638 23,593 19.66% 2018E 4,791 23,594 20.31% 2019E 4,859 24,991 19.44% 2020E 4,944 26,068 18.97% 2021E 4,863 27,036 17.99% 2022E 4,922 28,075 17.53% 2023CV 4,974 29,124 17.08% FCF Fiscal Years Ending Dec. 31 NOPLAT Change in Invested Capital FCF 2011 3,128 (1,272) 4,401 2012 3,231 (35) 3,266 2013 4,191 (1,249) 5,439 2014E 3,777 (658) 4,436 2015E 4,607 11 4,597 2016E 4,595 359 4,236 2017E 4,638 1 4,637 2018E 4,791 1,397 3,394 2019E 4,859 1,077 3,782 2020E 4,944 968 3,976 2021E 4,863 1,039 3,824 2022E 4,922 1,049 3,873 2023CV 4,974 355 4,620 EP Fiscal Years Ending Dec. 31 Beginning Invested Capital ROIC WACC Economic Profit 2011 26,436 11.83% 7.53% 1,139 2012 25,164 12.84% 7.53% 1,337 2013 25,130 16.68% 7.53% 2,300 2014E 23,881 15.82% 7.53% 1,980 2015E 23,223 19.84% 7.53% 2,860 2016E 23,234 19.78% 7.53% 2,847 2017E 23,593 19.66% 7.53% 2,863 2018E 23,594 20.31% 7.53% 3,016 2019E 24,991 19.44% 7.53% 2,978 2020E 26,068 18.97% 7.53% 2,983 2021E 27,036 17.99% 7.53% 2,829 2022E 28,075 17.53% 7.53% 2,810 2023CV 29,124 17.08% 7.53% 2,782 DELTA AIR LINES Inc Weighted Average Cost of Capital (WACC) Estimation (in millions) WACC Market Value of Debt Pre-Tax Cost of Debt Marginal Tax Rate 18,304 6.54% 35% Market Value of Equity Cost of Equity 37,687 9.12% WACC 7.53% Market Value of Debt Short Term Debt Long Term Debt PV of Operating Leases Market Value of Debt 1,169 8,970 8,165 18,304 Market Value of Equity Current Stock Price Shares Outstanding Market Value of Equity 45.03 837 37,687 CAPM-Cost of Equity Risk-Free Rate Equity Risk-Premium Beta Cost of Equity 3.07% 4.64% 1.303 9.12% DELTA AIR LINES Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth CV ROIC WACC Cost of Equity 2.25% 17.08% 7.53% 9.12% DCF Model Fiscal Years Ending Dec. 31 FCF Continuing Value (CV) WACC CF to Discount Period PV of FCF Value of Operating Assets Add: Excess Cash Short-Term Investments Restricted Cash Less: Short-Term Debt Long-Term Debt PV of Operating Leases PV of ESOP Underfunded Pension & Postretirement Value of Equity Number of Shares Outstanding Intrinsic Value of Stock Fraction of fiscal year elapsed Adjusted Stock Price 2013 5,439 2015E 4,597 2016E 4,236 2017E 4,637 2018E 3,394 2019E 3,782 2020E 3,976 2021E 3,824 2022E 3,873 2023CV 4,620 81,866 4,436 1 4,125 4,597 2 3,976 4,236 3 3,407 4,637 4 3,469 3,394 5 2,362 3,782 6 2,447 3,976 7 2,393 3,824 8 2,140 3,873 9 2,016 81,866 9 42,609 2014E 1,980 2015E 2,860 2016E 2,847 2017E 2,863 2018E 3,016 2019E 2,978 2020E 2,983 2021E 2,829 2022E 2,810 2023CV 2,782 52,742 1,980 1 1,842 2,860 2 2,474 2,847 3 2,290 2,863 4 2,142 3,016 5 2,098 2,978 6 1,927 2,983 7 1,795 2,829 8 1,583 2,810 9 1,462 52,742 9 27,450 7.53% $ $ EP Model Fiscal Years