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. Although Alaska Airlines is grounding all of its following table. As of March 31, 2021, less than 10% of available Max fleet, Southwest seems to be facing more their mainline and regional aircraft were temporarily potential losses with this mishap as they grounded 30 of parked.15 Delta Air Lines understands that it is cheaper its 58 Max planes. However, Delta Air Lines has not yet to retire a plane that is owned by the airlines than one responded to this issue and has not announced any that is leased or financed with debt. Delta owns all 18 of groundings of their 737-800 Max planes. its Boeing 777s that it possesses. Delta seems to mainly
Global Airline Traffic Growth Due to the pandemic of COVID-19, the global airline Consumer Confidence Index traffic growth was slashed during the 2020. Comparing In general, the Consumer Confidence Index (CCI) has to its main competitors, such as United, Southern decreased due to the COVID-19 pandemic. The CCI western, American Airlines, Delta gained its profit by indicates the customers' confidence for their spending in generating its positive brand. Many people tend to buy a specific industry. During the specific period, people Delta’s ticket, regardless of the pandemic. Therefore, it tend to stay in their safety at home instead of traveling gains its loyal customers and could generate its to other destinations. On the other hand, the CCI in Delta profitability in the long run. This 5.7% year-over-year Airlines is relatively higher than its competitors. growth decrease is due to the disruption from the global Because of COVID-19, people’s wages are slashed by pandemic. This sharp decline reveals that consumption the economic recession. People do not have enough decreased as well as consumer confidence. For money to spend in travel, such as personal and business industries to make up a high percentage of GDP, such travel. Compared to its main competitors, such as United as financial services and airlines, the government needs and Southwestern Airlines, Delta Air Lines has a to make drastic changes to our economy to slow the relative lower price. Therefore, people might afford it drop in GDP. Luckily, the federal government did just and it increases their CCI. that by increasing spending in the latter half of 2020 and implementing stimulus checks. As shown below, this Fuel Costs increase in government spending created a quick and positive impact on GDP. As shown in the quarter from 1 to 4 in 2020, the fuel cost has declined dramatically. Normally, the average fuel cost per quarter is above $1.2B. However, the situation Load Factor was different in 2020. The pandemic of COVID-19 In general, load factor is a key measure of the started around March in 2020 in the US, which was close company’s capacity utilization among industries. This to the end of the 1st quarter. The amount of fuel cost in is a challenge for airline industry because people do not 1st quarter reached above the normal level around tend to buy airline tickets for travelling during the $1.6B. Afterwards, it slashed to below $400M. It pandemic of COVID-19. Besides, there are some generally increased to 500 M in quarter 3 and to $700M airline-ban-policies in some countries, such as Spain, in quarter 4. According to the forecast, it still needs a UK, Italy, and so on. On the other hand, Delta did a long time to reach the normal level. On the other hand, great job in this field among its competitors. Delta Air Delta Air Lines did a good job to maintain its cash Lines followed closely behind American Airlines streams and Revenue Passenger Mile (RPM) by (Revenue Passenger Mile) RPM of 128.5 B with 121.7 reducing its expenditures. Generally, it reached the top B, as well as its RPM was closed by their industry- level of RPM among its competitors during the leading load factor of 86.5%. In conclusion, Delta pandemic period. As shown in quarter 4 of 2020, real generates a higher profitability than its competitors and GDP seems to have stabilized in the short-term for the maintains the top level of its capacity utilization by its United States economy. We expect that in the short- highest load factor in the airline industry. term, real GDP will see even higher increases when the first half of 2021’s real GDP is reported. This is due to the second round of stimulus checks flooding into the economy as well as a positive increase in consumer confidence due to the growing positive vaccination results stemming from the federal government’s research.
C ompetition Valuation Comparison 14 The level of competition globally and locally has always FactSet Universal Screening EBITDAR EV to been high both at global and local scales for the airline Symbol Name industry. Therefore, not only large players like Delta Prior FY EBITDAR compete with global market share, but they must ALGT ALLEGIANT TRAVEL CO 59.0 69.5x HAWAIIAN HOLDINGS constantly be aware and differentiate themselves across HA INC -211.0 - geographies and products as well. Price wars, and SAVE SPIRIT AIRLINES INC -333.3 - pushing for customer loyalty programs, discounts, and ALASKA AIR GROUP destination networks. The main ways that airlines have ALK INC -972.0 - looked to differentiate themselves in the market has been JETBLUE AIRWAYS through product innovation (premium economic classes JBLU CORP -1,370.0 - DAL DELTA AIR LINES INC -5,570.0 - with new features, new seating options like flatbed, UNITED AIRLINES Wifi, etc), flexible pricing (customer loyalty programs, UAL HOLDINGS INC -6,864.0 - multiple flying options to the same end destination, etc.) AMERICAN AIRLINES and finally maintaining their costs while maximizing AAL GROUP INC -7,668.0 - their revenues. LUV SOUTHWEST AIRLINES - -
Peer Analysis Fuel Consumption Comparison Delta Air Lines is the second highest in terms of revenue FactSet Universal Screening14 and available seat miles. Delta Air Lines also is the Avg Fuel Fuel highest in the average fuel cost per gallon with a high of Symbol Name Fuel Consumed Expense 1.64. This is a negative indicator when compared to its Cost/ Gallons Gallon peers because the high fuel cost correlates with the high SOUTHWEST operating liabilities displayed by Delta’s historical LUV AIRLINES 1.45 1,273.0 1,849.0 balance sheet. Delta is also tied for second in passenger ALLEGIANT revenue per available seat miles. This indicates it not ALGT TRAVEL CO 1.48 149.5 221.8 only has the volume of available seat miles, but also that AMERICAN AIRLINES it is efficient with its seat miles. Delta Air Lines is also AAL GROUP INC 1.48 2,297.0 3,402.0 currently second lowest in earnings per share at -19.5. SPIRIT We believe we can overlook for now due to the impact SAVE AIRLINES INC 1.49 289.4 431.0 the global pandemic had on the entire airlines industry. HAWAIIAN HA HOLDINGS INC 1.52 106.2 161.4 JETBLUE AIRWAYS Passenger Revenue Comparison JBLU CORP 1.53 412.0 631.0 ALASKA AIR ALK GROUP INC 1.57 461.0 723.0 FactSet Universal Screening14 UNITED Available Passenger Passenger AIRLINES Symbol Name Seat Revenue Revenue UAL HOLDINGS INC 1.57 2,004.0 3,153.0 Miles Miles Per ASM DELTA AIR AMERICAN DAL LINES INC 1.64 1,935.0 3,176.0 AIRLINES AAL GROUP INC 143,167.0 91,825.0 10.1 DELTA AIR DAL LINES INC 134,339.0 73,412.0 9.6 UNITED AIRLINES UAL HOLDINGS INC 122,804.0 73,883.0 9.6 HAWAIIAN HA HOLDINGS INC 7,560.5 4,576.6 8.8 JETBLUE AIRWAYS JBLU CORP 32,689.0 18,598.0 8.4 ALASKA AIR ALK GROUP INC 37,114.0 20,493.0 8.1 SOUTHWEST LUV AIRLINES 103,456.0 54,221.0 7.4 ALLEGIANT ALGT TRAVEL CO 13,125.5 7,626.5 7.1 SPIRIT SAVE AIRLINES INC 27,718.4 19,319.4 2.7 FactSet Universal Screening14 Market Value Closing Price to Earnings Per Div Symbol Name Price Sales Share Yield LUV SOUTHWEST AIRLINES 36,678.0 62.0 2.9 -5.4 0.4 DAL DELTA AIR LINES INC 29,520.4 46.2 1.5 -19.5 1.0 JBLU JETBLUE AIRWAYS CORP 6,380.6 20.2 1.4 -4.9 0.0 ALK ALASKA AIR GROUP INC 8,554.2 68.8 1.8 -10.7 0.7 UAL UNITED AIRLINES HOLDINGS INC 17,793.5 55.0 0.8 -25.3 0.0 ALGT ALLEGIANT TRAVEL CO 3,995.8 243.4 3.1 -11.5 0.4 HA HAWAIIAN HOLDINGS INC 1,261.8 24.7 1.0 -11.1 0.7 AAL AMERICAN AIRLINES GROUP INC 13,785.0 21.6 0.4 -18.4 0.6 SAVE SPIRIT AIRLINES INC 3,532.7 36.1 1.1 -5.1 0.0 Load Efficiency Comparison Debt Ratings Expanded Southwest Airlines has the only non-junk grade debt rating, according to FitchRatings, out of all of the eight airline peers listed. However, Delta Air Lines is right behind with the highest grade “junk” rating and the best debt rating out of the other seven peers, tied with Alaska Air Group. With this, Delta Air Lines seems to be balanced throughout their efforts and is not falling
substantially behind with their debt repayments as opposed to others in the airline industry as they are all mostly receiving junk-grade debt ratings at the moment.
