consumer discretionary delta (nyse: dal) · oil price the oil price has a huge impact on delta...

Analysts Zhengchang Chu zhengchang‐[email protected] Saiyin Liu saiyin‐[email protected]

Delta Air Lines, Inc. (DAL) is a Georgia based company that mainly provide passengers and cargo air transportation internationally. Its network routes are based on hubs and international gateways, such as Atlanta, Detroit, Los Angeles, New York, Paris, and Tokyo. It connects these hubs with a fleet of aircrafts that different in sizes and capacities; so it is more flexible to adjust aircraft accordingly. Its main revenue stream is from passenger and cargo transportation. It has two oil refineries mainly serves to mitigate the increasing cost of fuel. Its expected revenue growth is steady and strong. For the fiscal year ended 12/31/2015, total revenues rose 6.85% to $40.362 billion.

52 week High $52.00 52 week Low $34.61 Beta Value 1.28326 Average Daily Volume 9.344m

Market Capitalization $37.57b Shares Outstanding 836m Book Value per share $10.54 EPS (period??) $3.47 P/E Ratio 13.75 Dividend Yield 1.10% Dividend Payout Ratio 37.97%

Current Price: $48.99

Target Price: $62.46

ROA 7.24% ROE 25.03% Sales 40.85 b Current Ratio 0.68

• The low oil price has provided Delta with sufficient cash flow for paying off debt, paying dividends for its investors, purchasing operating assets.

• By purchasing/leasing more new fuel efficient aircrafts, Delta is not only able to increase its capacity, but also attract more potential customers to increase its future earnings.

• Loading factor of Delta is at historical maximum in the recent years, and will be at the level for next a few years.

• Delta’s frequent flyer program enhanced the current customer loyalty. It will also attract more potential customers, resulting in an increasing market share.

One Year Stock Performance

Krause Fund Research

Fall 2015

Consumer Discretionary

Recommendation: BUY November 13, 2015

Delta Air Lines (NYSE: DAL)

Company Overview

Stock Performance Highlights

Share Highlights

Company Performance Highlights

DAL Potential Strength

Real Gross Domestic Production (GDP) Because Delta is in the consumer discretionary sector,

which provides products and services mainly for

household, the growth of real GDP is a strong indicator

that measures the development of the consumer

discretionary sector1. Historically, two‐thirds of the real

GDP are contributed by personal consumption

expenditure.

The chart below illustrates the change of the real GDP

in the past ten years. The pattern is clear that after

housing bubble in 2008, the GDP growth is stable, in

between 2% to 3%. 2015 quarterly data has actually

show that the GDP is slightly over the last 5‐year data,

at 1.5% and 3.9% in the second and third quarter.

The escalating economy and improving job market will

allow DAL to generate more revenue from the domestic

market because approximately 80% of its revenue

comes from the individual consumer. We project a

domestic revenue growth of 3.1% after 2015, which will

ensure Delta a stable company operation and growth.

Source: Bloomberg Business; updated 10/29/15

Oil Price The oil price has a huge impact on Delta because air fuel

cost consists more than 30% of the company’s total

cost. As noted in the chart above, the crude oil price has

been plummeting nearly 50% from over $100 per barrel

in 2014 to nearly $45 per barrel recently. A lower crude

oil price makes the cost of jet fuel less expensive, which

allows DAL to reduce the price of flight tickets to attract

more consumers while avoid shrinking its profit margin.

We believe that the reduction in fuel cost will further

increase the company’s price‐compatibility in the

future, even though the edge of owning the refinery is

relatively small. We are expecting the crude oil price to

increase, but it will not go back to 100 per barrel in the

next three years9.

Source: Forbes.com

DAL is one of the companies in the airline industry that

hedges against oil price. DAL benefited a lot from

hedging fluctuating oil price in previous years when the

oil price was still very high. In 2011 and 2013, the

company faced a hedging gain of $420 million and $444

million, respectively. Even though the company faced a

large hedging loss of $2,258 million due to the plunging

oil price. We still believe that as domestic and global

economy recover, oil price is inclined to be more

volatile, and hedging against price volatility reduces the

company’s exposure to volatility risk10.

We anticipate the oil price in the next two years to

recover because of the slow growth of substitute

energy resource. Considering the fact that the oil is a

commodity and its price is relatively volatile, we believe

the oil price will be where it was a year ago, which is

around $100 per barrel.

Source: Seasonal Chart

Economic Outlook

Interest Rate As most of analysts’ forecasted that the interest rate

will increase by the end of 2015, it would impact high

levered firms, such as Delta. The current low‐interest

rate environment has enabled Delta to increase its cash

flow, which they have mainly used to repay its debt and

issue dividend payments. Increasing the interest rate

will increasing the cost of capital, but Delta will be

benefited from it because it also decreases the present

value of its underfunded pension18.

Unemployment rate The unemployment rate is illustrated by the percentage of individuals who does not have a resource of income. It is an important indicator of the economy because a prosperous job market determines the healthiness of the economy. Historically, the sales of companies in consumer discretionary sector are highly correlated to the unemployment rate. The unemployment rate has a large impact on DAL. During the period when the unemployment rate is stably low, consumers have more money for travel because income inflow encourages consumers to spend more money on companies under consumer discretionary sector. Therefore, we should employ unemployment rate as one of the major predictors to determine the demand for consumption.

Source: Bloomberg Business; updated 11/2/15

The unemployment rate continues to decrease. As of

November 2nd, the latest unemployment rate for last

month is 5%, which meets a consensus estimate of 5%

1. The continually lowered unemployment rate boosts

the performance of industries within the consumer

discretionary, such as hotel/restaurants/leisure,

textiles/apparel/luxury goods, and retailing. Recently,

the U.S. Government added 33,000 jobs in professional

and business services and 11,000 jobs in temporary help

subcomponent. Retail industry also increases 11,000

jobs in vehicle dealers. We projected that the

unemployment rate will continue decreasing to 4.9 % in

the next two years and finally stabilize at 4% in the long

run. The demand for consumer goods and services will

be stimulated as the unemployment rate becomes

lower.

Consumer Confidence Index (CCI) Consumer Confidence Index illustrates the individuals’ confidence of their expenditure. Consumers are willing to spend more on goods and services if they feel confident about their financial situation. Thus, the outlook for the consumer discretionary sector is highly correlated with the consumer confidence index.

Source: U.S. Conference Board

The Conference Board Consumer Confidence Index had

increased moderately in September and declined in

following October. Based on the monthly Consumer

Confidence Survey, Lynn Franco, Director of Economic

Indicators at The Conference Board, commented that

Consumers were less positive in their assessment of

present‐day conditions, in particular, the job market. As

a result, they do not anticipate the economy

strengthening much in the near‐term. Therefore, we

believe that in the short term, the consumer confidence

index will remain fluctuate around current standing,

which is 97.6. However, we believe that in the long

term, the index will remain at the level of 110.0 as a

result of recovering the economy and improving the job

market, two major components that affect the index.

With the forecast being made, we believe that the

market within the consumer discretionary will perform

strongly in the next two years as a result of constantly

increasing consumer optimism towards the economy

and the job market8.

Capital Market Outlook The Consumer Discretionary Sector consists of auto

components, automobiles, household durables,

homebuilders, leisure equipment/products, textiles and

apparel, hotels/restaurants/leisure, media and

advertising, distributors, internet retail, department

stores, and specialty retail industries; these industries

tend to be the most sensitive to economic cycles.

We will compare Vanguard Consumer Discretionary ETF

and Consumer Discretionary Select Sector SPDR. The

purpose of both funds is tracking “the performance of

the Morgan Stanley Capital International US Investable

Market Consumer Discretionary Index”, by comparing it

to the S&P500 and DJIA, which represent the market.

The following chart shows VCR:US, XLY:US, INDU:IND

and SPX:IND over the past six months.

Source: yahoo finance http://finance.yahoo.com/echarts?s=VCR#{"range":"6mo","allowChartStacking":true

Below is another chart demonstrating VCR:US, XLY:US,

INDU:IND and SPX:IND over the past two years.

Source: yahoo finance http://finance.yahoo.com/echarts?s=VCR#{"range":"2y","allowChartStacking":true

Based on these two charts it is apparent that VCR:US

and XLY:US have similar trends compared to the S&P

500 and DJIA.

Throughout the last two years, the Consumer

Discretionary Sector well performed during the U.S

economic upturn. However, the U.S. market has

experienced turmoil over the last six months, leading

the Consumer Discretionary Sector to plummet.

Although due to changing in oil price and interest rate,

the market could be volatile over the next two quarters

or two years, we still believe that the industries within

the consumer discretionary will outperform going

forward. As we have mentioned before, the oil price

boosts up earnings for a lot of companies, but the

growth of them were steady and strong during the

period when oil price doubled the recent number in

2012. As showing in the chart below, the XLY:US has

increased more than 21%, whereas oil price during 2012

was fluctuating between $95 to $105 per barrel. The

increasing interest rate will increase the cost of capital,

which will drive the stock market into a downturn.

However, no one knows whether the Fed will raise the

rate until mid‐September. Even if the Fed raised the

interest rate, most of the industries, which sensitive to

only the overall economic environment, would still

outperform, such as the retailing and media.

