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.
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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.
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xi.
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Participation,http://data.bls.gov/timeseries/LNS11300
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xii.
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Outlays, bloomgberg.com
xiii.
Federal Reserve, Current FAQ’s – Inflation,
http://www.federalreserve.gov/faqs/economy_14400.
htm
xiv.
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bloomberg.com
xv.
Yahoo! Finance, 2014
xvi.
Google Finance, 2014
Page | 13
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http://www.multpl.com/
xviii.
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xix.
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xx.
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petitivelandscape.aspx?entid=1125
xxi.
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xxii.
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2013 10K
xxiii.
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xxiv.
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http://www.investopedia.com/features/industryhandb
ook/airline.asp
xxv.
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xxvi.
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xxvii.
Credit Suisse, Delta Air Lines, Inc – Initial
Coverage, Julie Yates, 9/8/14
xxviii.
Delta Air Lines, Company Filings, Annual
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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
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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.
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http://www.nasdaq.com/markets/crude-oilbrent.aspx?timeframe=6m
xxxvi.
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xxxvii.
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Report 2013 10K
xxxviii.
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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