Peers Broadly Compared
Since the airline industry mainly offers transportation services for people or goods, the main source of revenues for nearly all airline companies involves filling the seats for their commercial flights, or in other words, sell as many flight tickets as possible. Airline companies are usually differentiated by the services they offer which include domestic, regional, intercontinental, intra-continental, or international. Some larger airline Debt Ratings Compared companies may also receive government funding in Fitch Ratings: (Under BBB- is “junk” grade) order to stay operational through disastrous times, American Airlines Group, Inc. (AAL) similar to the pandemic’s effect on worldwide • B- (highly speculative) discomfort towards travel. These main airlines compete Delta Air Lines, Inc. (DAL) against each other in an attempt to sell the most tickets • Fitch: BB+ (Non-investment grade speculative) possible. Airlines like Allegiant or Spirit aim to price United Airlines Holdings, Inc. (UAL) their tickets as low as possible but in turn have smaller • B+ (highly speculative) planes and less comfort for passengers either through Southwest Airlines Co. (LUV) smaller seats or less accommodations on board. Other • BBB+ (Lower medium grade) JetBlue Airways Corporation (JBLU) airlines like Delta and United are generally more • BB- (Non-investment grade speculative) expensively priced but offer more comfort for their Spirit Airlines Incorporated (SAVE) flyers and use rewards programs to build loyalty from • BB- (Non-investment grade speculative) their customers, hoping they make that airline their usual Hawaiian Holdings, Inc. (HA) choice. Delta Air Lines is considered a low-price carrier. • B- (highly speculative) ALGT and SAVE, absolutely, but not DAL, which Allegiant Travel Co. (ALGT) focuses on service. Interestingly, SAVE and ALGT earn • B+ (highly speculative) the highest margins in the industry despite focusing on Alaska Air Group, Inc. (ALK) low price tickets. They fill the planes and more • BB+ (Non-investment grade speculative) importantly keep labor costs very low.) (FitchRatings, 2021)
As for an inflation outlook, early numbers in 2021 indicated that the inflation is trending downwards Interest Rates towards historically low numbers. However, recent Interest rates play a significant role in the economy and March inflation reports have indicated that the United shape the behavior of the industrial sector, which deeply States is seeing a sharp rise to about 2.4% in the federal impacts financing abilities and strategies for both equity reserve PCE projection. Luckily, longer-term projections and debt. Interest rates have been historically low for the indicate much lower rates of around 2%. The reason is past decade, as the federal reserve has looked to that the base effect of inflation in March 2021 distorts the stimulate the economy to facilitate debt financing by PCE rate, and analyst consensus believes this will fade keeping its funds rate at low levels. This policy has been away in the long-term.3 only intensified during the pandemic, when the fed sets its target rate to 0% and engages in QE to keep corporate and treasury yields at even lower levels. Interest rates have been historically low for the past decade, as the federal reserve has looked to stimulate the economy by facilitating debt financing by keeping its fed funds rate at low levels. In terms of interest rate outlook, we should expect the federal reserve to maintain their commitment to economic growth and then see a similar federal funds rate of around .25% for years to come. The federal reserve has even stated their commitment to low interest rates as well. The graph below indicates the stagnation Producer Price Index Inflation of the fed funds rate. Another inflation rate to consider alarming for the
industrial sector is Producer Price Index (PPI). PPI relates mainly to commodity prices and has implications relating to our previously mentioned statements about wage prices and unemployment. PPI is a relevant statistic in today’s business environment based on the historical numbers that have sharply risen in the past few months, as shown below.
Personal Consumption Expenditure Inflation Inflation rates can be crucial to the industrial sector. Inflation is directly affected by wage prices of industrial workers. As minimum wage increases in a certain area, it might lead to a decline of employment and/or an increased cost of living. Commodity prices and precious metals such as gold, silver, and copper are also affected In the short-term, we will continue to see this rise by inflation because as the dollar is devaluated, precious because of supply-chain issues that have risen due to the metals will increase production costs. As we have seen global pandemic. Companies that rely on manufacturing in previous recessions, this can be a cause for worry in and commodities will take the biggest hit to their sectors reliant on a large workforce, such as the production costs due to the year-over-year increased industrial sector. As for an inflation outlook, early 2021 final demand goods of 1.7%. On the other hand, final numbers indicated that inflation is trending downwards demand services, such as transportation, will only see towards historically low numbers. However, recent small increases in production costs due to the year-over- March inflation reports have indicated that the United year increase of final demand services of only .7%. In States is seeing a sharp rise to about 2.4% in the federal the long-term, we can expect PPI numbers to reach more reserve PCE projection. normal increase levels of less than 1%.
Real Gross Domestic Product For the long-term outlook of real GDP, we expect more Real gross domestic product (GDP) is the inflation- stabilized numbers similar to that of quarter 4 of 2020. adjusted value to economy’s goods and services. It is Once the stimulus checks have been phased into the especially important to consider real GDP instead of economy, there is no reason to believe that the GDP will nominal GDP because of the previously mentioned see drastic growth in 2022 and beyond. rapidly fluctuating inflation rates. It’s also a relevant metric because of the drastically decreased GDP from Capital Markets Outlook 2020 growth as shown in historical data below. Recent improvements in Covid-19 cases have caused a promising recovery in our capital markets outlook. The
stimulus checks rolled out by the federal government as well as the vaccination % increases should continue to spur the markets forward. One way to look at the current markets is the transition towards value stocks. Companies that have previously held high intrinsic valuations as well as high dividend yields are currently the types of companies that investors are flocking towards.17 This is evident by the heavy fund inflows in the S&P 500 value ETFs. Overall, large cap S&P 500 value ETFs saw a $3,831.62M increase in the last month. We believe we will see this same trend continue in the short-term as investors look towards safer investments coming off of a historic bull run. In the This 5.7% year-over-year growth decrease is due to the long-term this will allow higher value sectors, such as disruption caused by the global pandemic. This sharp industrials, to see increased grow moving forward. decline reveals that consumption decreased as well as consumer confidence. In order for industries that make up a high percentage of GDP, such as financial services and airlines, the government needed to make drastic changes to our economy in order to slow the drop in GDP. Luckily, the federal government did just that by increasing spending in the latter half of 2020 and implementing stimulus checks. As shown below, this increase in government spending created a quick and positive impact on GDP.8
Porters Five Forces of Competition Threat of New Entrants Low to moderate barriers of entry due to the ease of leasing planes and starting an airline. However, Delta As shown in quarter four of 2020, real GDP seems to have stabilized in the short-term for the United States being a very large airline faces low risk to new entries. economy. We expect that in the short-term real GDP Bargaining Power of Suppliers will see even higher increases when the first half of Low to moderate bargaining power of airplane 2021’s real GDP is reported. This is due to the second manufacturers because of the pandemic causing round of stimulus checks flooding into the economy as multiple order cancellations from Airbus and Boeing. well as a positive increase in consumer confidence due Bargaining Power of Customers to the growing positive vaccination results stemming Buyers and customers have a high bargaining power as from the federal government’s research.16 most airlines rely on ticket purchases for revenue.
Degree of Rivalry or Competition payable account was not present in the final three years Since the airline industry is highly competitive, there is of Delta’s financials. We also did this with other line a high degree of competition as they all use different items that were in the same situation as the taxes strategies to convince consumers to fly with them and payable account. This will give us a more accurate eventually stay loyal. outlook of how Delta is moving forward with their Threat of Substitutes balance sheet items. The threat of substitutes is moderate because at times, consumers may only have the option to fly where they need to get to, other times if the destination is closer, the Application of Valuation Model consumer may turn to another form of transportation. We feel very confident in the implied share price range we decided on. Going into the valuation we expected the range to trend towards at a lower point than what Delta is currently trading at. While Delta does have good parts of their business, like its available seat miles, Valuation Reasoning low debt, and potential to operate in foreign countries, The final valuation range we arrived at was between we felt that in order for Delta to become a buy rating $36.05 and $40.05 per share. The way we arrived at this our valuation would have to trend closer to the upper range was mainly by using the DCF and EP models of trends of our sensitivity analysis. A number closer to the valuation and accounting for our sensitivity tables. The upper trends on the “Current Dividend Yield” and DDM model of valuation was not a technique our group “Beta” table would reverse the sell rating. The way that put a lot of stock into due to its low skewed valuation. Delta Air Lines can do this is by paying out a higher The reason for the low-skewed valuation is because dividend yield. A higher dividend yield makes Delta a Delta is not a company with a high payout ratio. To more attractive company to the inflow of value account for the low-skewed valuation, we made sure to investors and increase its DCF and EP valuation. Based show a range on the lower side when compared to the on our sensitivity tables, they could focus on improving DCF and EP valuation of $40.05 per share. This is their dividend payout ratio. One thing I do believe our abnormal for many companies with as strong of cash valuation understated is the underfunded pensions. flows as Delta has seen over the past decade. These Another way Delta could reverse the sell rating is by strong cash flows are also what caused us to put more providing consistently lower operating liabilities. In the stock into the DCF and EP models. post-pandemic world, this is still likely to continue based on the fact that many people are cancelling Critical Assumptions passenger flights and Delta still has to pay for their A crucial operations assumption we made was to lower highly inefficient fuel obligations. One thing that was the of growth made by “Cargo” and “Other” revenue. understated by our model was the underfunded These segments of revenue growth decreasing are pensions. Delta steal has to deal with underfunded something we are comfortable with as Delta transitions pensions today compared to other airlines. This could back towards its passenger revenue segments. Other potentially change its DCF and EP valuation. income statement assumptions were to not utilize the 2020 historical accounts. These accounts would drop the Weighted Average Cost of Capital revenue growth forecasts and not line up with The WACC our group arrived at was 9.69%. We reasonable assumptions for industry metrics. We also arrived at this percentage by weighing out the cost of made sure to include a steady growth of foreign revenue. equity as well as the cost of debt. By doing so we could As Delta intends to move more into this area, it logical account for the changes in Delta’s capital structure. to assume they are almost guaranteed to grow in this using a risk-free rate of 1.72%, a beta of 1.45, and an segment. The same critical assumption to not include equity risk premium of 5%. This WACC valuation 2020 balance sheet accounts in our forecasted averages seems to come out on the high side for the airlines was also made. The reasoning for this was because the industry. This indicates to us that Delta does not have 2020 accounts were far too inconceivable to forecast in an overwhelming amount of debt in their structure. the coming years. This would have completely thrown When compared to a company like American Airlines off the forecasting of our model. Another balance sheet who does have this type of structure, we can expect assumption we made was to not include the first seven Delta to see much less risk to their growth in the coming years of taxes payable. This is because the taxes years.