Most industries within consumer discretionary sector

are outperforming, because of the blooming economy.

Specifically, automobiles, hotel, restaurants and leisure,

media, and retailing is likely to perform strongly over

the next to a quarter and two years. Since we are

confident to these industries, we will focus on a

company within one of these industries for our future

analysis.

Recent Trends and development The demand for airline industry has been increasing due

to the stable economic growth and decreased oil prices.

Stable economic growth enables travel activities of both

business and personal propose. Low oil price reduced

fares for passengers, as well as the cost for companies

within the airline industry. According to Department of

Transportation (see table below), the revenue

passenger‐miles, an indicator of demand on the airline

industry, has been increasing every month compared to

same month of the previous year.

Industry Analysis

Source: Bureau of Transportation Statisitcs, T‐100 Segment;

Note: Revenue passenger‐miles are a measure of the volume of air passenger

transportation. A revenue passenger‐mile is equal to one paying passenger

carried one mile.

The diplomatic policy made between US and EU is

favorable to the entire airline industry. The US and EU

have made an agreement, which enable US airlines to

reach any cities in the 27 countries in EU, as well as

European airlines. As a consequence, US airlines can

create more routes, which essentially fill up the demand

of the market.

Strategic collaboration between major airlines made

every single flight more efficiently. The collaboration

includes shared flight numbers, shared resource within

an airport, and system investments. According to a

press released from a Chinese media, China Eastern

Airline and Delta Airline has already signed the related

contract.

The average net profit of airline industry has been

increasing in recent four years. Average EBIT of the

airline industry has increased from 5.1% to 6%, and it is

expected to grow continuously in following years. The

average net profits of was $19.9 billion dollars in 2014,

and it is expected to be $25 billion dollars in 201512.

Source: IATA. Domestic &international traffic

Competition Competition in the airline industry is highly intensive

when every airline carrier competes for its market share

by reducing costs to lower price. Over the past decades,

consolidation in the airline industry, the emergence of

government supported international carriers,

alterations in international alliances and so forth have

changed the competitive environment in the industry.

Delta Air Lines, Inc. has both domestic and international

operations, making the company exposed to

competitors not only from the United States but

international airline carriers as well11.

Source: transtats.bts.gov

In the United States, Delta is subject to competition

from traditional network carriers, national point‐to‐

point carriers, and discount carriers; these competitors

include American Airlines, United Airlines, Southwest

Airlines, Alaska Airlines, and so on. Based on data

extracted from Bureau of Transportation Statistics,

during the period September 2014 – August 2015,

Delta’s domestic airline market share is 17.0%, while

the four major US Airlines (American, Delta, Southwest

and United) account for around 70% of the domestic

airline market.

Southwest 18%

Delta17%

United 15%

American14%

Other36%

MARKET SHARE

Delta competes with both international and domestic

carriers, in the international scope. Well‐funded carriers

in the Gulf region have increased competition in the

industry, for instance, Emirates and Qatar Airways who

are enlarging their service to the U.S. In addition,

carriers from China, India, and Latin America, they are

funded or supported by governments who have helped

them grow rapidly.

U.S. carriers have expanded their international

business, through alliance and other marketing and

code sharing agreements with foreign carriers, when

foreign carriers have obtained access to interior U.S. air

travel market through these relationships. Furthermore,

Sky Team, the Star Alliance and the oneworld alliance,

these are alliances consist of carriers from different

countries. Delta is one of Sky Team member airlines13.

Peers Competitors Though Delta competes against many different airlines

either in the domestic market or its international

operations, American Airlines, United Airlines and

Southwest Airlines are regarded as Delta’s direct

competitors14.

American Airlines Group is the one of world’s largest

airline, having a market cap of $33.5 B and sales of

$42.65 B as of May 2015. However, many investors

concern that the company’s stock is still risky because

American Airlines only emerged from bankruptcy in

2013 indicating its weak financial position15.

United Continental Holdings, Inc. is another largest

airline holding companies worldwide, competing

directly with Delta. The company aims at customers as

the upper middle class, high‐net‐worth individuals and

frequent business travelers who are Delta’s target

customers as well.

Though both American and United went through

bankruptcy and their financial position are still causes

for concern, long‐term low oil price can make both

companies have strong potential upturns. In particular,

American does not have any fuel hedging program so

that the company can quickly benefit from the low cost

of fuel.

Southwest has played an influential role in the airline

industry for a decade, threatening booming airlines, for

example, Delta. Although the firm recently has

successful achievements because of its friendly

customer service and cheap flights, it is comparatively

new in comparison to traditional network carriers and

the company targets different customer groups from

Delta’s. Moreover, Southwest mainly operates its

business in the American market compared to Delta,

who has global operations.

Delta is considered as one of the outstanding airlines

worldwide. The firm has thrived and continued to

outperform in the upper‐class market where it focuses

on. Furthermore, Delta has been reducing its debts and

pension obligations in recent years. All these successes

help Delta outstanding in the industry and become a

market leader16;17.

Besides all these three major competitors, Delta should

also be aware of some carriers, such as discount

airlines. Despite their much smaller networks, these

discount carriers can steal market share leading to

cutthroat pricing.

Business Description Delta Air Lines, Inc. (DAL) is a Georgia based company

that mainly provide passengers and cargo air

transportation internationally. Their network routes are

based at hubs and international gateways, such as

Atlanta, Detroit, Los Angeles, New York, Paris, and

Tokyo.

Source: delta.com

They connect these hubs with a fleet of aircrafts that

different in sizes and capacities; so they are more

flexible to adjust aircraft accordingly. Their main

revenue stream is from the passengers, cargo

transportation, and whole‐owned subsidiaries called

Monroe Energy, LLC and MIPC, LLC1. Monroe Energy,

LLC and MIPC, LLC operate the Trainer refinery and their

related assets, serving to mitigate the increasing cost of

Company Analysis

fuel. The dividend payout, debt payoff, revenue growth

suggest that the company is in the mature stage of its

life cycle. The company will not be in the decline stage

soon because of the expected revenue growth is steady

and strong.

Corporate Strategy In the passenger transportation, their relationships with

other airlines have enabled them to match capacity

with demand in the air travel market.

Delta has Joint Venture Agreements with Air France,

KLM, Alitalia, Virgin Atlantic Airways (non‐controlling

49% equity stake by Delta) and Virgin Australia Airlines.

In addition, the company invested in AeroMéxico and

GOL who operate in Latin America’s two largest

markets. Furthermore, Delta is one of SkyTeam’s airline

members. The agreements have improved Delta’s

access to international markets.

In the domestic market, they have reciprocal

codesharing and frequent flyer program and airport

lounge access agreements with some regional air

carriers, such as Alaska Airlines and Hawaiian Airlines;

these air carriers feed traffic to Delta’s route system.

Besides those agreements with other air carriers to

enlarge the company’s route network, Delta has a

SkyMiles to retain and increase customer loyalty.

SkyMiles Program is a Frequent flier program.

Customers can earn credits for future purchases by the

program, on the one hand. On the other hand, male

credits may also be earned by other programs, such as

credit cards, hotels, and car rentals1.

Although they do not operate a special cargo fleet, they

are able to provide cargo transportation among major

gateways by using their cargo space on regularly

scheduled passenger aircrafts. They are a member of

SkyTeam Cargo, which is an international cargo alliance

that has more than then airline companies1.

In order to stabilize the price changing and availability

of aircraft fuel, one of their major factor in the cost

structure, their subsidiaries, Monroe Energy, LLC and

MIPC, LLC are able to utilize pipelines and other

terminal assets to supply aircraft fuel throughout the

Northeastern states. The two subsidiaries can provide a

lower cost of fuel to the company, while there is an

increase in oil price; moreover, subsidiaries can benefit

from increasing oil price.

Delta utilizes different contract and commodity types

according to market condition, to rebalance the

portfolio. They actively manage their cost of fuel by a

hedging program to mitigate the financial influence

from fluctuating price of oil. Hence, they can stabilize

the fuel price better1.

Revenue Composite As of December 21, 2014, the total revenue that Delta

generated was $40,362 million dollars, which is

increased by 6.9% to the year of 20133. As showing in

the chart below, its revenue has been strongly and

steady growing from 2008. Additionally, an earnings

estimates made by ThomsonOne suggests that its

revenue is likely to increase continually by 1% ‐ 2% in

2015 and 20162.

Delta Air Lines, Inc. Revenue 2008 – 2014

*Source: Statista; Dollars in million

As the chart showing below, more than 70% of its

revenue is from main line passenger, which is $28,688

million dollars. 15% revenue is from regional carriers,

which is $6,266 million dollars. Cargo and others have

generated 5,408 million in revenue. The revenue is

expected to grow due to increased domestic demand,

higher corporate sale, and merchandising initiatives1.

*Source: Delta Air Lines, Inc. Annual Report

Compared to data from last year, main line passenger

has increased 8%, cargo transportation has remained

28,688

6,266

9344,474

Revenue Composite

Main Line Regional Carriers Cargo Other

the same, and other sources of revenue has increased

15%. However, the regional carriers have decreased 2%,

because of decreased capacity and increased load

factor1. Delta is likely to fix its regional carriers because

if it is willing to lower its PRASM, the load factor would

be driven up and revenue would be boosted up.