Ending EP Continuing Value (CV) Beginning Invested Capital WACC EP to Discount Period to Discount PV of EP Value of Operating Assets Add: Excess Cash Short-Term Investments Restricted Cash Less: Short-Term Debt Long-Term Debt PV of Operating Leases PV of ESOP Underfunded Pension & Postretirement Value of Equity Number of Shares Outstanding Intrinsic Value of Stock Fraction of fiscal year elapsed Adjusted Stock Price 2014E 4,436 68,943 2,466 959 122 1,169 8,970 8,165 247 10,123 43,816 836.94 52.35 0.882 56.18 2013 2,300 23,881 7.53% 2,300 23,881 $ $ 68,943 2,466 959 122 1,169 8,970 8,165 247 10,123 43,816 836.94 52.35 0.882 56.18 DELTA AIR LINES Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model Fiscal Years Ending Dec. 31 EPS Key Assumptions CV growth CV ROE Cost of Equity Future Cash Flows P/E Multiple EPS(next period) Future Stock Price Dividends Per Share Number of Periods Discounted Cash Flows Intrinsic Value Fraction of Fiscal Year Elapsed Adjusted Stock Price 2013 2014E $ 12.41 $ 3.29 $ 2015E 4.99 $ 2016E 5.06 $ 2017E 5.20 $ 2018E 3.46 $ 2019E 3.61 $ 2020E 3.76 $ 2021E 2022E 3.64 $ 2023CV 3.69 $ 3.73 1.27 $ 8 0.63 $ 12.95 $ 3.73 $ 48.25 1.48 $ 48.25 9 9 0.67 $ 22.00 2.25% 20.32% 9.12% $ 0.12 $ $ $ 28.10 0.882 $ 31.23 0.36 $ 1 0.33 $ 0.75 $ 2 0.63 $ 1.01 $ 3 0.78 $ 1.30 $ 4 0.92 $ 1.04 $ 5 0.67 $ 1.26 $ 6 0.75 $ 1.32 $ 7 0.72 $ DELTA AIR LINES Inc Relative Valuation Models Ticker AAL UAL LUV Company Price AMERICAN AIRLINES GR $ 44.89 UNITED CONTINENTAL H $ 58.37 SOUTHWEST AIRLINES C $ 39.61 EPS 2014E $5.68 $4.98 $1.93 EPS 2015E $7.35 $6.80 $2.37 Average DAL DELTA AIR LINES Inc $3.29 $4.99 Implied Value: Relative P/E (EPS14) Relative P/E (EPS15) $ 45.03 $ 43.97 $ 52.26 P/E 14 7.9 11.7 20.5 13.4 13.7 P/E 15 Market Cap 6.1 31.56 8.6 20.7 16.7 26.44 10.5 9.0 DELTA AIR LINES Inc Key Management Ratios Fiscal Years Ending Dec. 31 Liquidity Ratios Cash Ratio Current Ratio Quick Ratio Cash & Cash Equivalents/Current Liabilities Current Assets/Current Liabilities (CA - (Inventory + Prepaid Expenses))/ CL Activity or Asset-Management Ratios Asset Turnover Receivables Turnover Net Sales/Total Assets Net Sales/Average Net Receivables Financial Leverage Ratios Debt Ratio Debt to Equity Ratio Interest Coverage Ratio Debt to EBITA Ratio Total Liabilities/Total Assets Total Debt/Total Equity EBITA/Interest Expense Total Debt/EBITA Profitability Ratios Operating Margin Return on Equity Return on Invested Capital Operating Income/Net Sales Net Income/Average Total Equity NOPLAT/Beginning Invested Capital Payout Policy Ratios Dividend Payout Ratio Dividends/EPS 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023CV 0.21 0.57 0.43 0.18 0.59 0.41 0.20 0.56 