Cost of Debt pre-tax cost of debt does not impact our valuation in a We arrived at the cost of debt by using a risk-free rate large way. What this table does reveal is that the equity of 1.72%, an implied default premium of 11.67%, and a going into our WACC is crucial to the valuation based marginal tax rate of 22.90%. The risk-free rate was on the high changes in the valuation when we change assumed by using the United States’ 10-year treasury the WACC. yield. The implied default premium was also found by then subtracting the risk-free rate from the cost of debt. The final piece, the marginal tax rate, we came to by CV Growth of EPS and Pre-tax Cost of Debt accounting for the domestic segments of Delta’s The EPS is critically important to the valuation. Delta business as well as their foreign segments. Air Lines EPS fell drastically in the final year of 2020
and revealed the large impact the pandemic had on the Cost of Equity company. As shown in the table the impact of the EPS We arrived at the cost of equity by using a risk-free rate is shown by having extremely high and low valuation of 1.72%, a beta of 1.45, and an equity risk premium of with even the slightest changes. Pre-tax cost of debt did 5%. The risk-free was assumed the same way as our cost not move the valuation much due to the low debt ratio of debt. The beta was taken from the average historical of Delta Air Lines. This kept the valuation consistent beta for Delta Air Lines. The equity risk premium was across the table and strengthened our knowledge of the assumed by taking the difference between the average effect of Delta’s EPS. market returns and the returns of Delta Air Lines stock performance. Beta and Equity Risk Premium This sensitivity table provided with a drastic range in our company’s valuation. This is mainly because of the fact that the beta is a key component in calculating WACC and Cost of Equity Delta’s WACC. The WACC is the number that can In general, the WACC and Cost of Equity play an skew the DCF and EP valuation the most. We took this important role in a company´s financial situation. into consideration when analyzing this table, by Because of the pandemic of COVID-19, WACC has considering this to be a close range to our final valuation been slashed in Delta due to the fewer investors to invest range given the importance the beta has on the final in airline industry. Because of the lower passenger, it share price. generates a relative lower revenue in this specific sensitivity table. We consider this table to be of high importance to the valuation because of the high amount Risk Free Rate and CV Growth of NOPLAT of equity in Delta’s capital structure. This sensitivity analysis had little effect on the final valuation of our company. The overall NOPLAT The WACC considers of cost of debt and cost of equity. growth sees large increases up to .30% and only lightly It generally includes a company´s bonds and long-term raises the valuation of the company. I believe this debt in the cost of debt and common and preferred stock comparison is a good benchmark showing that the in the cost of equity. Comparing to Southwest Airlines internal factors of the valuation were accurately borrowing money from government bonds, Delta has calculated. much less borrowing fonds from lenders. Furthermore, due to the pandemic, the stock value does not have a Current Dividend Yield and Beta dramatically increase for Delta Airlines. Many people tend to stay safety at home instead of travelling outside. This sensitivity analysis was an analysis that helped us In general, the Airline industry cannot be able to attract decide not to put much stock into the DDM model of other investors to invest money. Therefore, the WACC valuation. The dividend yield displayed here has an is gently slashed for Delta. extremely high amount of impact on the final stock price and reaches either an unreasonably high price of $51.64 or an unreasonably low price of $30.62. The Pre -tax Cost of Debt and WACC impact the dividend payout has on the final price The pre-tax cost of debt is especially important to cannot be understated. These unreasonably low ranges analyze because it is critical to the health of the airline show that through the DDM model we will reach an industry. However, Delta Air Lines has a WACC unreasonably low price due to Delta’s lacking dividend indicates that it has a lower debt ratio meaning that the payout.
Delta Airlines, Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth of NOPLAT 3.00% CV Year ROIC 20.37% WACC 9.69% Cost of Equity 8.97%
Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E CV
DCF Model: Free Cash Flow (FCF) 10,041 6,791 5,979 6,177 6,383 Continuing Value (CV) 69,177 PV of FCF 9,154 5,644 4,531 4,268 47,792 Value of Operating Assets 71,389 Non-Operating Adjustments: Equity investments 1,843 Short-term investments 447 Cash restricted for airport construction 2,103 Goodwill 10,261 Identifiable intangibles 5,953 Pension, postretirement, and related benefits 11,556 Current maturities of long term debt and finance 2,135 leases Debt and finance leases 11,557 ESOP 281.41 Value of Equity 25,252 Shares Outstanding 639 Intrinsic Value of Last FYE 39.55 Implied Price as of Today 40.05
EP Model: Economic Profit (EP) 4,250 3,820 3,814 3,901 3,991 Continuing Value (CV) 55,779 PV of EP 3,875 3,175 2,890 2,695 38,536 Total PV of EP 52,171 Invested Capital (last FYE) 19,218 Value of Operating Assets 71,389 Non-Operating Adjustments: Equity investments 1,843 Short-term investments 447 Cash restricted for airport construction 2,103 Goodwill 10,261 Identifiable intangibles 5,953 Pension, postretirement, and related benefits 11,556 Current maturities of long term debt and finance 2,135 leases Debt and finance leases 11,557 ESOP 281.41 Value of Equity 25,252 Shares Outstanding 639 Intrinsic Value of Last FYE 39.55 Implied Price as of Today 40.05 Delta Airlines, Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E CV
EPS $ 5.47 $ 5.63 $ 5.79 $ 5.96 $ 6.14
Key Assumptions CV growth of EPS 3.00% CV Year ROE 21.70% Cost of Equity 8.97%
Future Cash Flows P/E Multiple (CV Year) $ 57,185.90 EPS (CV Year) $ 6.14 Future Stock Price $ 351,098 Dividends Per Share $ 0.95 $ 0.98 $ 1.01 $ 1.04 Discounted Cash Flows 4.49 3.80 3.21 2.72 2.80
Intrinsic Value as of Last FYE $ 17.02 Implied Price as of Today $ 17.24 Delta Airlines, Inc Value Driver Estimation
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV
NOPLAT: Operating income 5,264 6,618 (12,469) 3,888 4,015 4,141 4,275 4,414 Operating lease interest 1,043 628 615 603 665 686 708 731 EBITA 6,307 7,246 (11,854) 4,491 4,680 4,827 4,983 5,145