Other revenues, 11% of the total revenue, has increased

by 15%, mainly because of sales of mileage credit,

baggage services, aircraft maintenance services, and oil

refinery products1. Other revenues of Delta has

decreased 5% and 2% in the year 2013 and 2012. We

believe that the sudden boost is mainly driven by oil

refinery products that were sold to third parties,

because the crude oil price, the main factor of refinery

cost structure, has fallen more than $50 per barrel in

2014.

Cost Structure The total operating expense was $34,373 million

dollars, which mainly consists of aircraft fuel, personal

salaries.

Aircraft fuel, averagely 35% of the total cost, has

increased 24%, from $$9,397 million dollars in 2013 to

$$11,668 in 2014, because it utilizes the FIFO

accounting method for recording its inventory. It

purchased mass inventory before the crude oil price

drop in mid‐2014. Thus, the aircraft fuel will be declined

significantly in 2015 due to the same reason.

As its second largest cost factor, the salaries paid to

their employees has been increasing 5% ‐ 6% since

2012. As of 2014, the salaries and related costs are

$8,120 million dollars. The increasing in salaries

expense helps build a good cooperation image, which

not only raise employee’s loyalty but also build a

reputation for the company.

Marketing Strategy Delta is the most reliable airline companies and

characterized itself by being on time, notifying

consumers of delays and cancelations, risk‐free

cancelation, and providing fast refunds4. With these

marketing strategies, Delta is able to satisfy more

current and potential customers.

As the chart showing below, Delta has the highest

percentage of punctual flights, which is near 80%,

compared to other large airlines. The percentage of

punctual flights of US Airways, American Airline, and

United Airlines are 78%, 74%, and 73%3.

Percentage of Punctual Flights in North America

*Source: Statista

Delta’s marketing strategies enable it to make business

travelers as its targeted customers. In fact, it has ranked

as the first place in the Business Travel News Annual

Airline survey5. Business travelers enable Delta to

experience less sensitive of its revenue when the fare is

volatile because business travelers are less likely to

switch airlines when fare price goes up.

Key Partners Labor unions, airports, and oil refineries are three major

partners to Delta. To keep good relationships with labor

unions enable Delta reduce or at least remain the

salaries and related cost. Airports help Delta not only

with ground customer services but also aircraft logistics.

Corporate with the airport is one of the major ways to

improve customer satisfaction, by increase percentage

of punctual flights, efficient check‐in services, and

baggage services. Oil refineries control the largest cost

of Delta. It has more leverage in controlling both price

and availability of aircraft fuel due to its subsidiary oil

refineries.

Competitive Environment In the airline industry, four largest domestic airline

companies are Southwest, Delta, United Airline, and

American Airline. Each of the four company has more

than 10% market share. Delta with the 16.9% of

domestic market share is the second to the Southwest

with 17.7% of the market share6. United Airlines and

American Airlines each has 14.8% and 12.1 percent,

which are close to the Delta’s share; so Delta might face

strong challenges from other three large airline

companies.

“At Delta, we’re really focused on providing a premium

product for all travelers.” Delta’s CEO Richard Anderson

said to one of the reporters from The Seattle Times7.

This is how Delta’s CEO differentiate the company from

others. In order to provide premium services, Delta also

utilizes advanced technology, such as on‐board Wi‐Fi

system and advanced self‐check‐in system8. As

mentioned in the Market Strategy section, Delta’s

operating performance is stellar. Because of business

travelers’ characteristic and increasing users of SkyMile

program, Delta would not have any problem when

facing challenges from other competitors.

SWOT Analysis Strengths: Delta has a strong presence in the airline

industry worldwide. It occupies high market share in

U.S. airline industry. Meanwhile, it also has alliances

with foreign airlines to expand its international market.

In addition, Delta provides over 15000 daily flights to

the passengers to enhance its presence in worldwide.

Moreover, the low oil price saves its fuel cost, and

hedging oil increases the non‐operating profit a lot9.

Weakness: Delta has substantial long‐term debt, so the

company also has much interest expense. Too much

interest expense may lead the net income to decrease.

Besides that, the company has different covenants. If

the company cannot meet the standards of maintaining

the various minimum ratios and minimum liquidity, the

default would result. The default will make the

company adversely impacted9.

Opportunities: The global tourism stimulates the

demand for airline services. The World Tourism

Organization (UNWTO) released the data that the

number of international tourists increased from 1,087

million in 2013 to 1138 million in 2014. The increasing

trend continues for five years since the 2009 financial

crisis. The Delta can expect to utilize this trend to lead

the airline industry. Delta also has a bright anticipation

on global air freight sector. The revenue from air

freight increases for consecutive five years9.

Threats: Delta faces the great challenges from small

carriers such as Allegiant because these small carriers

require lower cost than the large airline company does.

Although the services are limited to these small carriers,

these carriers can also provide direct domestic flights to

major cities for a short time as the big airline carriers

do. So Delta should be cautious about the rise of the

small carriers. Another threat is the competition for the

international route. In the global airline industry, there

are many alliance group formed by different airline

carriers such as SkyTeam, the Star Alliance (among

United Airlines, Lufthansa, Air Canada and others) and

the Oneworld alliance (among American Airlines, British

Airways, Qantas and others). Thus, Delta ought to make

strong consolidation with big foreign carriers to win

more international routes9.

Dividend Payout The first two quarters of the fiscal year 2014 is

$0.06/share. Then next two quarters, the dividend

increased to $0.09/share. In June 2015, the dividend is

$0.135/share10. When the dividend payout increased,

the net income did not decrease. This situation

indicates that the company earned enough profit to

afford more dividend paid.

Debt Policy Delta has been paying off its debt in the recent six

years. It is able to reduce its debt from $17 billion

dollars in 2009 to $9.4 billion in 2013. As the chart

showing below, its expected debt will be less than $6

billion dollars by the end of 2015. By reducing its debt,

Delta is able to strength its balance. In other work, Delta

is not dependent on its debt to grow. On another hand,

Delta saved nearly $200 million dollars as interest

expense11. Instead of paying interest, Delta is started

declaring the dividends, which will ultimately benefit

shareholders.

Delta Air Lines, Inc. Debt 2009 ‐ 2015

*Source: Delta Air Lines, Inc.

Recent earning release In 2015, the EPS of first two quarter is greater than the

estimated number. The EPS is on the recovering trends

even though the EPS of the first quarter in 2015 is at a

low level. In the recent two years, the actual EPS

always beats the estimated EPS1. Due to the decreasing

fuel cost and increasing air flight revenue, the EPS will

keep its upward trend.

Delta Earning Release 2013 ‐ 2015

*Source: Delta 10‐K Report

Investment Positives Low P/E ratio due to the undervalued price and

the relatively high earning per share Large market capital that reduces price volatility Few substitutions for long-distance and

international travel The leader in the market of the both domestic

and international aviation industry

Investment Negatives

Low EBIT margin due to aircraft expense Highly dependent on fluctuating oil price Vulnerable to changes in currency exchange

rates Heavily dependent on the global economy

Revenue The total passenger revenue is expected to grow 4% by

the end of this year, 5% in the next two years, and 4.5%

in the future. The main reason of the growth is because

of increased capacity, as more aircraft is utilized.

Specifically, Delta has more than 50 aircraft will be

delivered by 2016 and 2017.

Cost Delta’s cost is mainly driven by the aircraft fuel and

salary‐related cost. Due to the crude oil price drop,

Delta’s expected cost of fuel is expected to drop by 9%,

which will be less than 25% of the revenue. However, as

the diminishing of the oil oversupply and no substitute

energy for the aircraft fuel, it is expected to grow at 5%

when it stabilize. The fuel cost has a strong impact on

the stock value, because as the scenario analysis

showing that 0.5% increasing in the fuel growth rate will

result in a $2.56 price decreasing. As the overall

economic growth and labor union pressure, the labor

and related cost will be growing at 4% in the future,

which will be 20% of the total revenue. The labor cost

to Delta is as just as strong as fuel cost. 0.5% increasing

in labor growth rate will result in a $2.52 decreasing in

its stock price. 21Other cost, more than 40% of the

revenue, such as aircraft maintenance, landing fees and

other rents, passenger services, etc. has a strong

pattern that will grow at the same rate as the revenue

growth.

Debt and Assets As Delta suggested that the aircrafts that they

rented/bought will be delivered in 2017 and 2018, we

assumed that their PP&E growth will be near 5%.

Whereas other years PP&E growth will be a little more

than 4%. As the historical data indicates that it has been

paying back its debt in recent years due to the higher

cash inflows that provided by low fuel cost. We have

assumed that they will pay back their debt until the D/E

ratio reaches to 30%, which is its optimum peer data.

These two major cash outflows will have a strong

impact on the intrinsic value of Delta’s share under the

DCF and PE model, which we will talk about after

introducing the risk‐free, beta, market premium, cost of

debt, and WACC.