0.39 0.05 0.44 0.27 0.17 0.57 0.39 0.17 0.56 0.39 0.24 0.62 0.45 0.24 0.62 0.45 0.23 0.63 0.46 0.26 0.66 0.49 0.28 0.68 0.51 0.29 0.69 0.52 0.34 0.75 0.57 0.82 23.26 0.83 22.52 0.83 22.88 0.91 23.39 0.90 22.66 0.91 22.52 0.90 22.46 0.89 22.44 0.90 22.44 0.88 22.39 0.87 22.33 0.86 22.33 0.85 22.33 1.03 -17.01 4.74 5.56 1.05 -10.46 5.44 5.05 0.74 1.68 7.95 3.52 0.69 1.21 7.83 2.86 0.63 0.92 12.71 2.20 0.57 0.77 14.76 2.17 0.52 0.68 15.82 2.20 0.49 0.63 15.73 2.13 0.46 0.57 16.88 2.07 0.44 0.55 18.87 2.09 0.42 0.54 18.28 2.18 0.41 0.52 18.23 2.21 0.39 0.50 18.16 2.21 0.056 6.10% 11.83% 0.059 7.17% 12.84% 0.090 75.38% 16.68% 0.090 19.44% 15.82% 0.116 28.91% 19.84% 0.111 28.61% 19.78% 0.109 29.03% 19.66% 0.111 19.13% 20.31% 0.112 19.88% 19.44% 0.113 20.67% 18.97% 0.108 19.92% 17.99% 0.108 20.12% 17.53% 0.108 20.32% 17.08% 0.00% 0.00% 0.97% 10.96% 15.00% 20.00% 25.00% 30.00% 35.00% 35.00% 35.00% 40.00% 40.00% DELTA AIR LINES Inc Sensitivity Tables Risk-Free Rate CV Growth Rate Pre-Tax Cost of Debt $ 56.18 1.75% 2.00% 2.25% 2.50% 2.75% 3.07% 3.25% 3.50% 3.75% 4.00% 4.25% $ 56.18 0.00% 0.50% 1.00% 1.50% 2.00% 2.25% 2.50% 3.00% 3.50% 4.00% 4.50% WACC 7.53% 4.00% 4.50% 5.00% 5.50% 6.00% 6.54% 7.00% 7.50% 8.00% 8.50% 9.00% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.8 127.31 118.75 111.10 104.23 98.00 90.86 87.18 82.45 78.09 74.07 70.35 16.00% 70.17 72.87 75.98 79.60 83.89 86.33 89.02 95.30 103.12 113.17 126.54 7.75% 6.00% 6.12% 6.25% 6.36% 6.48% 6.61% 6.71% 6.82% 6.93% 7.04% 7.15% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.9 112.16 105.17 98.86 93.13 87.90 81.84 78.70 74.63 70.87 67.37 64.11 17.00% 65.27 67.78 70.67 74.04 78.03 80.30 82.80 88.64 95.92 105.27 117.70 8.00% 6.17% 6.29% 6.41% 6.53% 6.65% 6.77% 6.88% 6.99% 7.10% 7.21% 7.32% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1 99.73 93.92 88.63 83.77 79.31 74.10 71.39 67.86 64.56 61.49 58.62 18.00% 60.36 62.68 65.36 68.48 72.17 74.27 76.59 81.98 88.72 97.36 108.87 8.25% 6.33% 6.46% 6.58% 6.70% 6.82% 6.94% 7.05% 7.16% 7.27% 7.38% 7.49% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.1 89.36 84.45 79.93 75.77 71.92 67.39 65.02 61.92 59.02 56.30 53.75 19.00% 55.46 57.59 60.05 62.92 66.31 68.24 70.37 75.32 81.51 89.46 100.03 8.50% 6.50% 6.62% 6.74% 6.87% 6.98% 7.11% 7.22% 7.33% 7.44% 7.55% 7.66% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.2 80.56 76.35 72.46 68.85 65.49 61.52 59.43 56.68 54.10 51.68 49.39 20.00% 50.56 52.50 54.74 57.36 60.44 62.21 64.15 68.67 74.31 81.55 91.19 8.75% 6.66% 6.79% 6.91% 7.03% 7.15% 7.28% 7.39% 7.50% 7.61% 7.72% 7.83% $ $ $ $ $ $ $ $ $ $ $ Beta 1.303 72.79 69.16 65.78 62.62 59.68 56.18 54.32 51.89 49.59 47.41 45.36 $ $ $ $ $ $ $ $ $ $ $ 1.4 