Less: Adjusted Taxes: Tax shield on interest expense (71) (69) (213) (175) (181) (186) (192) (199) Tax shield on amortization of debt discount, net - - - (22) (23) (23) (24) (25) Tax shield on loss on extinguishment of debt - - - (18) (18) (19) (19) (20) Tax shield on impairments and equity losses (14) (14) (557) (3) (3) (3) (3) (3) Tax shield on loss from investment - - (24) (3) (3) (3) (3) (3) Tax on gains from investment 9 27 ------Tax shield on miscellaneous, net 50 (40) 80 (20) (21) (22) (22) (23) Total Adjusted Taxes (127) (16) (825) (240) (248) (256) (264) (273) Plus: Change in deferred taxes - 1,456 (1,456) 188 6 6 6 7 NOPLAT 6,434 8,717 (12,485) 4,919 4,934 5,089 5,254 5,424 Invested Capital (IC): Operating Current Assets: Normal cash 1,565 1,655 602 1,708 1,763 1,819 1,878 1,939 Accounts receivable 2,314 2,854 1,396 2,963 3,057 3,155 3,257 3,363 Fuel Inventory 592 730 377 803 829 855 883 912 Prepaid expenses 1,203 1,262 1,180 1,232 1,272 1,312 1,355 1,399 Expendable parts and supplies inventories 463 521 355 473 488 504 520 537 Total Operating Current Assets 6,137 7,022 3,910 7,179 7,408 7,646 7,893 8,149
Non Interest-Bearing Current Liabilities Accounts payable 2,976 3,266 2,840 2,689 2,791 2,896 3,006 3,120 Air traffic liability 4,661 5,116 4,044 4,270 4,438 4,613 4,794 4,982 Accrued expenses 3,287 3,701 2,086 2,474 2,569 2,668 2,770 2,876 Deferred revenue 2,989 3,219 1,777 2,436 2,513 2,594 2,678 2,765 Income taxes payable ------Fuel card obligation 1,075 736 1,100 456 471 486 502 518 Current maturities of operating leases 955 801 678 632 652 673 695 717 Noncurrent operating leases 5,801 5,294 5,713 1,948 2,042 2,140 2,241 2,347 Other accrued liabilities 1,117 1,078 1,670 1,618 1,670 1,723 1,779 1,837 Total Current Liabilities 22,861 23,211 19,908 16,523 17,146 17,793 18,464 19,161
Plus: Net PPE 28,335 31,310 26,529 29,248 30,182 31,151 32,157 33,201
Plus: Net Other Operating Assets Capitalized PV of operating leases 4,687 4,589 4,502 4,964 5,122 5,286 5,457 5,634 Operating lease right-of-use assets 5,994 5,627 5,733 5,174 5,371 5,575 5,788 6,008 Other noncurrent assets 3,608 1,078 1,357 2,005 2,069 2,136 2,205 2,276 Net Other Operating Assets 14,289 11,294 11,592 12,142 12,562 12,997 13,449 13,919
Less: Other Operating Liabilities Deferred revenue 3,652 3,509 5,405 2,707 2,809 2,916 3,026 3,141 Noncurrent air traffic liability - - 500 - - - - - Other noncurrent liabilities 1,132 1,386 4,862 1,393 1,460 2,230 1,602 1,676 Net Other Operating Liabilites 3,652 3,509 5,905 2,707 2,809 2,916 3,026 3,141 Total Invested Capital (IC) 22,248 22,907 19,218 24,340 26,196 27,086 28,009 28,967
Free Cash Flow (FCF): NOPLAT 6,434 8,717 (12,485) 4,919 4,934 5,089 5,254 5,424 Change in IC (3,444) 659 (3,689) 5,122 1,857 889 923 958 FCF 2,990 9,376 (16,174) 10,041 6,791 5,979 6,177 6,383
Return on Invested Capital (ROIC): NOPLAT 6,434 8,717 (12,485) 4,919 4,934 5,089 5,254 5,424 Beginning IC 25,691 22,248 22,907 19,218 24,340 26,196 27,086 28,009 ROIC 25.04% 39.18% -54.50% 26.60% 21.27% 20.43% 20.40% 20.37%
Economic Profit (EP): Beginning IC 25,691 22,248 22,907 19,218 24,340 26,196 27,086 28,009 x (ROIC - WACC) 15.36% 29.50% -64.19% 16.91% 11.58% 10.74% 10.71% 10.68% EP 3,945 6,562 (14,704) 4,250 3,820 3,814 3,901 3,991 Delta Airlines, Inc Income Statement
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV Operating Revenue: Passenger 39,755 42,277 12,883 43,817 45,414 47,069 48,783 50,561 Cargo 865 753 608 730 707 686 665 644 Other 3,818 3,977 3,604 3,951 3,925 3,899 3,873 3,848 Total Operating Revenue 44,438 47,007 17,095 48,498 50,046 51,653 53,321 55,053
Operating Expense: Salaries and related costs 10,743 11,225 8,754 10,701 11,042 11,397 11,765 12,147 Aircraft fuel and related taxes 9,020 8,519 3,176 10,385 10,716 11,060 11,417 11,788 Regional carriers expense, excluding fuel 3,438 3,584 2,479 5,824 6,010 6,203 6,403 6,611 Depreciation and amortization 2,329 2,581 2,312 2,694 2,780 2,869 2,962 3,058 Ancillary businesses and refinery 1,695 1,245 1,785 1,632 1,684 1,738 1,795 1,853 Contracted Services 2,175 2,641 1,778 2,317 2,390 2,467 2,547 2,630 Landing fees and other rents 1,662 1,762 1,518 1,804 1,861 1,921 1,983 2,048 Aircraft maintenance materials and outside repairs 1,575 1,751 822 2,196 2,266 2,339 2,415 2,493 Passenger commissions and other selling expenses 1,941 1,993 582 2,081 2,148 2,217 2,288 2,363 Passenger service 1,178 1,251 523 1,099 1,134 1,171 1,209 1,248 Aircraft rent 394 423 399 452 466 481 497 513 Restructuring charges - - 8,219 304 313 324 334 345 Government grant recognition - - (3,946) - - - - - Profit Sharing 1,301 1,643 - 982 1,013 1,046 1,079 1,114 Other 1,723 1,771 1,163 2,139 2,208 2,279 2,352 2,429 Total Operating Expense 39,174 40,389 29,564 44,610 46,031 47,512 49,046 50,639
Operating Loss/Income 5,264 6,618 (12,469) 3,888 4,015 4,141 4,275 4,414
Non-Operating Expense: Interest Expense, net (311) (301) (929) (764) (788) (814) (840) (867) Amortization of debt discount, net - - - (95) (98) (102) (105) (108) Loss on extinguishment of debt - - - (77) (79) (82) (85) (87) Impairments and equity method losses (60) (62) (2,432) (13) (13) (14) (14) (15) Gain/(loss) on investments, net 38 119 (105) (12) (13) (13) (13) (14) Miscellaneous, net 220 (176) 348 (89) (92) (94) (97) (101) Total non-operating expense, net (113) (420) (3,118) (1,050) (1,084) (1,119) (1,155) (1,192)
(Loss)/Income Before Income Taxes 5,151 6,198 (15,587) 2,838 2,931 3,023 3,121 3,222
Income Tax Benefit/(Provision) (1,216) (1,431) 3,202 652 673 694 717 740
Net (Loss)/Income 3,935 4,767 (12,385) 3,490 3,604 3,717 3,837 3,962
Basic (Loss)/Earnings Per Share 5.69 7.32 (19.49) 5.47 5.63 5.79 5.96 6.14 Basic Cash Dividends Per Share 1.31 1.51 0.40 0.95 0.98 1.01 1.04 1.07 Total Shares Outstanding 691 651 636 639 640 642 644 645 Delta Airlines, Inc Balance Sheet
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV Assets Current Assets: Cash and cash equivalents 1,565 2,882 8,307 2,509 2,589 2,672 2,758 2,848 Short-term investments 203 - 5,789 447 461 476 491 507 Restricted cash ------Accounts receivable 2,314 2,854 1,396 2,963 3,057 3,155 3,257 3,363 Fuel Inventory 592 730 377 803 829 855 883 912 Expendable parts and supplies inventories 463 521 355 473 488 504 520 537 Prepaid expenses and other 1,203 1,262 1,180 1,232 1,272 1,312 1,355 1,399 Hedge Derivative Asset ------Hedge Margin Receivable ------Total current assets 6,340 8,249 17,404 8,427 8,696 8,975 9,265 9,566 Noncurrent Assets Property, plant, and equipment 28,335 31,310 26,529 29,248 30,182 31,151 32,157 33,201 Operating lease right-of-use assets 5,994 5,627 5,733 5,174 5,371 5,575 5,788 6,008 Goodwill 9,781 9,781 9,753 10,261 11,104 11,461 11,831 12,215 Identifiable intangibles 4,830 5,163 6,011 5,453 6,143 6,340 6,545 6,758 Cash restricted for airport construction 1,136 636 1,556 2,103 2,171 2,240 2,313 2,388 Equity investments - 2,568 1,665 1,843 1,902 1,963 2,027 2,092 Deferred income taxes, net 242 120 1,988 2,676 2,762 2,850 2,942 3,038 Other noncurrent assets 3,608 1,078 1,357 2,005 2,069 2,136 2,205 2,276 Total noncurrent assets 53,926 56,283 54,592 58,764 61,703 63,717 65,807 67,976 Total Assets 60,266 64,532 71,996 69,190 71,399 73,692 76,072 78,542
Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long term debt and finance leases 1,518 2,287 1,732 1,937 1,999 2,063 2,130 2,199 Current maturities of operating leases 955 801 678 632 652 673 695 717 Air traffic liability 4,661 5,116 4,044 4,270 4,438 4,613 4,794 4,982 Accounts payable 2,976 3,266 2,840 2,689 2,791 2,896 3,006 3,120 Accrued Salaries and related benefits 3,287 3,701 2,086 2,474 2,569 2,668 2,770 2,876 Loyalty program deferred revenue 2,989 3,219 1,777 2,436 2,513 2,594 2,678 2,765 Taxes Payable ------Fuel card obligation 1,075 736 1,100 456 471 486 502 518 Hedge Derivative Liability ------Other accrued liabilities 1,117 1,078 1,670 1,618 1,670 1,723 1,779 1,837 Total current liabilities 18,578 20,204 15,927 16,512 17,103 17,716 18,353 19,014 Noncurrent Liabilities: - Debt and finance leases 8,253 8,873 27,425 9,605 9,943 10,295 10,659 11,038 Noncurrent air traffic liability - - 500 - - - - - Pension, postretirement, and related benefits 9,163 8,452 10,630 11,556 12,053 12,568 13,104 13,659 Loyalty program deferred revenue 3,652 3,509 5,405 2,707 2,809 2,916 3,026 3,141 Noncurrent operating leases 5,801 5,294 5,713 1,948 2,042 2,140 2,241 2,347 Deferred Income taxes, net - 1,456 - 188 194 200 206 213 Other noncurrent liabilities 1,132 1,386 4,862 1,393 1,460 2,230 1,602 1,676 Total noncurrent liabilities 28,001 28,970 54,535 27,398 28,502 30,348 30,839 32,074
Commitments and Contingencies Stockholders' Equity: Common stock at par value ------Additional paid-in-capital 11,671 11,129 11,259 14,628 15,095 15,580 16,083 16,605 Retained earnings (deficit) 10,039 12,454 (428) 10,287 10,616 10,956 11,310 11,678 Accumulated comprehensive loss (7,825) (7,989) (9,038) (8,528) (8,800) (9,083) (9,376) (9,680) Treasury stock (198) (236) (259) (306) (316) (326) (337) (348) Total stockholders' equity 13,687 15,358 1,534 16,081 16,594 17,127 17,680 18,254 Total liabilities and stockholders' equity 60,266 64,532 71,996 69,190 71,399 73,692 76,072 78,542 Delta Airlines, Inc Forecasted Cash Flow Statement Source: FactSet Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E CV Net Income 3,490 3,604 3,717 3,837 3,962 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 2,694 2,780 2,869 2,962 3,058 Changes in working capital accounts: Restricted cash - - - - - Accounts receivable (1,567) (95) (98) (102) (106) Fuel inventory (426) (26) (27) (28) (29) Expendable parts and supplies inventory (118) (15) (16) (16) (17) Prepaid expenses and other (52) (39) (41) (42) (44) Pension, postretirement, and related benefits (926) (497) (515) (535) (555) Air traffic liability 226 168 175 181 188 Accounts payable (151) 102 106 110 114 Accrued Salaries and related benefits 388 95 99 102 106 Loyalty program deferred revenue 659 78 81 84 87 Taxes Payable - - - - - Fuel card obligation (644) 15 15 16 16 Non current air traffic liability (500) - - - - Deferred taxes (188) (6) (6) (6) (7) Noncurrent operating leases 3,765 (94) (98) (101) (105) Current maturities of operating leases (46) 20 21 22 23 Other accrued liabilities (52) 52 54 56 58 Net cash from operating activities 6,551 6,142 6,335 6,538 6,749
Change in cash from investing activities: Change in short-term investments 5,342 (14) (15) (15) (16) Capital expenditures (change in gross ppe) (25) 1,846 1,900 1,956 2,014 Capitalization of intangible assets 558 (690) (197) (205) (213) Business acquisitions (change in goodwill) (508) (843) (357) (370) (384) Long-term loyalty program deferred revenue (2,698) 102 106 110 115 Other noncurrent assets (648) (64) (66) (69) (72) Other noncurrent liabilities (3,469) 67 769 (628) 75 Net cash from investing activities (1,448) 404 2,141 779 1,519
Cash from financing activities: Hedge derivative asset - - - - - Hedge margin receivable - - - - - Common stock at par value - - - - - Additional paid-in-capital (3,369) (467) (485) (503) (522) Retained earnings (deficit) 10,715 328 341 354 367 Accumulated comprehensive loss 510 (272) (283) (293) (304) Treasury stock (47) (10) (10) (11) (11) Hedge Derivative Liability - - - - - Equity investments (178) (59) (61) (63) (66) Current maturities of long term debt and finance leases 205 62 64 67 69 Net cash from financing activities 7,836 (418) (433) (450) (467)
Increase/decrease in cash/cash equivalents 12,939 6,128 8,042 6,867 7,801 Cash/cash equivalents beginning of the year 8,307 2,509 2,589 2,672 2,758 End of the year cash balance 21,246 8,637 10,631 9,539 10,559 Delta Airlines, Inc Common Size Balance Sheet (% of revenue)
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV Assets Current Assets: Cash and cash equivalents 3.52% 6.13% 48.59% 5.17% 5.17% 5.17% 5.17% 5.17% Short-term investments 0.46% 0.00% 33.86% 0.92% 0.92% 0.92% 0.92% 0.92% Restricted cash 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accounts receivable 5.21% 6.07% 8.17% 6.11% 6.11% 6.11% 6.11% 6.11% Fuel Inventory 1.33% 1.55% 2.21% 1.66% 1.66% 1.66% 1.66% 1.66% Expendable parts and supplies inventories 1.04% 1.11% 2.08% 0.98% 0.98% 0.98% 0.98% 0.98% Prepaid expenses and other 2.71% 2.68% 6.90% 2.54% 2.54% 2.54% 2.54% 2.54% Hedge Derivative Asset 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Hedge Margin Receivable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Assets 14.27% 17.55% 101.81% 20.76% 20.76% 20.76% 20.76% 20.76% Noncurrent Assets: Property, plant, and equipment 63.76% 66.61% 155.19% 60.31% 60.31% 60.31% 60.31% 60.31% Operating lease right-of-use assets 13.49% 11.97% 33.54% 12.73% 12.73% 12.73% 12.73% 12.73% Goodwill 22.01% 20.81% 57.05% 22.19% 22.19% 22.19% 22.19% 22.19% Identifiable intangibles 10.87% 10.98% 35.16% 12.27% 12.27% 12.27% 12.27% 12.27% Cash restricted for airport construction 2.56% 1.35% 9.10% 4.34% 4.34% 4.34% 4.34% 4.34% Equity investments 0.00% 5.46% 9.74% 3.80% 3.80% 3.80% 3.80% 3.80% Deferred income taxes, net 0.54% 0.26% 11.63% 5.52% 5.52% 5.52% 5.52% 5.52% Other noncurrent assets 8.12% 2.29% 7.94% 4.13% 4.13% 4.13% 4.13% 4.13% Total Noncurrent Assets 121.35% 119.73% 319.34% 110.82% 110.82% 110.82% 110.82% 110.82% Total Assets 135.62% 137.28% 421.15% 131.58% 131.58% 131.58% 131.58% 131.58%
Liabilities and Stockholders' Equity Current Liabilities: Current maturities of debt and finance leases 3.42% 4.87% 10.13% 3.99% 3.99% 3.99% 3.99% 3.99% Current maturities of operating leases 2.15% 1.70% 3.97% 1.30% 1.30% 1.30% 1.30% 1.30% Air traffic liability 10.49% 10.88% 23.66% 10.87% 10.87% 10.87% 10.87% 10.87% Accounts payable 6.70% 6.95% 16.61% 6.58% 6.58% 6.58% 6.58% 6.58% Accrued Salaries and related benefits 7.40% 7.87% 12.20% 6.13% 6.13% 6.13% 6.13% 6.13% Loyalty program deferred revenue 6.73% 6.85% 10.39% 5.02% 5.02% 5.02% 5.02% 5.02% Taxes Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Fuel card obligation 2.42% 1.57% 6.43% 0.94% 0.94% 0.94% 0.94% 0.94% Hedge Derivative Liability 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other accrued liabilities 2.51% 2.29% 9.77% 3.34% 3.34% 3.34% 3.34% 3.34% Total Current Liabilities 41.81% 42.98% 93.17% 39.88% 39.88% 39.88% 39.88% 39.88% Noncurrent Liabilities: Debt and finance leases 18.57% 18.88% 160.43% 21.87% 21.87% 21.87% 21.87% 21.87% Noncurrent air traffic liability 0.00% 0.00% 2.92% 0.00% 0.00% 0.00% 0.00% 0.00% Pension, postretirement, and related benefits 20.62% 17.98% 62.18% 32.08% 32.08% 32.08% 32.08% 32.08% Loyalty program deferred revenue 8.22% 7.46% 31.62% 6.61% 6.61% 6.61% 6.61% 6.61% Noncurrent operating leases 13.05% 11.26% 33.42% 6.08% 6.08% 6.08% 6.08% 6.08% Deferred Income taxes, net 0.00% 3.10% 0.00% 0.39% 0.39% 0.39% 0.39% 0.39% Other noncurrent liabilities 2.55% 2.95% 28.44% 4.32% 4.32% 4.32% 4.32% 4.32% Total Noncurrent Liabilities 63.01% 61.63% 319.01% 71.64% 71.64% 71.64% 71.64% 71.64%