Other Factors We used 2.66% as the risk‐free rate, which is the YTM of

the 20‐year treasury. Our beta estimates range from

1.57 in 2015 to 1.32 in 2019, due to the decreasing debt

to equity ratio. Scenario analysis suggested that 0.05

increasing in beta will result in a $0.66 decreasing in

stock value. The market premium is at 5.46%, which is

0

0.5

1

1.5

Q113

Q213

Q313

Q413

Q114

Q214

Q314

Q414

Q115

Q215

Actual Estimate

Valuation

the average stock market return subtracted by risk‐free

rate. 0.05% increasing in the equity risk premium will

decrease the Delta share by 88 cents. Although, the cost

of debt is expected to decrease as Delta pay off its debt

over time because its bond is not publicly traded, there

is no available future data of its cost of debt. We used

1.92%, which is a benchmark for the airline industry.

However, the cost of debt will have a strong effect on

our model. As the scenario analysis suggests, the 0.05%

increasing in the cost of debt will only result in a 2 cents

increasing in its stock value. As beta decreases, our

WACC will be decreased from 9.39% in 2015 to 8.69% in

2019.

As of Dec 31st, 2014, our intrinsic value under DCF

model is $57.20, which does not equal to the value

under EP model, $57.06. The reason is mainly because

of the constant changing in WACC. However, after we

adjusted to the date today, Nov 16, 2015, the value is

$62.53 under both methods.

We believe that Delta will maintain a 19% payout ratio,

which is calculated by dividing continuing value growth

rate by continuing value of ROE. As evidence showing

that the Delta has ready entered into the maturity

stage, its growth rate will be as same as the national

GDP growth rate, which is 3%. Under our DDM model,

we have calculated the intrinsic value of the Delta

share, which is $43.87 as Nov 11th, 2015.

Citation:

1. Bureau of Economic Analysis; http://www.bea.gov/national/index.htm#gdp

2. Bloomberg Business;

http://www.bloomberg.com/

3. U.S. Conference Board;

https://www.conference‐

board.org/data/consumerconfidence.cfm

4. Bloomberg Business;

http://www.bloomberg.com/quote/VCR:US

5. NASDAQ Curde Oil Price;

http://www.nasdaq.com/markets/crude‐

oil.aspx?timeframe=3y

6. Seasonal Chart;

http://www.seasonalcharts.com/classics_ro

hoel.html

7. yahoo finance; http://finance.yahoo.com/

8. Consumer Confidence Index® | The Conference Board. (n.d.). Retrieved November 5, 2015, from https://www.conference-board.org/data/consumerconfidence.cfm

9. Helman, C. (2015, January 21). How Cheap Oil Has Delta Air Lines Jet Fooled. Retrieved October 17, 2015, from http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/

10. Delta Air Lines: Hedging Gone Awry. (2014, December 4). Retrieved October 17, 2015, from http://seekingalpha.com/article/2731365-delta-air-lines-hedging-gone-awry

11. 2015 Aviation Trends. (n.d.). Retrieved November 17, 2015, from http://www.strategyand.pwc.com/perspectives/2015-aviation-trends

12. (n.d.). Retrieved October 27, 2015, from https://www.iata.org/whatwedo/Documents/economics/Central-forecast-Dec-2014-Figures.pdf

13. Delta Air Lines, Company Filings, Annual Report 2014 10K

14. Delta Air Lines Inc. (n.d.). Retrieved November 11, 2015, from

http://financials.morningstar.com/competitors/industry-peer.action?t=DAL

15. Who Are Delta Airlines' Main Competitors? (DAL). (2015, September 30). Retrieved November 11, 2015, from http://www.investopedia.com/articles/markets/093015/who-are-delta-airlines-main-competitors.asp

16. The collusion delusion. (2015, July 10). Retrieved November 14, 2015, from http://www.economist.com/blogs/gulliver/2015/07/airline-competition

17. ) Delta Air Lines (DAL) Stock Gaining Today on Competitor's Positive Earnings. (2015, January 29). Retrieved November 13, 2015, from http://www.thestreet.com/story/13028450/1/delta-air-lines-dal-stock-gaining-today-on-competitors-positive-earnings.html

18. United States Fed Funds Rate | 1971-2015 | Data | Chart | Calendar. (n.d.). Retrieved November 12, 2015, from http://www.tradingeconomics.com/united-states/interest-rate

19.

Delta Air Lines Inc.

Key Assumptions of Valuation Model

Ticker Symbol DAL

Current Share Price $50.70

Current Model Date 11/13/2015

Fiscal Year End Dec. 31

Pre‐Tax Cost of Debt 1.92%

Beta 1.57

Risk‐Free Rate 2.66%

Market Return 8.12%

Equity Risk Premium 5.46%

CV Growth of NOPLAT 3%

CV Growth of EPS 3%

Current Dividend Yield 0.06%

Marginal Tax Rate 37.00%

Effective Tax Rate 38.50%


Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Domestic $ 14,050.00 $ 15,204.00 $ 17,017.00 18,429.41$ 19,922.19$ 21,237.06$ 22,511.28$ 23,861.96$

6.6% 8.2% 11.9% 8.30% 8.10% 6.60% 6.00% 6.00%

International $ 11,187.00 $ 11,330.00 $ 11,671.00 12,034.82$ 12,462.63$ 13,101.20$ 13,748.16$ 14,137.92$

Atlantic $ 5,645.00 $ 5,657.00 $ 5,826.00 6,064.87$ 6,416.63$ 6,897.88$ 7,325.54$ 7,545.31$

1.20% 0.21% 2.99% 4.10% 5.80% 7.50% 6.20% 3.00%

Pacific $ 3,645.00 $ 3,561.00 $ 3,421.00 3,284.16$ 3,185.64$ 3,185.64$ 3,281.20$ 3,363.23$

9.59% ‐2.30% ‐3.93% ‐4.00% ‐3.00% 0.00% 3.00% 2.50%

Latin America $ 1,897.00 $ 2,112.00 $ 2,424.00 2,685.79$ 2,860.37$ 3,017.69$ 3,141.41$ 3,229.37$

7.54% 11.33% 14.77% 10.80% 6.50% 5.50% 4.10% 2.80%

Mainline $ 25,237.00 $ 26,534.00 $ 28,688.00 30,464.23$ 32,384.83$ 34,338.26$ 36,259.44$ 37,999.88$

5.85% 5.14% 8.12% 6.19% 6.30% 6.03% 5.59% 4.80%

Regional affiliates $ 6,570.00 $ 6,408.00 $ 6,266.00 6,172.01$ 6,122.63$ 6,189.98$ 6,326.16$ 6,465.34$

2.43% ‐2.47% ‐2.22% ‐1.50% ‐0.80% 1.10% 2.20% 2.20%

Passenger Revenue $ 31,807.00 $ 32,942.00 $ 34,954.00 36,636.24$ 38,507.46$ 40,528.24$ 42,585.61$ 44,465.21$ 5.12% 3.57% 6.11% 4.81% 5.11% 5.25% 5.08% 4.41%

Revenue passenger miles $ 192,974.00 $ 194,998.00 $ 202,925.00 215,507.29$ 226,514.47$ 238,401.41$ 250,503.56$ 261,560.08$

0.11% 1.05% 4.07% 6.20% 5.11% 5.25% 5.08% 4.41%

Available seat miles $ 230,415.00 $ 232,740.00 $ 239,676.00 234,247.05$ 246,211.38$ 259,131.97$ 272,286.48$ 284,304.44$

‐1.81% 1.01% 2.98% ‐2.27% 5.11% 5.25% 5.08% 4.41%

passenger revenue per available seat mile $ 13.78 $ 14.15 $ 14.58 14.24$ 14.97$ 15.76$ 16.56$ 17.29$

6.90% 2.69% 3.04% ‐2.32% 5.11% 5.25% 5.08% 4.41%

passenger load factor 83.80% 83.80% 84.70% 85.20% 85.50% 83.20% 82.80% 83.50%2.07% 0.00% 1.07% 0.59% 0.35% ‐2.69% ‐0.48% 0.85%

Airport Services and Other, net $ 3,873.00 $ 3,894.00 $ 4,474.00 4,608.22$ 4,746.47$ 4,888.86$ 5,035.53$ 5,186.59$

1.10% 0.54% 14.89% 3.00% 3.00% 3.00% 3.00% 3.00%

Cargo $ 990.00 $ 937.00 $ 934.00 962.02$ 990.88$ 1,020.61$ 1,051.23$ 1,082.76$

‐3.60% ‐5.35% ‐0.32% 3.00% 3.00% 3.00% 3.00% 3.00%

Total Operating Revenue $ 36,670.00 $ 37,773.00 $ 40,362.00 42,206.48$ 44,244.81$ 46,437.71$ 48,672.36$ 50,734.57$

4.43% 3.01% 6.85% 4.57% 4.83% 4.96% 4.81% 4.24%


Income Statement


RevenueTotal passenger revenue 31,807$ 32,942$ 34,954$ $ 36,636 $ 38,507 $ 40,528 $ 42,586 $ 44,465

Cargo revenue 990$ 937$ 934$ $ 962 $ 991 $ 1,021 $ 1,051 $ 1,083

Other operating revenue 3,873$ 3,894$ 4,474$ $ 4,608 $ 4,746 $ 4,889 $ 5,036 $ 5,187

