Delta Air Lines Inc
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Krause Fund Research Spring 2021 Industrials and Materials Delta Air Lines, Inc. (NYSE: DAL) Recommendation: SELL April 20, 2021 Analysts Current Price: $44.45 Eddie Khachikian Target Price: $36.05-$40.05 [email protected] Michael Samataro [email protected] We recommend to SELL Delta Air Lines because of its Kezheng Yi inefficient operations, uncertain consumer confidence, [email protected] and unpredictable industry outlook. Our target price is a range of $36.05-$40.05. This is a 14.56% decrease from their current price. Delta Air Lines was founded in 1924. It is one of the oldest American airlines. Since the change in jet fuel prices is a leading factor for financial problems in the airline sector, • Consumer confidence is trending downwards since Delta makes strategies towards improving the situation the beginning of the global pandemic regarding these types of expense. Delta also aims to attract the • Delta Air Lines has highly inefficient fuel costs and corporate traveler, which is a market characterized by low overall operating liabilities price sensitivity leading to higher margins. For the leadership • Low dividend payout keeps Delta from being a target skills of their employees, Delta leads to the highest level of by the inflow of value investors attention and respect towards customers. 52-Week High $52.28 • Consumer confidence has the ability to drastically 52-Week Low $17.51 increase with the increasing vaccination rates Beta Value (5Y Monthly) 1.51 • Low debt costs could allow for an opportunity to Average Daily Volume (90 day) leverage and grow coming out of the pandemic 13.6M • Declining fuel costs due to the global pandemic’s impact on the industry Market Capitalization $30.74B Shares Outstanding 638.1M • Uncertainty around pent-up demand from consumers Book Value/Share $2.41 EPS GAAP | 2020 ($10.76) P/E Ratio (LTM) (5Y Avg.) 8.7 Dividend Yield (5Y Avg.) 1.7% Dividend Payout Ratio 15.18% ROA (5Y Avg.) 1.9% ROE (5Y Avg.) (4.0%) Sales | 2020 $17.10B Current Ratio (5Y Avg.) 0.6% Total Debt-Equity Ratio (5Y Avg.) 6.83% Asset Turnover Ratio (5Y Avg.) 0.6% Payables Turnover Ratio (5Y Avg.) 10.2% revenue. In this case, the wave of international students returning to their home country is one of the main reasons. For example, Chinese students are one of the In recent years, Delta Air Lines, Inc. (DAL) is showing largest group of students in US university. During 2020, signs of expansion and involving themselves further into many students feel that their studies are disrupted, fear foreign and international commercial travel. Due to the they will not be able to graduate and are struggling from fragmentation of the Airline Industry, the environment a lack of support and information by Chinese is highly competitive overall across geographies and universities and authorities over their return. product offerings. As the globalization keeps taking over Frustrations have reached an all-time high, prompting the airline industry, consolidation, increased corporate students to start several online courses for their quick partnerships and minority stake acquisitions will return to China. Not only them, but also their parents continue in the long term. They tend to spend more in urge them back to China. Thus, many Chinese student capital expenditures than capital structure. However, returned to China to take online courses instead of this spending is into more aircraft, airport slots, and staying at the universities. The most important thing is investments into other foreign airlines. We believe this that they want to maintain safety. During this time, the growth in spending will allow Delta Air Lines to take airline’s industry revenue returned a little back at the end advantage of the short-term growth. The airlines of the year, in particular the Delta Air Lines. All in all, industry will experience it as more people across the the total revenue was greatly slashed and is expected to globe are vaccinated. recover with the help of the vaccine within this next year. In 2020, Delta lost a record $12.39 billion as the pandemic drastically reduced customer travel demand. It is important to analyze the total operating expense in 2020 and the 4th quarter last year. According to the Total revenue fell from $11.44 billion in the fourth quarter of 2019 to $3.97 billion, down to about 35% of analysis, the total operating expense is $4.3 billion in what it was at the end of 2019. It is clear that Delta 2020, with a $10.8 billion decrease compared to 2019. Airlines’ total revenue is dramatically declined due to The adjusted operating expense decreased $16 billion with a 40% decline over 2019. The