Commitments and Contingencies Stockholders' Equity: Common stock at par value 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Additional paid-in-capital 26.26% 23.68% 65.86% 30.16% 30.16% 30.16% 30.16% 30.16% Retained earnings (deficit) 22.59% 26.49% -2.50% 21.21% 21.21% 21.21% 21.21% 21.21% Accumulated comprehensive loss -17.61% -17.00% -52.87% -17.58% -17.58% -17.58% -17.58% -17.58% Treasury stock -0.45% -0.50% -1.52% -0.63% -0.63% -0.63% -0.63% -0.63% Total Stockholders' Equity 30.80% 32.67% 8.97% 21.97% 21.97% 21.97% 21.97% 21.97% Total Liabilities and Stockholders' Equity 135.62% 137.28% 421.15% 131.58% 131.58% 131.58% 131.58% 131.58% Delta Airlines, Inc Common Size Income Statement
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV Operating Revenue: Passenger 89.46% 89.94% 75.36% 90.35% 90.74% 91.12% 91.49% 91.84% Cargo 1.95% 1.60% 3.56% 1.50% 1.41% 1.33% 1.25% 1.17% Other 8.59% 8.46% 21.08% 8.15% 7.84% 7.55% 7.26% 6.99% Total Operating Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Operating Expense: Salaries and related costs 24.18% 23.88% 51.21% 21.26% 21.26% 21.26% 21.26% 0.00% Aircraft fuel and related taxes 20.30% 18.12% 18.58% 21.41% 21.41% 21.41% 21.41% 21.41% Regional carriers expense, excluding fuel 7.74% 7.62% 14.50% 12.01% 12.01% 12.01% 12.01% 12.01% Depreciation and amortization 5.24% 5.49% 13.52% 5.55% 5.55% 5.55% 5.55% 5.55% Ancillary businesses and refinery 3.81% 2.65% 10.44% 3.37% 3.37% 3.37% 3.37% 3.37% Contracted Services 4.89% 5.62% 10.40% 4.78% 4.78% 4.78% 4.78% 4.78% Landing fees and other rents 3.74% 3.75% 8.88% 3.72% 3.72% 3.72% 3.72% 3.72% Aircraft maintenance materials and outside repairs 3.54% 3.72% 4.81% 4.53% 4.53% 4.53% 4.53% 4.53% Passenger commissions and other selling expenses 4.37% 4.24% 3.40% 4.29% 4.29% 4.29% 4.29% 4.29% Passenger service 2.65% 2.66% 3.06% 2.27% 2.27% 2.27% 2.27% 2.27% Aircraft rent 0.89% 0.90% 2.33% 0.93% 0.93% 0.93% 0.93% 0.93% Restructuring charges 0.00% 0.00% 48.08% 0.63% 0.63% 0.63% 0.63% 0.63% Government grant recognition 0.00% 0.00% -23.08% 0.00% 0.00% 0.00% 0.00% 0.00% Profit Sharing 2.93% 3.50% 0.00% 2.02% 2.02% 2.02% 2.02% 2.02% Other 3.88% 3.77% 6.80% 4.41% 4.41% 4.41% 4.41% 4.41% Total Operating Expense 88.15% 85.92% 172.94% 89.01% 89.01% 89.01% 89.01% 89.01%
Operating Loss/Income 11.85% 14.08% -72.94% 11.01% 11.01% 11.01% 11.01% 11.01%
Non-Operating Expense: 0.00% 0.00% 0.00% Interest Expense, net -0.70% -0.64% -5.43% -1.58% -1.58% -1.58% -1.58% -1.58% Amortization of debt discount, net 0.00% 0.00% 0.00% -0.20% -0.20% -0.20% -0.20% -0.20% Loss on extinguishment of debt 0.00% 0.00% 0.00% -0.16% -0.16% -0.16% -0.16% -0.16% Impairments and equity method losses -0.14% -0.13% -14.23% -0.03% -0.03% -0.03% -0.03% -0.03% Gain/(loss) on investments, net 0.09% 0.25% -0.61% -0.03% -0.03% -0.03% -0.03% -0.03% Miscellaneous, net 0.50% -0.37% 2.04% -0.18% -0.18% -0.18% -0.18% -0.18% Total non-operating expense, net -0.25% -0.89% -18.24% -3.56% -3.56% -3.56% -3.56% -3.56%
(Loss)/Income Before Income Taxes 11.59% 13.19% -91.18% 8.87% 8.87% 8.87% 8.87% 8.87%
Income Tax Benefit/(Provision) -2.74% -3.04% 18.73% 1.34% 1.34% 1.34% 1.34% 1.34%
Net (Loss)/Income 8.86% 10.14% -72.45% 8.55% 8.55% 8.55% 8.55% 8.55% Delta Airlines, Inc Weighted Average Cost of Capital (WACC) Estimation
Cost of Equity: ASSUMPTIONS: Risk-Free Rate 1.72% *Current risk-free rate on 10-year treasury bond Beta 1.45 *Average beta Equity Risk Premium 5.00% *Average equity risk premium on 10-year treasury Cost of Equity 8.97%
Cost of Debt: Risk-Free Rate 1.72% *Current risk-free rate on 10-year treasury bond Implied Default Premium 11.67% Pre-Tax Cost of Debt 13.39% *Yield to maturity on 10-year corporate bond Marginal Tax Rate 22.90% After-Tax Cost of Debt 10.32%
Market Value of Common Equity: MV Weights Total Shares Outstanding 636 Current Stock Price $48.06 MV of Equity 30,566.16 47.09%
Market Value of Debt: Short-Term Debt 678 Current Portion of LTD 1732 Long-Term Debt 27,425 PV of Operating Leases 4,502 MV of Total Debt 34,337.07 52.91%
Market Value of the Firm 64,903.23 100.00%
Estimated WACC 9.69% Delta Airlines, Inc Revenue Decomposition
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E CV
Operating Revenue
Total Passenger Revenue 39,755 42,277 12,883 43,817 45,414 47,069 48,783 50,561 Cargo 865 753 608 730 707 686 665 644 Other 3,818 3,977 3,604 3,951 3,925 3,899 3,873 3,848 Total Operating Revenue 44,438 47,007 17,095 48,498 50,046 51,653 53,321 55,053
Total Passenger Revenue Growth Rate 14.18% 21.42% -69.53% 3.64% 3.64% 3.64% 3.64% 3.64% Cargo Growth Rate 18.66% -12.95% -19.26% -3.08% -3.08% -3.08% -3.08% -3.08% Other Growth Rate -32.97% 4.16% -9.37% -0.66% -0.66% -0.66% -0.66% -0.66% Operating Revenue Growth Rate 7.74% 5.78% -63.63% 183.70% 3.19% 3.21% 3.23% 3.25%
Other Revenue Ancillary Businesses and Refinery 1,801 1,297 1,798 1,410 1,533 1,666 1,812 1,969 Loyalty Program 1,459 1,962 1,458 1,913 1,865 1,818 1,773 1,729 Miscellaneous 558 718 348 596 494 410 340 282 Total Other Revenue 3,818 3,977 3,604 3,951 3,925 3,899 3,873 3,848
Ancillary Businesses and Refinery Growth Rate 13.20% -27.98% 38.63% 8.71% 8.71% 8.71% 8.71% 8.71% Loyalty Program Growth Rate 14.97% 34.48% -25.69% -2.50% -2.50% -2.50% -2.50% -2.50% Miscellaneous Growth Rate -4.94% 28.67% -51.53% -17.03% -17.03% -17.03% -17.03% -17.03%
Passenger Revenue by Geographic Region Domestic 28,159 30,367 10,041 30,767 31,172 31,582 31,998 32,419 Atlantic 6,165 6,381 1,171 6,556 6,735 6,919 7,108 7,303 Latin America 2,888 3,002 1,113 3,033 3,063 3,095 3,126 3,158 Pacific 2,543 2,527 558 2,540 2,552 2,565 2,577 2,590 Total Passenger Revenue 39,755 42,277 12,883 43,817 45,414 47,069 48,783 50,561
Domestic Revenue Growth Rate -4.73% 7.84% -66.93% 1.32% 1.32% 1.32% 1.32% 1.32% Atlantic Revenue Growth Rate 2.00% 3.50% -81.65% 2.74% 2.74% 2.74% 2.74% 2.74% Latin America Revenue Growth Rate -0.89% 3.95% -62.92% 1.02% 1.02% 1.02% 1.02% 1.02% Pacific Revenue Growth Rate -6.85% -0.63% -77.92% 0.50% 0.50% 0.50% 0.50% 0.50%