Total operating revenue 36,670$ 37,773$ 40,362$ $ 42,206 $ 44,245 $ 46,438 $ 48,672 $ 50,735

Operating Expense:Aircraft fuel & related taxes 10,150$ 9,397$ 11,668$ 12,018$ 12,379$ 12,750$ 13,132$ 13,526$

Salaries & related costs 7,266$ 7,720$ 8,120$ 8,282$ 8,448$ 8,617$ 8,789$ 8,965$

Contract carrier arrangements 5,647$ 5,669$ 5,237$ 5,604$ 5,996$ 6,416$ 6,865$ 7,345$

Aircraft maintenance materials & outside repairs 1,955$ 1,852$ 1,828$ 1,938$ 2,054$ 2,177$ 2,308$ 2,446$

Depreciation & amortization 1,565$ 1,658$ 1,771$ 1,699$ 1,678$ 1,671$ 1,673$ 1,680$

Contracted services 1,566$ 1,665$ 1,749$ 1,784$ 1,820$ 1,856$ 1,893$ 1,931$

Passenger commissions & other selling expenses 1,590$ 1,603$ 1,700$ 2,015$ 2,118$ 2,229$ 2,342$ 2,446$

Landing fees & other rents 1,336$ 1,410$ 1,442$ 1,475$ 1,509$ 1,544$ 1,579$ 1,616$

Profit sharing 372$ 506$ 1,085$ 1,080$ 1,050$ 1,100$ 990$ 890$

Passenger service 732$ 762$ 810$ 883$ 928$ 977$ 1,026$ 1,072$

Aircraft rent 272$ 209$ 233$ 219$ 206$ 194$ 182$ 171$

Restructuring & other items 452$ 402$ 716$ 610$ 647$ 685$ 727$ 712$

Other operating expense 2,200$ 1,922$ 2,513$ 2,588$ 2,666$ 2,746$ 2,828$ 2,913$

Total operating expense 34,495$ 34,373$ 38,156$ 40,195$ 41,498$ 42,961$ 44,335$ 45,713$

Operating income (loss) 2,175$ 3,400$ 2,206$ 2,011$ 2,747$ 3,477$ 4,338$ 5,022$

Interest expense, net (1,004)$ (852)$ (650)$ (169)$ (159)$ (161)$ (147)$ (119)$

Gain (loss) on extinguishment of debt (118)$ - (268)$ ‐$ ‐$ ‐$ ‐$ ‐$

Miscellaneous, net (27)$ (21)$ (216)$ (80)$ (80)$ (80)$ (80)$ (80)$

Total other income (expense), net (1,150)$ (873)$ (1,134)$ (249)$ (239)$ (241)$ (227)$ (199)$

Income (loss) before income taxes 1,025$ 2,527$ 1,072$ 1,762$ 2,508$ 3,236$ 4,111$ 4,822$

Income tax provision (benefit) 16$ (8,013)$ 413$ 652$ 928$ 1,197$ 1,521$ 1,784$

Net income (loss) 1,009$ 10,540$ 659$ 1,110$ 1,580$ 2,039$ 2,590$ 3,038$

Weighted average shares outstanding - basic 845 849 836 847 849 851 850 850

Net earnings (loss) per share - basic 1.20$ 12.41$ 0.79$ 1.31$ 1.86$ 2.40$ 3.05$ 3.57$

Pay Out Ratio 0.00% 0.97% 37.97% 19% 19% 19% 19% 19%

Dividends per share -$ 0.12$ 0.30$ 0.25$ 0.35$ 0.46$ 0.58$ 0.68$


Balance Sheet


Cash & cash equivalents 2,416$ 2,844$ 2,088$ 661$ 967$ 2,362$ 3,247$ 4,150$

Short-term investments 958$ 959$ 1,217$ 1,243$ 1,270$ 1,298$ 1,326$ 1,354$

Accounts receivable, net 1,693$ 1,609$ 2,297$ 2,011$ 2,114$ 2,225$ 2,338$ 2,441$

Hedge margin receivable -$ -$ 925$ ‐$ ‐$ ‐$ ‐$ ‐$

Inventory (fuel and Expendable parts) 1,023$ 1,063$ 852$ 1,250$ 1,237$ 1,185$ 1,256$ 1,197$

Hedge derivatives asset -$ -$ 1,078$ ‐$ ‐$ ‐$ ‐$ ‐$

Deferred income taxes, net 463$ 1,736$ 3,275$ 3,455$ 3,644$ 3,845$ 4,056$ 4,278$

Prepaid expenses & other current assets 1,344$ 1,318$ 733$ 748$ 763$ 778$ 793$ 809$

Total current assets 8,272$ 9,651$ 12,465$ 9,368$ 9,995$ 11,692$ 13,016$ 14,230$

Property & equipment, gross 27,369$ 29,646$ 31,269$ 32,698$ 34,277$ 35,976$ 37,740$ 39,357$

Less accumulated depreciation & amortization 6,656$ 7,792$ 9,340$ 11,039$ 12,717$ 14,388$ 16,061$ 17,740$

Property & equipment, net 20,713$ 21,854$ 21,929$ 21,659$ 21,560$ 21,588$ 21,679$ 21,617$

Goodwill 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$ 9,794$

Indentifiable intangibles, growth 5,349$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$ 5,396$

Depreciation and aormotization - Indentifiable intangibles 670$ 738$ 793$ 848$ 903$ 958$ 1,013$ 1,068$

Indentifiable intangibles, net 4,679$ 4,658$ 4,603$ 4,548$ 4,493$ 4,438$ 4,383$ 4,328$

Deferred income taxes, net -$ 4,992$ 4,320$ 4,557$ 4,557$ 4,557$ 4,557$ 4,557$

Other noncurrent assets 1,092$ 1,303$ 1,010$ 1,092$ 1,181$ 1,277$ 1,381$ 1,493$

Total other assets 15,565$ 20,747$ 19,727$ 19,991$ 20,025$ 20,066$ 20,115$ 20,172$

Total assets 44,550$ 52,252$ 54,121$ 51,018$ 51,580$ 53,346$ 54,810$ 56,019$

Current maturities of long-term debt & capital leases 1,627$ 1,547$ 1,216$ 1,111$ 1,326$ 2,137$ 2,028$ 1,158$

Air traffic liability 3,696$ 4,122$ 4,296$ 4,597$ 4,918$ 5,263$ 5,631$ 6,025$

Accounts payable 2,293$ 2,300$ 2,622$ 2,456$ 2,540$ 2,627$ 2,717$ 2,811$

Accrued salaries & related benefits 1,680$ 1,926$ 2,266$ 2,153$ 2,196$ 2,240$ 2,285$ 2,331$

Hedge derivatives liability -$ -$ 2,772$ ‐$ ‐$ ‐$ ‐$ ‐$

Frequent flyer deferred revenue 1,806$ 1,861$ 1,580$ 2,132$ 2,241$ 2,359$ 2,478$ 2,588$

Taxes payable 585$ 673$ -$ ‐$ ‐$ ‐$ ‐$ ‐$

Other accrued liabilities 1,583$ 1,723$ 2,127$ 1,678$ 1,764$ 1,856$ 1,950$ 2,037$

Total current liabilities 13,270$ 14,152$ 16,879$ 14,128$ 14,986$ 16,482$ 17,091$ 16,950$

Long-term debt & Capital Lease 11,082$ 9,795$ 8,561$ 7,705$ 6,934$ 6,241$ 5,617$ 5,055$

Pension, postretirement & related benefits 16,005$ 12,392$ 15,138$ 13,776$ 12,536$ 11,408$ 10,381$ 9,447$

Frequent flyer deferred revenue 2,628$ 2,559$ 2,602$ 3,297$ 3,466$ 3,648$ 3,833$ 4,002$

Deferred income taxes, net 2,047$ -$ -$ ‐$ ‐$ ‐$ ‐$ ‐$

Other noncurrent liabilities 1,649$ 1,711$ 2,128$ 2,128$ 2,128$ 2,128$ 2,128$ 2,128$

Total noncurrent liabilities 33,411$ 26,457$ 28,429$ 26,906$ 25,064$ 23,424$ 21,958$ 20,632$

Additional paid-in capital 14,069$ 13,982$ 12,981$ 13,011$ 13,041$ 13,071$ 13,071$ 13,071$

Retained earnings (accumulated deficit) (7,389)$ 3,049$ 3,456$ 4,355$ 5,635$ 7,286$ 9,384$ 11,845$

Accumulated other comprehensive income (loss) (8,577)$ (5,130)$ (7,311)$ (7,062)$ (6,822)$ (6,590)$ (6,366)$ (6,150)$

Treasury stock, at cost (234)$ (258)$ (313)$ (318)$ (323)$ (328)$ (328)$ (329)$

Total stockholders' equity (deficit) (2,131)$ 11,643$ 8,813$ 9,985$ 11,530$ 13,439$ 15,761$ 18,438$