total operating the COVID-19 pandemic. It is a huge impact on the th airline company’s revenue. For example, people in US expense is $930 million in the 4 quarter in 2020, with a $5.2 billion decline compared to the 4th quarter in are the main travelers to Europe. In particular, in 2019, th the flights generated about 15% of all passenger revenue 2019. The adjusted operating expense in the 4 quarter in 2020 decreased by $4.6 billion, which is 47% greater for Delta, or $6.4 billion. However, the European Union th 15 is planning to bar most Americans to control the spread than the 4 quarter in 2019”. Due to the pandemic, of virus. The policy is the main reason to slash the Delta Delta Air Lines tried to reduce its expenditures to Airline’s revenue in 2020. To control the spread of virus, maintain its positive cash flow by reducing the number Company Analysis Notes: the ban flight policy is necessary. On the other hand, it of planes they had flying and reducing ticket costs. It is important to maintain its normal operations and not fall -Connectwould slashDelta’s the numbers airline to industry. the industry The analysis revenue keys would be greatly impacted, and it needs time to recover. Adjusted too behind due to the pandemic as they should settle earnings per share had a loss of $2.53 versus an expected back to pre-pandemic levels within the next year or two. Delta even attempted to hedge jet fuel costs in 2012 by loss of $2.50. Total revenue of $3.97 billion versus an expected $3.59 billion in revenue and so they made purchasing a refinery, being the first airline company to slightly more than forecasted. The flight ban policy own one. However, over time, they found that the greatly impacted the airline industries economic. It refinery barely made profit in some years and lost impacted the stock price of Delta Air Lines. On the other money in others; overall it was not worth it. Last year in hand, there is a slight increase from the expected 2020, due to the pandemic and the decreased demand for air travel, the refinery actually proved to be a liability 12 and is ultimately not seen as a successful venture. 2015 2016 2017 2018 2019 2020 2021E Domestic 23,817.00 25,002.00 26,079.00 28,159.00 30,367.00 10,041.00 16,684.99 International 10,965.00 10,812.00 10,868.00 11,596.00 11,910.00 2,842.00 4,195.37 % of International 31.525% 30.189% 29.415% 29.169% 28.171% 22.060% 20.092% During mid-2013, Delta Air Lines planned for a $2-$2.5 lease their 717s, 737-900s, and 321s. Most other plane billion capital expenditure budget for the following 5 types are owned by the company, most likely to save years. However, they only really maintained this in 2014 money through the entire life of the plane as it is cheaper and rose past the limit every year after reaching $3.2 to retire an owned plane. billion in capital expenditures in 2016 to acquire international airport slots as well as investing in foreign airlines. Delta Air Lines has also restructured their Exposure to 737-800 Max Groundings aircraft orders for future aircraft deliveries and as of In 2018 and 2019, the Boeing 737-800 Max airplane had December 31, 2020, removed approximately 350 two major accidents between two different airlines and mainline and regional aircraft from active service to was forced to be grounded by the Federal Aviation align capacity with reduced customer demand as a result Administration until March 2020. However, Delta Air of the COVID-19 pandemic. As of December 31, 2020, Lines did not face any serious problems with this approximately 125 mainline and regional aircraft were airplane at the time and only has to emergency land a temporarily parked. Additionally, 227 aircraft were single flight because of this plane’s possible electrical permanently parked as a result of the early retirements. issues in May 2019. April 2020, Delta also was reported As the duration and extent of reduced demand is made considering ordering a hundred 737-800 Max airplanes, clearer, Delta will continue to evaluate the current fleet but we can see from their current fleet at the end of 2020 compared to network requirements and may decide to that they only possess a total of 77. There has also been retire additional aircraft. Future decisions regarding the recent news surrounding potential electrical problems timing of returning temporarily parked aircraft to service with this airplane again in early April 2021 as Southwest will be dependent on the situation of customer demand.15 Airlines, American Airlines, Unites Airlines, and Alaska Their operating aircraft fleet, purchase commitments Airlines are all pulling and grounding many of their Max and options at March 31, 2021 are summarized in the planes.