66.43 63.24 60.25 57.45 54.83 51.70 50.03 47.84 45.76 43.79 41.92 $ $ $ $ $ $ $ $ $ $ $ 1.5 60.67 57.85 55.20 52.71 50.36 47.55 46.05 44.07 42.18 40.40 38.69 Salary Expense % of Revenue 21.00% 22.00% 23.00% $ 45.65 $ 40.75 $ 35.85 $ 47.41 $ 42.32 $ 37.23 $ 49.43 $ 44.13 $ 38.82 $ 51.79 $ 46.23 $ 40.67 $ 54.58 $ 48.72 $ 42.86 $ 56.18 $ 50.14 $ 44.11 $ 57.93 $ 51.71 $ 45.49 $ 62.01 $ 55.35 $ 48.69 $ 67.10 $ 59.90 $ 52.70 $ 73.64 $ 65.74 $ 57.83 $ 82.35 $ 73.51 $ 64.67 Cost of Equity 9.12% 6.90% 7.03% 7.15% 7.28% 7.40% 7.53% 7.63% 7.75% 7.86% 7.97% 8.08% 9.25% 6.99% 7.12% 7.24% 7.37% 7.49% 7.62% 7.72% 7.84% 7.95% 8.06% 8.17% 9.50% 7.16% 7.28% 7.41% 7.53% 7.66% 7.78% 7.89% 8.01% 8.12% 8.23% 8.35% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.6 55.57 53.06 50.69 48.46 46.35 43.80 42.45 40.65 38.93 37.30 35.74 24.00% 30.94 32.13 33.51 35.11 37.00 38.08 39.27 42.04 45.49 49.93 55.83 9.75% 7.32% 7.45% 7.58% 7.70% 7.82% 7.95% 8.06% 8.18% 8.29% 8.40% 8.52% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.7 51.02 48.77 46.64 44.63 42.72 40.41 39.18 37.53 35.96 34.47 33.04 25.00% 26.04 27.04 28.20 29.55 31.14 32.05 33.05 35.38 38.29 42.02 46.99 10.00% 7.49% 7.62% 7.74% 7.87% 7.99% 8.12% 8.23% 8.35% 8.46% 8.58% 8.69% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1.8 46.94 44.91 42.99 41.16 39.42 37.31 36.18 34.68 33.24 31.86 30.54 26.00% 21.14 21.95 22.89 23.98 25.28 26.02 26.83 28.72 31.08 34.12 38.15 10.25% 7.65% 7.78% 7.91% 8.03% 8.16% 8.29% 8.40% 8.52% 8.63% 8.75% 8.86% Equity Risk-Premium Cost of Equity $ 56.18 2.00% 2.50% 3.00% 3.50% 4.00% 4.64% 5.00% 5.50% 6.00% 6.50% 7.00% $ 56.18 6.50% 7.00% 7.50% 8.00% 8.50% 9.12% 9.50% 10.00% 10.50% 11.00% 11.50% $ $ $ $ $ $ $ $ $ $ $ 0.00% 80.14 71.46 64.03 57.58 51.93 45.65 42.51 38.53 34.95 31.70 28.73 $ $ $ $ $ $ $ $ $ $ $ 0.00% 69.38 63.80 58.80 54.29 50.20 45.65 43.06 39.93 37.04 34.37 31.88 $ $ $ $ $ $ $ $ $ $ $ 0.50% 85.70 75.84 67.51 60.38 54.21 47.41 44.03 39.79 35.99 32.56 29.45 $ $ $ $ $ $ $ $ $ $ $ 50.00% 20.43 19.67 18.93 18.20 17.48 16.61 16.08 15.40 14.73 14.07 13.42 $ $ $ $ $ $ $ $ $ $ $ 1.00% 92.57 81.15 71.68 63.69 56.86 49.43 45.78 41.22 37.16 33.53 30.25 $ $ $ $ $ $ $ $ $ $ $ 1.00% 78.47 71.40 65.19 59.69 54.79 49.43 46.42 42.81 39.52 36.51 33.74 $ $ $ $ $ $ $ $ $ $ $ 1.50% 101.30 87.74 76.75 67.66 60.00 51.79 47.80 42.86 38.50 34.63 31.16 $ $ $ $ $ $ $ $ $ $ $ 1.50% 84.62 76.43 69.35 63.16 57.70 51.79 48.50 44.58 41.04 37.81 34.85 $ $ $ $ $ $ $ $ $ $ $ 2.00% 112.75 96.15 83.07 72.50 63.77 54.58 50.17 44.77 40.04 35.88 32.18 CV Growth 2.25% $ 119.93 $ 101.28 $ 86.85 $ 75.35 $ 65.96 $ 56.18 $ 51.52 $ 45.84 $ 40.90 $ 36.57 $ 32.74 $ $ $ $ $ $ $ $ $ $ $ 2.00% 92.39 82.70 74.45 67.36 