Cash Flow Statement

Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 2014

Net income (loss) (1,237)$ 593$ 854$ 1,009$ 10,540$ 659$

Depreciation & amortization 1,536$ 1,511$ 1,523$ 1,565$ 1,658$ 1,771$

Amortization of debt discount (premium), net 370$ 216$ 193$ 193$ 154$ 59$

Hedge derivative contracts - - - - - 2,186$

Deferred income taxes (329)$ 9$ (2)$ 17$ (7,991)$ 414$

Pension, postretirement & postemployment expense in excess of (less than) payments 307$ (301)$ (308)$ (208)$ (624)$ (723)$

Restructuring & other items - 182$ 142$ 184$ 285$ 758$

Loss (gain) on extinguishment of debt 83$ 391$ 68$ 56$ - 268$

Equity investment loss (earnings) - - - - - 106$

SkyMiles used pursuant to advance purchase under American Express Agreements - - - (333)$ (333)$ -

Receivables 147$ (141)$ (76)$ (116)$ 90$ (302)$

Restricted cash & cash equivalents 79$ 16$ 153$ (51)$ 231$ 62$

Fuel inventory - - - (451)$ (87)$ 172$

Hedge margin - - - - - (922)$

Prepaid expenses & other current assets (61)$ (105)$ (16)$ (134)$ 28$ 58$

Air traffic liability (286)$ 232$ 174$ 216$ 426$ 174$

Frequent flyer deferred revenue (298)$ (345)$ 82$ (115)$ (121)$ (238)$

Accounts payable & accrued liabilities 143$ 516$ 303$ 899$ 213$ 228$

Other assets & liabilities - - (373)$ (66)$ (36)$ -

Other operating activities, net (167)$ 105$ (66)$ (34)$ 185$ 217$

Net cash flows from operating activities 1,379$ 2,832$ 2,834$ 2,476$ 4,504$ 4,947$ Property & equipment additions - flight equipment, including advance payments (951)$ (1,055)$ (907)$ (1,196)$ (2,117)$ (1,662)$

Property & equipment additions - ground property & equipment, including technology (251)$ (287)$ (347)$ (772)$ (451)$ (587)$

Purchase of Virgin Atlantic shares - - - - (360)$ -

Purchase of investments - (730)$ (1,078)$ (958)$ (959)$ (1,795)$

Redemption of investments - - 844$ 1,019$ 1,117$ 1,533$

Other investing activities, net (4)$ 12$ (10)$ (55)$ 14$ 48$

Net cash flows from investing activities (1,008)$ (2,026)$ (1,498)$ (1,962)$ (2,756)$ (2,463)$ Payments on long-term debt & capital lease obligations (2,891)$ (3,722)$ (4,172)$ (2,864)$ (1,461)$ (2,928)$

Repurchase of common stock - - - - (250)$ (1,100)$

Cash dividends - - - - (102)$ (251)$

Proceeds from long-term obligations 2,966$ 1,130$ 2,395$ 1,965$ 268$ 1,020$

Other financing activities, net (94)$ 71$ 2$ 48$ 78$ 19$

Net cash flows from financing activities (19)$ (2,521)$ (1,571)$ (755)$ (1,320)$ (3,240)$ Net increase (decrease) in cash & cash equivalents 352$ (1,715)$ (235)$ (241)$ 428$ (756)$ Cash & cash equivalents at beginning of year 4,255$ 4,607$ 2,892$ 2,657$ 2,416$ 2,844$

Cash & cash equivalents at end of year 4,607$ 2,892$ 2,657$ 2,416$ 2,844$ 2,088$

Cash paid for interest 867$ 1,036$ 925$ 834$ 698$ 560$

Fiscal Years Ending DAL 2015E 2016E 2017E 2018E 2019E

Cash from Operating Activities:Net Income 1,110$ 1,580$ 2,039$ 2,590$ 3,038$

Depreciation & Amortization 1,699$ 1,678$ 1,671$ 1,673$ 1,680$ Amortization of Identifiable Intangibles 55$ 55$ 55$ 55$ 55$ Total Amortization & Depreciation 1,754$ 1,733$ 1,726$ 1,728$ 1,735$ Change in Deferred Income Taxes (current) (180)$ (190)$ (200)$ (211)$ (223)$ Hedge Margin Receviable 925$ ‐$ ‐$ ‐$ ‐$ Deferred income taxes, net (non‐current) (237)$ ‐$ ‐$ ‐$ ‐$ Change in Account receivable 286$ (103)$ (111)$ (113)$ (103)$ Change in Fuel inventories (398)$ 13$ 52$ (71)$ 59$ Prepaid expenses and other current assets (15)$ (15)$ (15)$ (16)$ (16)$ Hedge derivatives assets 1,078$ ‐$ ‐$ ‐$ ‐$ Other noncurrent assets (82)$ (89)$ (96)$ (104)$ (112)$ Change in Air traffic liability 301$ 322$ 344$ 368$ 394$ Change in Acconts Payable (166)$ 84$ 87$ 90$ 94$ Change in Accrued salaries & related benefits (113)$ 43$ 44$ 45$ 46$ Change in Frequent flyer deferred revenue 552$ 109$ 118$ 120$ 109$

Change in Frequent flyer deferred revenue (non‐current) 695$ 168$ 182$ 185$ 169$

Hedge derivatives liability (2,772)$ ‐$ ‐$ ‐$ ‐$

Change in other accrued liabilities (449)$ 86$ 93$ 94$ 86$

Other noncurrent liabilities ‐$ ‐$ ‐$ ‐$ ‐$

Cash from Operating Activities 2,290$ 3,742$ 4,261$ 4,706$ 5,276$

Cash from Investing Activities PPE purchase (1,429)$ (1,579)$ (1,699)$ (1,764)$ (1,617)$

Short‐term investments (26)$ (27)$ (27)$ (28)$ (29)$

Cash from Investing Activities (1,455)$ (1,606)$ (1,726)$ (1,792)$ (1,646)$

Cash from Financing Activities Debt (long‐term and maturities of long‐term) (961)$ (555)$ 118$ (733)$ (1,432)$

Pension (1,362)$ (1,240)$ (1,128)$ (1,027)$ (934)$

Additional paid‐in capital 30$ 30$ 30$ ‐$ ‐$

Dividends Paid (211)$ (300)$ (387)$ (492)$ (577)$

Treasury Stock (5.48)$ (4.93)$ (4.43)$ (0.43)$ (0.39)$

Accumulated other comprehensive income (loss) 249$ 240$ 232$ 224$ 216$

Cash from Financing Activities (2,261)$ (1,830)$ (1,140)$ (2,028)$ (2,727)$

Net Changes in Cash (1,427)$ 306$ 1,395$ 885$ 903$


Common Size Income Statement


RevenuePassenger - mainline 68.82% 70.25% 71.08% 72.18% 73.19% 73.94% 74.50% 74.90%

Passenger - regional carriers 17.92% 16.96% 15.52% 14.62% 13.84% 13.33% 13.00% 12.74%

Total passenger revenue 86.74% 87.21% 86.60% 86.80% 87.03% 87.27% 87.49% 87.64%

Cargo revenue 2.70% 2.48% 2.31% 2.28% 2.24% 2.20% 2.16% 2.13%

Other operating revenue 10.56% 10.31% 11.08% 10.92% 10.73% 10.53% 10.35% 10.22%

Total operating revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Operating Expense:Aircraft fuel & related taxes 27.68% 24.88% 28.91% 28.47% 27.98% 27.46% 26.98% 26.66%

Salaries & related costs 19.81% 20.44% 20.12% 19.62% 19.09% 18.56% 18.06% 17.67%

Contract carrier arrangements 20.12% 20.20% 18.66% 13.28% 13.55% 13.82% 14.10% 14.48%

Aircraft maintenance materials & outside repairs 6.97% 6.60% 6.51% 4.59% 4.64% 4.69% 4.74% 4.82%

Depreciation & amortization 5.58% 5.91% 6.31% 4.03% 3.79% 3.60% 3.44% 3.31%

Contracted services 5.58% 5.93% 6.23% 4.23% 4.11% 4.00% 3.89% 3.81%

Passenger commissions & other selling expenses 5.01% 5.05% 5.35% 4.77% 4.79% 4.80% 4.81% 4.82%

Landing fees & other rents 4.76% 5.02% 5.14% 3.50% 3.41% 3.32% 3.24% 3.18%

Profit sharing 1.01% 1.34% 2.69% 2.56% 2.37% 2.37% 2.03% 1.75%

Passenger service 2.00% 2.02% 2.01% 2.09% 2.10% 2.10% 2.11% 2.11%

Aircraft rent 0.74% 0.55% 0.58% 0.52% 0.47% 0.42% 0.37% 0.34%

Restructuring & other items 1.23% 1.06% 1.77% 1.45% 1.46% 1.48% 1.49% 1.40%

Other operating expense 6.00% 5.09% 6.23% 6.13% 6.03% 5.91% 5.81% 5.74%

Total operating expense 94.07% 91.00% 94.53% 95.23% 93.79% 92.51% 91.09% 90.10%

Operating income (loss) 5.93% 9.00% 5.47% 4.77% 6.21% 7.49% 8.91% 9.90%

Interest expense, net ‐2.74% ‐2.26% ‐1.61% ‐0.40% ‐0.36% ‐0.35% ‐0.30% ‐0.24%

Gain (loss) on extinguishment of debt ‐0.32% #VALUE! ‐0.66% 0.00% 0.00% 0.00% 0.00% 0.00%