Key Industry Revenue Metrics Revenue Passenger Miles 225,243 237,680 73,412 243,045 248,532 254,142 259,880 265,746 Available Seat Miles 263,365 275,379 134,339 280,990 286,715 292,556 298,517 304,599 Total Revenue per Available Seat Mile (In Cents) 16.87 17.07 12.73 17.12 17.78 18.47 19.19 19.93 Load Factor 86.00% 86.00% 55.00% 86.26% 86.53% 86.79% 87.06% 87.33%
Revenue Passenger Miles Growth Rate 3.46% 5.52% -69.11% 2.26% 2.26% 2.26% 2.26% 2.26% Available Seat Miles Growth Rate 3.55% 4.56% -51.22% 2.04% 2.04% 2.04% 2.04% 2.04% Total Revenue per Available Seat Mile (In Cents) Growth23.23% Rate 1.19% -25.42% 3.87% 3.87% 3.87% 3.87% 3.87% Load Factor Growth Rate 0.47% 0.00% -36.05% 0.31% 0.31% 0.31% 0.31% 0.31% Balance Sheet Assumptions 2018 2019 2020 Depreciation Rate: Depreciation Expense 2,329 2,581 2,312 Beginning Net PPE 26,563 28,335 31,310 Implied Depreciation Rate (%) 8.77% 9.11% 7.38% 8.44%
Marginal Tax Rate (%) US Statutory (Federal) Tax (%) 21% 21% 21% State and Local Tax (%) 2.50% 2.30% 1.90% Foreign Income Tax (%) 0.10% NA NA Implied Marginal Tax Rate 23.60% 23.30% 22.90%
Normal Cash Calculation (%) Cash from B/S 1,565 2,882 8,307 Revenue 44,438 47,007 17,095 Cash as a % of Sales 3.52% 6.13% 48.59% 3.52%
Dividend Payout Ratio (%) Total Dividends 994 1,043 260 Net Income 3,935 4,767 (12,385) Implied Payout Ratio (%) 25.26% 21.89% -2.10% 17.37%
CS Balance Sheet Averages Cash and cash equivalents (% of rev) 3.52% 6.13% 48.59% 5.17% Short-term investments (% of rev) 0.46% 0.00% 33.86% 0.92% Restricted cash (% of rev) 0.00% 0.00% 0.00% 0.00% Accounts receivable (% of rev) 5.21% 6.07% 8.17% 6.11% Fuel Inventory (% of rev) 1.33% 1.55% 2.21% 1.66% Expendable parts and supplies inventories (% of rev)1.04% 1.11% 2.08% 0.98% Prepaid expenses and other (% of rev) 2.71% 2.68% 6.90% 2.54% Hedge Derivative Asset (% of rev) 0.00% 0.00% 0.00% 0.00% Hedge Margin Receivable(% of rev) 0.00% 0.00% 0.00% 0.00% Total Current Assets 14.27% 17.55% 101.81% 20.76% Noncurrent Assets: Property, plant, and equipment 63.76% 66.61% 155.19% 60.31% Operating lease right-of-use assets 13.49% 11.97% 33.54% 12.73% Goodwill 22.01% 20.81% 57.05% 22.19% Identifiable intangibles 10.87% 10.98% 35.16% 12.27% Cash restricted for airport construction 2.56% 1.35% 9.10% 4.34% Equity investments 0.00% 5.46% 9.74% 3.80% Deferred income taxes, net 0.54% 0.26% 11.63% 5.52% Other noncurrent assets 8.12% 2.29% 7.94% 4.13% Total Noncurrent Assets 121.35% 119.73% 319.34% 110.82% Total Assets 135.62% 137.28% 421.15% 131.58%
Liabilities and Stockholders' Equity Current Liabilities: Current maturities of debt and finance leases 3.42% 4.87% 10.13% 3.99% Current maturities of operating leases 2.15% 1.70% 3.97% 1.30% Air traffic liability 10.49% 10.88% 23.66% 10.87% Accounts payable 6.70% 6.95% 16.61% 6.58% Accrued Salaries and related benefits 7.40% 7.87% 12.20% 6.13% Loyalty program deferred revenue 6.73% 6.85% 10.39% 5.02% Taxes Payable 0.00% 0.00% 0.00% 0.00% Fuel card obligation 2.42% 1.57% 6.43% 0.94% Hedge Derivative Liability 0.00% 0.00% 0.00% 0.00% Other accrued liabilities 2.51% 2.29% 9.77% 3.34% Total Current Liabilities 41.81% 42.98% 93.17% 39.88% Noncurrent Liabilities: Debt and finance leases 18.57% 18.88% 160.43% 21.87% Noncurrent air traffic liability 0.00% 0.00% 2.92% 0.00% Pension, postretirement, and related benefits 20.62% 17.98% 62.18% 32.08% Loyalty program deferred revenue 8.22% 7.46% 31.62% 6.61% Noncurrent operating leases 13.05% 11.26% 33.42% 6.08% Deferred Income taxes, net 0.00% 3.10% 0.00% 0.39% Other noncurrent liabilities 2.55% 2.95% 28.44% 4.32% Total Noncurrent Liabilities 63.01% 61.63% 319.01% 71.64%
Commitments and Contingencies Stockholders' Equity: Common stock at par value 0.00% 0.00% 0.00% 0.00% Additional paid-in-capital 26.26% 23.68% 65.86% 30.16% Retained earnings (deficit) 22.59% 26.49% -2.50% 21.21% Accumulated comprehensive loss -17.61% -17.00% -52.87% -17.58% Treasury stock -0.45% -0.50% -1.52% -0.63% Total Stockholders' Equity 30.80% 32.67% 8.97% 21.97% Total Liabilities and Stockholders' Equity 135.62% 137.28% 421.15% 131.58% Delta Airlines, Inc Valuation of Options Granted under ESOP
Current Stock Price $48.06 Risk Free Rate 1.72% Current Dividend Yield 0.97% Annualized St. Dev. of Stock Returns 36.50%
Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 7.57 37.18 5.00 $ 19.25 281.41 Range 2 Range 3 Range 4 Range 5 Range 6 Range 7 Range 8 Range 9 Total 7.57 $ 37.18 5.00 $ 21.02 $ 281.41 Delta Airlines, Inc Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 8 Average Time to Maturity (years): 5.00 Expected Annual Number of Options Exercised: 1.51
Current Average Strike Price: $ 37.18 Cost of Equity: 8.97% Current Stock Price: $48.06
Fiscal Years Ending Dec. 31 2021E 2022E 2023E 2024E 2025E CV Increase in Shares Outstanding: 1.51 1.51 1.51 1.51 1.51 Average Strike Price: $ 37.18 $ 37.18 $ 37.18 $ 37.18 $ 37.18 Increase in Common Stock Account: 56.28 56.28 56.28 56.28 56.28
Share Repurchases ($) -47.48 -9.78 -10.16 -10.54 -10.94 Expected Price of Repurchased Shares: $ 48.06 $ 51.90 $ 56.06 $ 60.54 $ 65.39 Number of Shares Repurchased: (0.99) (0.19) (0.18) (0.17) (0.17)
Shares Outstanding (beginning of the year) 636.00 638.50 640.20 641.90 643.59 Plus: Shares Issued Through ESOP 1.51 1.51 1.51 1.51 1.51 Less: Shares Repurchased in Treasury (0.99) (0.19) (0.18) (0.17) (0.17) Shares Outstanding (end of the year) 638.50 640.20 641.90 643.59 645.27 Delta Airlines, Inc Key Management Ratios
Fiscal Years Ending Dec. 31 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Liquidity Ratios: Current ratio=current assets/current liabilities 0.34 0.41 1.09 0.51 0.51 0.51 0.50 0.50 Quick ratio=(Cash & equivalents + Marketable securities + Account 0.21 receivable)/Current 0.28 liabilities 0.61 0.33 0.33 0.33 0.33 0.33 Operating cash flow ratio=Non operating expenses/Current liabilities (0.01) (0.02) (0.20) (0.06) (0.06) (0.06) (0.06) (0.06)
Asset-Management Ratios: AR turnover ratio=Sales/Account receivable net 16.93 14.15 21.18 15.06 15.06 15.06 15.06 15.06 Inventory turnover ratio=Sales/Avg. Inventory 66.17 55.33 78.42 55.55 55.54 55.55 55.54 55.54 Fixed assets turnover ratio=Net sales/Avg. Fixed assets 0.73 0.72 0.54 0.76 0.75 0.75 0.75 0.74
Financial Leverage Ratios: Debt-Equity ratio=total liabillity/total shareholder's equity 3.40 3.20 45.93 2.73 2.75 2.81 2.78 2.80 Equity multipler=Total assets/total liabilities 1.29 1.31 1.02 1.58 1.57 1.53 1.55 1.54 Total debt to capitalization=Short-term debt + long-term debt/short-term 0.44 debt + 0.44 long-term debt 0.95 + total shareholder's 0.43 equity 0.43 0.43 0.43 0.43
Profitability Ratios: Return on Equity (NI/Beg TSE) 0.28 0.35 (0.81) 2.27 0.22 0.22 0.22 0.22 ROE=NI/Shareholder's equity 28.75% 31.04% -807.37% 21.70% 21.72% 21.70% 21.70% 21.70% EBITDA Margin=(Earnings before interest and tax + depreciation 4,840.05 + amortization)/total 5,897.05 revenue (16,515.86) 2,073.91 2,143.06 2,209.02 2,280.83 2,354.57 Net profit margin=NI/Total revenue 8.86% 10.14% -72.45% 7.20% 7.20% 7.20% 7.20% 7.20%