61.18 54.58 50.94 46.64 42.78 39.29 36.12 CV Growth 2.25% $ 97.11 $ 86.44 $ 77.46 $ 69.80 $ 63.19 $ 56.18 $ 52.32 $ 47.80 $ 43.76 $ 40.12 $ 36.82 $ $ $ $ $ $ $ $ $ $ $ 2.50% 128.42 107.22 91.15 78.55 68.39 57.93 52.99 47.00 41.83 37.32 33.34 $ $ $ $ $ $ $ $ $ $ $ 2.50% 102.55 90.70 80.85 72.54 65.41 57.93 53.84 49.07 44.82 41.01 37.58 $ $ $ $ $ $ $ $ $ $ $ 3.00% 151.19 122.47 101.85 86.31 74.17 62.01 56.38 49.65 43.93 38.99 34.68 $ $ $ $ $ $ $ $ $ $ $ 3.00% 116.38 101.28 89.11 79.09 70.68 62.01 57.35 51.97 47.23 43.03 39.27 $ $ $ $ $ $ $ $ $ $ $ 3.50% 187.26 144.82 116.68 96.64 81.62 67.10 60.56 52.86 46.43 40.96 36.25 $ $ $ $ $ $ $ $ $ $ $ 3.50% 136.31 115.93 100.18 87.64 77.40 67.10 61.67 55.49 50.13 45.43 41.27 $ $ $ $ $ $ $ $ $ $ $ 4.00% 253.15 180.72 138.62 111.06 91.59 73.64 65.82 56.82 49.46 43.31 38.09 $ $ $ $ $ $ $ $ $ $ $ 4.00% 167.55 137.56 115.80 99.27 86.28 73.64 67.14 59.87 53.68 48.32 43.65 $ $ $ $ $ $ $ $ $ $ $ 4.50% 411.81 247.88 174.38 132.60 105.60 82.35 72.66 61.83 53.21 46.16 40.29 $ $ $ $ $ $ $ $ $ $ $ 4.50% 223.47 172.68 139.46 116.02 98.57 82.35 74.28 65.47 58.12 51.90 46.55 Present Value of Operating Lease Obligations Fiscal Years Ending Dec 2008 2009 2010 2011 2012 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Operating 2007 Leases 1231 1062 969 824 758 3854 8698 2289 6409 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Pa Lease Year Commitment 1 1231 2 1062 3 969 4 824 5 758 6 & beyond 758 PV of Minimum Payments Fiscal Years Ending Dec. 3 2009 2010 2011 2012 2013 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments 2008 Operating Leases 1646 1559 1326 1204 1059 5664 12458 3347 9111 Capitalization of Operating Leases 6.54% 5.1 PV Lease Payment 1155.4 935.6 801.3 639.6 552.2 2325.2 6409.3 Pre-Tax Cost of Debt Number Years Implied by Year 6 Payme Lease Year Commitment 1 1646 2 1559 3 1326 4 1204 5 1059 6 & beyond 1059 PV of Minimum Payments 6.54% 5.3 PV Lease Payment 1545.0 1373.5 1096.5 934.5 771.5 3390.2 9111.2 Operating Fiscal Years Ending De 2009 Leases 2010 1589 2011 1407 2012 1296 2013 1171 2014 1085 Thereafter 5242 Total Minimum Payments 11790 Less: Interest 3101 PV of Minimum Payments 8689 Operating Fiscal Years Ending De 2010 Leases 2011 1420 2012 1351 2013 1320 2014 1263 2015 1169 Thereafter 8423 Total Minimum Payments 14946 Less: Interest 4727 PV of Minimum Payments 10219 Operating Fiscal Years Ending De 2011 Leases 2012 1462 2013 1441 2014 1380 2015 1271 2016 1126 Thereafter 7588 Total Minimum Payments 14268 Less: Interest 4320 PV of Minimum Payments 9948 Operating Fiscal Years Ending De 2012 Leases 2013 1507 2014 1433 2015 1332 2016 1159 2017 1000 Thereafter 7415 Total Minimum Payments 13846 Less: Interest 4264 PV of Minimum Payments 9582 Operating Fiscal Years Ending De 2013 Leases 2014 1429 2015 1356 2016 1186 2017 1026 2018 831 Thereafter 5666 Total Minimum Payments 11494 Less: Interest 3329 PV of Minimum Payments 8165 Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 6.54% 4.8 Lease PV Lease Year Commitment Payment 1 1589 1491.5 2 1407 1239.6 3 1296 1071.7 4 1171 908.9 5 1085 790.4 6 & beyond 1085 3186.7 PV of Minimum Payments 8688.7 Pre-Tax Cost of Debt Number Years Implied by Year 6 6.54% 7.2 Lease PV Lease Year Commitment Payment 1 1420 1332.8 2 1351 1190.2 3 1320 1091.5 4 1263 980.3 5 1169 851.6 6 & beyond 1169 4772.2 10218.7 PV of Minimum Payments Pre-Tax Cost of Debt Number Years Implied by Year 6 6.54% 6.7 Lease PV Lease Year Commitment Payment 1 1462 1372.3 2 1441 1269.5 3 1380 1141.1 4 1271 986.5 820.3 5 1126 6 & beyond 1126 4358.4 PV of Minimum Payments 9948.1 Pre-Tax Cost of Debt Number Years Implied by Year 6 6.54% 7.4 Lease PV Lease Year Commitment Payment 1 1507 1414.5 2 1433 1262.5 3 1332 1101.5 4 1159 899.6 5 1000 728.5 6 & beyond 1000 4175.4 PV of Minimum Payments 9581.9 Pre-Tax Cost of Debt Number Years Implied by Year 6 6.54% 6.8 Lease PV Lease Year Commitment Payment 1 1429 1341.3 2 1356 1194.6 3 1186 980.7 4 1026 796.3 5 831 605.4 6 & beyond 831 3246.8 PV of Minimum Payments 8165.2 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: Increase in Shares Outstanding: Average Strike Price: Increase in Common Stock Account: Change in Treasury Stock Expected Price of Repurchased Shares: Number of Shares Repurchased: Shares Outstanding (beginning of the year) Plus: Shares Issued Through ESOP Less: Shares Repurchased in Treasury Shares Outstanding (end of the year) 7 5.00 1.418 $ $ 11.02 9.12% 45.03 2014E 2015E 2016E 2017E 2018E $ 1.418 11.02 $ 15.624 1.418 11.02 $ 15.624 1.418 11.02 $ 15.624 1.418 11.02 $ 15.624 $ 692 45.03 $ 15.368 450 49.13 $ 9.158 600 53.61 $ 11.191 100 58.50 $ 1.709 851.443 1.418 15.368 837.493 837.493 1.418 9.158 829.753 829.753 1.418 11.191 819.979 819.979 1.418 1.709 819.688 2019E 2020E 2021E 2022E 1.418 11.02 $ 15.624 0 11.02 $ - 0 11.02 $ - 0 11.02 $ - 0 11.02 $ - 0 11.02 - 100 63.83 $ 1.567 100 69.65 $ 1.436 200 76.00 $ 2.631 200 82.93 $ 2.412 300 90.49 $ 3.315 0 98.74 - 819.688 1.418 1.567 819.539 819.539 0.000 1.436 818.103 818.103 0.000 2.631 815.472 815.472 0.000 2.412 813.060 813.060 0.000 3.315 809.745 2023CV 809.745 0.000 0.000 809.745 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 Exercise Number of Shares Price (millions) 7.089055 11.02 7 $ 11.02 DAL 45.03 4.80% 0.80% 40.00% Average Remaining Life (yrs) 5.00 $ 5.00 $ B-S Option Price 34.83 $ 36.57 $ Value of Options Granted 247 247