Miscellaneous, net ‐0.07% ‐0.06% ‐0.54% ‐0.19% ‐0.18% ‐0.17% ‐0.16% ‐0.16%

Total other income (expense), net ‐3.14% ‐2.31% ‐2.81% ‐0.59% ‐0.54% ‐0.52% ‐0.47% ‐0.39%

Income (loss) before income taxes 2.80% 6.69% 2.66% 4.17% 5.67% 6.97% 8.45% 9.51%

Income tax provision (benefit) 0.04% ‐21.21% 1.02% 1.54% 2.10% 2.58% 3.12% 3.52%

Net income (loss) 2.75% 27.90% 1.63% 2.63% 3.57% 4.39% 5.32% 5.99%

Weighted average shares outstanding - basic 2.30% 2.25% 2.07% 2.01% 1.92% 1.83% 1.75% 1.68%


Common Size Balance Sheet


Cash & cash equivalents 6.59% 7.53% 5.17% 1.57% 2.19% 5.09% 6.67% 8.18%

Short-term investments 2.61% 2.54% 3.02% 2.95% 2.87% 2.79% 2.72% 2.67%

Accounts receivable, net 4.62% 4.26% 5.69% 4.77% 4.78% 4.79% 4.80% 4.81%

Hedge margin receivable 0.00% 0.00% 2.29% 0.00% 0.00% 0.00% 0.00% 0.00%

Inventory (fuel and Expendable parts) 2.79% 2.81% 2.11% 2.96% 2.80% 2.55% 2.58% 2.36%

Hedge derivatives asset 0.00% 0.00% 2.67% 0.00% 0.00% 0.00% 0.00% 0.00%

Deferred income taxes, net 1.26% 4.60% 8.11% 8.19% 8.24% 8.28% 8.33% 8.43%

Prepaid expenses & other current assets 3.67% 3.49% 1.82% 1.77% 1.72% 1.68% 1.63% 1.60%

Total current assets 22.56% 25.55% 30.88% 22.20% 22.59% 25.18% 26.74% 28.05%

Property & equipment, gross 74.64% 78.48% 77.47% 77.47% 77.47% 77.47% 77.54% 77.57%

Less accumulated depreciation & amortization 18.15% 20.63% 23.14% 26.16% 28.74% 30.98% 33.00% 34.97%

Property & equipment, net 56.48% 57.86% 54.33% 51.32% 48.73% 46.49% 44.54% 42.61%

Goodwill 26.71% 25.93% 24.27% 23.20% 22.14% 21.09% 20.12% 19.30%

Indentifiable intangibles, growth 14.59% 14.29% 13.37% 12.78% 12.20% 11.62% 11.09% 10.64%

Depreciation and aormotization - Indentifiable intangibles 1.83% 1.95% 1.96% 2.01% 2.04% 2.06% 2.08% 2.11%

Indentifiable intangibles, net 12.76% 12.33% 11.40% 10.78% 10.15% 9.56% 9.01% 8.53%


Other noncurrent assets 2.98% 3.45% 2.50% 2.59% 2.67% 2.75% 2.84% 2.94%

Total other assets 42.45% 54.93% 48.88% 47.37% 45.26% 43.21% 41.33% 39.76%

Total assets 121.49% 138.33% 134.09% 120.88% 116.58% 114.88% 112.61% 110.42%

Current maturities of long-term debt & capital leases 4.44% 4.10% 3.01% 2.63% 3.00% 4.60% 4.17% 2.28%

Air traffic liability 10.08% 10.91% 10.64% 10.89% 11.12% 11.33% 11.57% 11.88%

Accounts payable 6.25% 6.09% 6.50% 5.82% 5.74% 5.66% 5.58% 5.54%

Accrued salaries & related benefits 4.58% 5.10% 5.61% 5.10% 4.96% 4.82% 4.70% 4.59%

Hedge derivatives liability 0.00% 0.00% 6.87% 0.00% 0.00% 0.00% 0.00% 0.00%

Frequent flyer deferred revenue 4.93% 4.93% 3.91% 5.05% 5.07% 5.08% 5.09% 5.10%

Taxes payable 1.60% 1.78% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other accrued liabilities 4.32% 4.56% 5.27% 3.98% 3.99% 4.00% 4.01% 4.01%

Total current liabilities 36.19% 37.47% 41.82% 33.47% 33.87% 35.49% 35.11% 33.41%

Long-term debt & Capital Lease 30.22% 25.93% 21.21% 18.26% 15.67% 13.44% 11.54% 9.96%

Pension, postretirement & related benefits 43.65% 32.81% 37.51% 32.64% 28.33% 24.57% 21.33% 18.62%

Frequent flyer deferred revenue 7.17% 6.77% 6.45% 7.81% 7.83% 7.85% 7.87% 7.89%


Other noncurrent liabilities 4.50% 4.53% 5.27% 5.04% 4.81% 4.58% 4.37% 4.19%

Total noncurrent liabilities 91.11% 70.04% 70.44% 63.75% 56.65% 50.44% 45.11% 40.67%

Additional paid-in capital 38.37% 37.02% 32.16% 30.83% 29.47% 28.15% 26.86% 25.76%

Retained earnings (accumulated deficit) ‐20.15% 8.07% 8.56% 10.32% 12.74% 15.69% 19.28% 23.35%

Accumulated other comprehensive income (loss) ‐23.39% ‐13.58% ‐18.11% ‐16.73% ‐15.42% ‐14.19% ‐13.08% ‐12.12%

Treasury stock, at cost ‐0.64% ‐0.68% ‐0.78% ‐0.75% ‐0.73% ‐0.71% ‐0.67% ‐0.65%

Total stockholders' equity (deficit) ‐5.81% 30.82% 21.83% 23.66% 26.06% 28.94% 32.38% 36.34%


Weighted Average Cost of Capital (WACC) Estimation

2014 2015 2016 2017 2018 2019

Risk Free 2.66% 2.66% 2.66% 2.66% 2.66% 2.66%

Risk Premium 5.46% 5.46% 5.46% 5.46% 5.46% 5.46%

Beta 1.57 1.52 1.47 1.42 1.37 1.32

Cost of Equity 11.25% 10.96% 10.69% 10.41% 10.14% 9.87%

Pre-Tax Cost of Debt 1.92% 1.92% 1.92% 1.92% 1.92% 1.92%

Tax Rate 37% 37% 37% 37% 37% 37%

After-Tax Cost of Debt 1.21% 1.21% 1.21% 1.21% 1.21% 1.21%

Cost of Preferred 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

MV of the firm $52,057.20 $51,962.90 $52,096.72 $51,390.12 $49,893.85 $49,881.20

MV Weight of Equity 81% 83% 83% 84% 86% 86%

MV Weight of Debt 19% 17% 17% 16% 14% 14%

MV Weight of Pfd 0% 0% 0% 0% 0% 0%

Forward WACC 9.39% 9.26% 9.04% 8.93% 8.93% 8.69%

Discount Factor 1.09 1.19 1.30 1.41 1.54

Implied Constant WACC 9.26% 9.15% 9.08% 9.04% 8.97%

Growth Rate 0.03

Delta Air Lines Inc. 2011 2012 2013 2014 WACC 8.00%

Value Driver Estimation 36.30% 38.30% 38.30% 37.00% Cost of Debt 6.00%

Normal Cash 8%Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

NOPLAT Computation

Net Sales $ 36,670 $ 37,773 $ 40,362 42,206$ 44,245$ 46,438$ 48,672$ 50,735$

cost of good sold $ 34,495 $ 34,373 $ 38,156 37,607$ 38,832$ 40,215$ 41,506$ 42,800$

Implied Interest on Operating Lease $ 740 $ 619 $ 688 591$ 631$ 657$ 601$ 577$

EBITA $ 1,435 $ 2,781 $ 1,518 4,008$ 4,782$ 5,566$ 6,565$ 7,357$

Provision for Income Taxes $ 16 $ (8,013) $ 413 652$ 928$ 1,197$ 1,521$ 1,784$

Tax shield on Interest Expense(+) $ (385) $ (326) $ (241) (63)$ (59)$ (60)$ (54)$ (44)$

Tax shield on Implied Lease Interest(+) $ 283 $ 237 $ 255 219$ 234$ 243$ 223$ 214$

Tax on Miscellaneous $ 10 $ 8 $ 80 30$ 30$ 30$ 30$ 30$

(Minus) Adjusted Taxes (85)$ (8,102)$ 427$ 808$ 1,103$ 1,381$ 1,689$ 1,954$

DT Liablities 585$ 673$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$

DT Current Assets(‐) 463$ 1,736$ 3,275$ 3,455$ 3,644$ 3,845$ 4,056$ 4,278$

DT Long‐term Assets(‐) ‐$ 4,992$ 4,320$ 4,557$ 4,557$ 4,557$ 4,557$ 4,557$

Net DT Liabilities 122$ (6,055)$ (1,045)$ (1,102)$ (913)$ (713)$ (502)$ (279)$

(Plus )Net change in DT Liabilities (6,177)$ 5,010$ (57)$ 190$ 200$ 211$ 223$ 279$