Payout Policy Ratios: Dividend Payout Ratio (Dividend/EPS) 23.02% 20.63% -2.05% 17.37% 17.37% 17.37% 17.37% 17.37% Total Payout Ratio ((Divs. + Repurchases)/NI) 0.03% 0.03% 0.00% 94.92% 97.80% 100.60% 103.59% 106.66% Divident Payout Ratio=Dividend/NI 0.03% 0.03% 0.00% 0.03% 0.03% 0.03% 0.03% 0.03% Delta Airlines, Inc Present Value of Operating Lease Obligations
Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Year 1 1,420 1,462 1,507 1,429 1,732 1,583 1,572 1,735 1,185 1,031 949 Year 2 1,351 1,441 1,433 1,356 1,542 1,440 1,443 1,589 1,022 913 848 Year 3 1,320 1,380 1,332 1,186 1,372 1,307 1,304 1,430 845 825 837 Year 4 1,263 1,271 1,159 1,026 1,167 1,158 1,133 1,156 712 803 770 Year 5 1,169 1,126 1,000 831 977 1,053 862 1,036 673 738 746 Thereafter 8,423 7,588 7,415 5,666 6,614 6,220 6,781 9,290 4,289 4,293 4,450 Total Minimum Payments 14,946 14,268 13,846 11,494 13,404 12,761 13,095 16,236 8,726 8,603 8,600 Less: Cumulative Interest 7,576 6,979 6,839 5,396 6,279 5,888 6,390 8,447 4,039 4,014 4,098 PV of Minimum Payments 7,370 7,289 7,007 6,098 7,125 6,873 6,705 7,789 4,687 4,589 4,502
Implied Interest in Year 1 Payment - 986.9 976.0 938.2 816.5 954.0 920.3 897.8 1042.9 627.6 614.5
Pre-Tax Cost of Debt 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% 13.39% Years Implied by Year 6 Payment 7.2 6.7 7.4 6.8 6.8 5.9 7.9 9.0 6.4 5.8 6.0 Expected Obligation in Year 6 & Beyond 1169 1126 1000 831 977 1053 862 1036 673 738 746
Present Value of Lease Payments PV of Year 1 1252.3 1289.4 1329.0 1260.3 1527.5 1396.1 1386.4 1530.1 1045.1 909.3 836.9 PV of Year 2 1050.8 1120.8 1114.5 1054.7 1199.3 1120.0 1122.3 1235.9 794.9 710.1 659.5 PV of Year 3 905.4 946.6 913.7 813.5 941.1 896.5 894.4 980.9 579.6 565.9 574.1 PV of Year 4 764.0 768.9 701.1 620.7 705.9 700.5 685.4 699.3 430.7 485.8 465.8 PV of Year 5 623.6 600.7 533.5 443.3 521.2 561.8 459.9 552.7 359.0 393.7 398.0 PV of 6 & beyond 2774.2 2562.7 2415.1 1905.4 2230.0 2198.3 2156.4 2790.1 1477.6 1524.8 1567.7 Capitalized PV of Payments 7370.4 7288.9 7006.9 6097.8 7125.1 6873.1 6704.8 7788.9 4686.9 4589.5 4502.1 Delta Airlines, Inc Key Assumptions of Valuation Model
Ticker Symbol DAL Current Share Price $48.06 Current Model Date 3/1/2021 FY End (month/day) Dec. 31 Last FYE Date 12/31/2020 Next FYE Date 12/31/2021 Pre-Tax Cost of Debt 13.39% Beta 1.45 Risk-Free Rate 1.72% Equity Risk Premium 5.00% CV Growth of NOPLAT 3.00% CV Growth of EPS 3.00% Current Dividend Yield 0.97% Forecasted Marginal Tax Rate 22.90% Forecasted Effective Tax Rate 25.00% Cost of Equity 8.97% WACC 9.69% Normal Cash Estimate (% sales) 3.52% Delta Airlines, Inc Sensitivity Tables
Beta Current Dividend Yield 40.05 1.15 1.25 1.35 1.45 1.55 1.65 1.75 40.05 0.67% 0.77% 0.87% 0.97% 1.07% 1.17% 1.27% 4.40% 57.91 53.83 50.02 46.46 43.12 39.98 37.03 1.15 51.66 51.65 51.64 51.64 51.63 51.62 51.61 4.60% 55.74 51.64 47.81 44.24 40.89 37.75 34.80 1.25 47.51 47.50 47.50 47.49 47.48 47.47 47.47 4.80% 53.65 49.52 45.68 42.10 38.75 35.61 32.66 1.35 43.66 43.65 43.65 43.64 43.63 43.63 43.62
5.00% 51.64 47.49 43.64 40.05 36.70 33.57 30.62 1.45 40.07 40.06 40.06 40.05 40.05 40.04 40.03 ERP 5.20% 49.69 45.53 41.67 38.08 34.73 31.60 28.67 Beta 1.55 36.72 36.71 36.71 36.70 36.70 36.69 36.69 5.40% 47.81 43.64 39.78 36.19 32.84 29.72 26.80 1.65 33.58 33.58 33.57 33.57 33.56 33.56 33.55 5.60% 45.99 41.81 37.95 34.36 31.02 27.91 25.00 1.75 30.64 30.63 30.63 30.62 30.62 30.61 30.61
Risk Free Rate Cost of Equity 40.05 1.42% 1.52% 1.62% 1.72% 1.82% 1.92% 2.02% 40.05 7.47% 7.97% 8.47% 8.97% 9.47% 9.97% 10.47% 2.70% 40.05 39.37 38.71 38.05 37.40 36.76 36.13 3.98% 607.91 608.38 608.85 609.31 609.77 610.24 610.69 2.80% 40.74 40.05 39.37 38.70 38.04 37.38 36.74 4.48% 383.57 383.87 384.16 384.45 384.75 385.04 385.33 2.90% 41.44 40.74 40.05 39.36 38.69 38.02 37.37 4.98% 272.46 272.67 272.88 273.09 273.29 273.50 273.71 3.00% 42.17 41.46 40.75 40.05 39.36 38.68 38.01 5.48% 206.09 206.25 206.41 206.56 206.72 206.88 207.03
3.10% 42.93 42.19 41.47 40.76 40.06 39.36 38.68 WACC 5.98% 161.95 162.07 162.19 162.32 162.44 162.56 162.69 3.20% 43.70 42.95 42.22 41.49 40.77 40.07 39.37 6.48% 130.45 130.55 130.65 130.75 130.85 130.94 131.04
3.30% 44.50 43.74 42.98 42.24 41.51 40.79 40.08 6.98% 106.83 106.91 106.99 107.07 107.15 107.24 107.32 CV Growth of NOPLAT Growth of CV
Pre-tax Cost of Debt Pre-tax Cost of Debt 40.05 10.39% 11.39% 12.39% 13.39% 14.39% 15.39% 16.39% 40.05 10.39% 11.39% 12.39% 13.39% 14.39% 15.39% 16.39% 2.70% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 3.98% 594.21 599.72 604.73 609.31 613.49 617.32 620.82 2.80% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 4.48% 374.55 378.16 381.45 384.45 387.19 389.70 392.00 2.90% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 4.98% 265.75 268.43 270.87 273.09 275.11 276.97 278.66 3.00% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 5.48% 200.77 202.88 204.81 206.56 208.17 209.63 210.97
3.10% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 WACC 5.98% 157.54 159.28 160.87 162.32 163.64 164.84 165.95 3.20% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 6.48% 126.69 128.17 129.52 130.75 131.87 132.89 133.82
CV Growth of EPS Growth of CV 3.30% 59.81 52.36 45.83 40.05 34.89 30.25 26.04 6.98% 103.56 104.84 106.01 107.07 108.04 108.93 109.74
Citations
1. https://tradingeconomics.com/united-states/interest-rate 2. https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20210317.html 3. https://www.whitehouse.gov/briefing-room/blog/2021/04/12/pandemic-prices-assessing-inflation-in-the-months-and-years-ahead/ 4. https://www.investing.com/economic-calendar/core-pce-price-index-905 5. https://fred.stlouisfed.org/series/PPIACO 6. https://www.bls.gov/news.release/pdf/ppi.pdf 7. https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/ 8. https://www.bea.gov/news/2021/gross-domestic-product-4th-quarter-and-year-2020-advance-estimate 9. https://businessquant.com/delta-airlines-fuel-and-other-costs 10. https://www.bea.gov/news/2021/gross-domestic-product-4th-quarter-and-year-2020-advance-estimate 11. https://businessquant.com/delta-airlines-fuel-and-other-costs 12. https://www.nytimes.com/2020/08/10/business/energy-environment/delta-oil-refinery-jet-fuel.html 13. Bloomberg Terminal 14. Factset Integrated Solutions 15. https://ir.delta.com/financials/default.aspx 16. https://www.pfizer.com/news/press-release/press-release-detail/pfizer-biontech-announce-positive-topline-results-pivotal 17. https://www.forbes.com/sites/investor/2021/04/01/value-stocks-showing-signs-of-awakening/?sh=4476ae90614d 18. https://www.fitchratings.com/entity/jetblue-airways-corporation-82391899 19. https://thepointsguy.com/news/delta-air-lines-fleet-plans-coronavirus/ 20. https://www.businessinsider.com/delta-boeing-737-800-flight-makes-emergency-landing-2019-5 21. https://onemileatatime.com/delta-boeing-737-max/ 22. https://www.washingtonpost.com/local/trafficandcommuting/boeing-737max-southwest/2021/04/09/df4ac0b2-992c-11eb-b28d-bfa7bb5cb2a5_story.html