NOPLAT (4,656)$ 15,893$ 1,034$ 3,390$ 3,879$ 4,396$ 5,098$ 5,683$

Invested Capital Computation

Operating Current Assets:

Normal Cash 2,416$ 2,844$ 2,088$ 661$ 967$ 2,362$ 3,247$ 4,059$

Accounts Receivable, Net 1,693$ 1,609$ 2,297$ 1,353$ 1,456$ 1,563$ 1,693$ 1,609$

Prepaid expenses & other current assets 1,344$ 1,318$ 733$ 748$ 763$ 778$ 793$ 809$

Inventory 1,023$ 1,063$ 852$ 1,250$ 1,237$ 1,185$ 1,256$ 1,197$

Operating Current Assets 6,476$ 6,834$ 5,970$ 4,012$ 4,423$ 5,888$ 6,990$ 7,674$

Operating Current Liabilities:

Accounts Payable 2,293$ 2,300$ 2,622$ 2,456$ 2,540$ 2,627$ 2,717$ 2,811$

Air traffic liability 3,696$ 4,122$ 4,296$ 4,597$ 4,918$ 5,263$ 5,631$ 6,025$

Defferred Revenue 1,806$ 1,861$ 1,580$ 2,132$ 2,241$ 2,359$ 2,478$ 2,588$

Accrued Expenses 1,680$ 1,926$ 2,266$ 2,153$ 2,196$ 2,240$ 2,285$ 2,331$

Other Liabilities 1,583$ 1,723$ 2,127$ 1,678$ 1,764$ 1,856$ 1,950$ 2,037$

Operating Current Liabilities 11,058$ 11,932$ 12,891$ 13,017$ 13,660$ 14,345$ 15,063$ 15,792$

Net Operating Working Capital (4,582)$ (5,098)$ (6,921)$ (9,005)$ (9,237)$ (8,458)$ (8,073)$ (8,118)$

Plus: Net PPE 20,713$ 21,854$ 21,929$ 21,659$ 21,560$ 21,588$ 21,679$ 21,617$

Indentifiable intangibles, net 4,679$ 4,658$ 4,603$ 4,548$ 4,493$ 4,438$ 4,383$ 4,328$

Plus: PV of Operating Leases 12,329$ 10,320$ 11,464$ 9,857$ 10,521$ 10,954$ 10,023$ 9,624$

Other noncurrent assets $ 1,092 $ 1,303 $ 1,010 1,092$ 1,181$ 1,277$ 1,381$ 1,493$

Less: Other Operating Liabilities $ 3,696 $ 4,122 $ 4,296 4,597$ 4,918$ 5,263$ 5,631$ 6,025$

Invested Capital 30,535$ 28,915$ 27,789$ 23,555$ 23,599$ 24,536$ 23,762$ 22,918$

ROIC ‐14.98% 52.05% 3.58% 12.20% 16.47% 18.63% 20.78% 23.91%

EP (7,143)$ 13,450$ (1,681)$ 815$ 1,750$ 2,288$ 2,908$ 3,617$

FCF (4,112)$ 17,512$ 2,160$ 7,624$ 3,834$ 3,458$ 5,873$ 6,526$

CV Growth 3.00%Fiscal Years Ending Dec. 31 2014A 2015E 2016E 2017E 2018E 2019E

Implied Constant WACC 9.26% 9.15% 9.08% 9.04% 8.97%

Cost of Equity 11.25% 10.96% 10.69% 10.41% 10.14% 9.87%

FCF to Discount $ 7,624 $ 3,834 $ 3,458 $ 5,873 $ 83,237

CV $ 83,237

Discount period 1 2 3 4 4

Discount Factor 1.09 1.19 1.30 1.41 1.41

PV of FCF 6,977.71$ 3,218.53$ 2,664.79$ 4,154.27$ 59,030.50$

Sum PV 76,046$

Adjustment

Add: ST Investments 1,217$

Add: Excess Cash 1,921$

Less: Total Debt (9,777)$

Less: PV of Operating Lease (11,464)$

Less: PV of ESOP (272)$

Less: Underfunded Pension (7,315)$

Value of Equity 50,356$

Share of Outstanding 845

Intrinsic Value of Stock 59.59$

EP Model

NOPLAT 3,390$ 3,879$ 4,396$ 5,098$ 5,683$

Beg. IC 27,789$ 23,555$ 23,599$ 24,536$ 23,762$

End IC 23,555$ 23,599$ 24,536$ 23,762$ 22,918$

Change in IC (4,234)$ 44$ 937$ (775)$ (843)$

ROIC 12.2% 16.5% 18.6% 20.8% 23.9%

EP 815$ 1,724$ 2,254$ 2,880$ 3,551$

EP to discount $ 815 $ 1,724 $ 2,254 $ 2,880

CV $ 59,475

Beg IC $ 27,789

Discount Period 1 2 3 4 4

Discount Factor 1.09 1.19 1.30 1.41 1.41

PV of EP 746$ 1,447$ 1,736$ 2,037$ 42,179$

Sum PV 75,934$

Adjestment:

Add: ST Investments 1,217$

Add: Excess Cash 1,921$

Less: Total Debt (9,777)$

Less: PV of Operating Lease (11,464)$

Less: PV of ESOP (272)$

Less: Underfunded Pension (7,315)$

Value of Equity 50,244$

Share of Outstanding 845

Intrinsic Value of Stock 59.46$

EP DCF

Adjected Price as Nov 16,2014 65.16$ 65.16$


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

EPS 1.31$ 1.86$ 2.40$ 3.05$ 3.57$

Key Assumptions CV growth 3.00%

CV ROE 17.77%

Cost of Equity 10.96% 10.69% 10.41% 10.14% 9.87%

Future Cash Flows P/E Multiple (CV Year) 12.1032

EPS (CV Year) 3.57$

Future Stock Price 43.24$

Dividends Per Share

Future Cash Flows 0.25$ 0.35$ 0.46$ 0.58$ 0.68$

1 2 3 4 4

Discounted Cash Flows 0.28 0.35 0.46 0.58 43.24

Intrinsic Value 12/31/2014 44.63$

Price as of Today (11/13/2015) 48.65$

Delta Air Lines Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

AAL American Airlines $46.50 $9.39 $6.05 5.0 7.7 8.2 0.60 0.94

ALK Alaska Airlines $77.68 $1.18 $1.48 65.8 52.5 18.9 3.49 2.78

JBLU JetBlue Airways $25.41 $0.91 $1.08 27.9 23.5 53.5 0.52 0.44

LUV Southwest Airlines $46.96 $0.59 $0.91 79.6 51.6 28.9 2.76 1.79

SAVE Spirit Airlines $35.36 $0.72 $1.03 49.1 34.3 16.1 3.06 2.14 ALGT Allegiant Air $195.56 $1.90 $2.07 102.9 94.5 32.9 3.13 2.87

Average 55.1 44.0 2.3 1.8

DAL Delta Air Lines Inc. $50.70 $ 4.63 $ 5.73 11.0 8.8 0.4 31.1 25.1

Implied Value:

Relative P/E (EPS15) $ 254.91

Relative P/E (EPS16) 252.22$


Key Management Ratios

Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Liquidity RatiosCurrent Ratio (C.A./C.L.) 0.61 0.62 0.68 0.74 0.66 0.67 0.71 0.76 0.84

Cash Ratio ((Cash + S.T.)/C.L.) 0.28 0.25 0.27 0.20 0.13 0.15 0.22 0.27 0.32

Operating Cash Flows/ Current L 0.22 0.19 0.32 0.29 0.16 0.25 0.26 0.28 0.31

Activity or Asset‐Management RatiosReceivables Turnover (Rev./Ave. Assets) 23.26 22.52 22.88 20.67 19.59 21.45 21.40 21.33 21.23

Asset Turnover Ratio (Rev./ Ave. Rec.) 0.81 0.83 0.78 0.76 0.80 0.86 0.89 0.90 0.92

Fixed Asset Turnover (Rev./ Ave. PPE) 1.81 2.17 3.99 3.39 11.88 17.32 21.61 29.55 42.10

Financial Leverage RatiosDebt/Equity Ratio (Total Lib./ Total E.) ‐32.16 ‐21.91 3.49 5.14 4.11 3.47 2.97 2.48 2.04

Debt Ratio (A./L.) 0.97 0.95 1.29 1.19 1.24 1.29 1.34 1.40 1.49

Interest Coverage Ratio (operating income/ interest exp.) 1.81 2.17 3.99 3.39 11.88 17.32 21.61 29.55 42.10

Profitability RatiosROE ( NI/AVE. E.) ‐342.28% ‐57.22% 221.61% 6.44% 11.81% 14.69% 16.33% 17.74% 17.77%

ROA (NI/ Ave. A.) 1.97% 2.29% 21.78% 1.24% 2.11% 3.08% 3.89% 4.79% 5.48%

EBIT Margin 5.31% 5.53% 8.95% 4.27% 4.58% 6.03% 7.31% 8.75% 9.74%

Payout Policy RatiosPayout Ratio 0.00% 0.00% 0.97% 37.97% 19.00% 19.00% 19.00% 19.00% 19.00%