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Delta Air Lines, Inc. Company Report

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Delta Air Lines, Inc. Company Report MASTERS IN FINANCE EQUITY RESEARCH DELTA AIR LINES, INC. COMPANY REPORT INDUSTRIALS 6 JANUARY 2017 STUDENT: MICHAEL LÜFFE (#972) [email protected] Recommendation: BUY A flight, investors should board Capacity discipline continues to be key profit driver Price Target FY17: 61.74 $ . For the past two years Delta Air Lines has been generating benchmark returns that other US legacy carriers were Price (as of 6-Jan-17) 49.73 $ struggling to keep up with. Reuters: DAL.N, Bloomberg: DAL:US . Going forward the airline will have to increasingly invest 52-week range ($) 33.36-51.78 in the replacement as well as expansion of its aircraft fleet which Market Cap ($m) 37,335.00 is one of the oldest in the industry. Higher capital expenditures Outstanding Shares (m) 736.39 will inevitably come at the expense of shareholder cash returns. Source: Yahoo Finance . Even against the backdrop of rising crude oil and jet fuel prices, operating margins are forecasted to remain in a range of 14% to 18% until 2025. This is subject to the condition that the US airline industry remains disciplined about capacity growth and that unit revenues in Delta’s international markets continue to recover. Source: Fidelity, 06.01.2017 . Valuation: We recommend buying Delta Air Lines given (Values in $ millions) 2015 2016F 2017F our price target for year end 2017 of $61.74 per share, offering Revenues 40,704 40,861 41,329 investors an upside potential of 24.15% to the current share price EBITDA 9,637 10,738 9,094 of $49.73. EBITDA margin 23.68% 26.28% 22.00% Net Profit 4,526 5,373 4,335 Net profit margin 11.12% 13.08% 10.49% Basic EPS 5.68 7.26 6.01 ROIC 25.69% 19.34% 18.14% Capex 2,945 2,809 3,598 Current ratio 0.52 0.60 0.59 Sales per share 51.07 55.49 57.27 Company description Source: Company Data, Analyst’s Estimates Delta Air Lines, Inc., founded in 1924 and headquartered in Atlanta, Georgia, offers air transportation services to passengers and cargo throughout the United States and on international routes. Furthermore, the company runs an oil refinery which provides its north eastern US airline operations with jet fuel. As of today, the company and its global alliance partners offer air travel services to 323 destinations in 57 countries across all six continents. THIS REPORT WAS PREPARED BY MICHAEL LÜFFE, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT) See more information at WWW.NOVASBE.PT Page 1/32 DELTA AIR LINES, INC. COMPANY REPORT Table of Contents COMPANY OVERVIEW ........................................................................... 3 COMPANY DESCRIPTION ....................................................................................... 3 SHAREHOLDER STRUCTURE ................................................................................. 4 ANALYSIS OF REGIONS/MARKETS ...................................................... 6 NORTH AMERICA................................................................................................... 6 LATIN AMERICA ................................................................................................... 12 ATLANTIC ............................................................................................................ 13 THE AIRLINE INDUSTRY .......................................................................14 FIVE FORCES ....................................................................................................... 14 Competition ....................................................................................... 14 Industry entry and exit ..................................................................... 15 Substitute and complement products or services ........................ 16 Supplier power .................................................................................. 17 Buyer power ...................................................................................... 18 COMPETITIVE ANALYSIS ......................................................................19 SWOT ANALYSIS ................................................................................................ 19 Strengths ........................................................................................... 19 Weaknesses ...................................................................................... 20 Opportunities ..................................................................................... 21 Threats ............................................................................................... 21 RISKS TO THE INVESTMENT THESIS ..................................................22 EXTERNAL RISKS................................................................................................. 22 INTERNAL RISKS .................................................................................................. 23 FINANCIAL OUTLOOK ...........................................................................24 DIVIDEND POLICY ................................................................................................ 24 VALUATION ............................................................................................24 WACC APPROACH ............................................................................................. 24 MULTIPLES .......................................................................................................... 25 APPENDIX ..............................................................................................26 PAGE 2/32 DELTA AIR LINES, INC. COMPANY REPORT Company overview Company description Founded in 1924 as an aerial crop dusting operation, Delta Air Lines, Inc. (NYSE: DAL) is nowadays one of the largest US carriers and a globally operating airline, Figure 1: Operating revenues by segment 2015 (in million USD) that employs 84,000 people worldwide, manages a mainline fleet of more than 800 aircraft and offers air travel services to nearly 60 countries all over the world.1 Since 2012 the Atlanta-based company has split its operating activities into two distinct segments, airline and refinery, whose relative importance as measured by operating revenues has been very different, a fact that is highlighted by the waterfall chart in Figure 1 giving a precise breakdown of consolidated revenue in 2015. Delta’s airline segment provides air transportation both for passengers and cargo throughout the United States as well as to and from international Source: Company Data destinations. With a CAGR2 of 6.52% since 2009 and an 85% share of operating revenue in 2015, passenger air travel has been an important value driver for Delta Figure 2: Operating revenues 2009-2015 Air Lines, while cargo’s CAGR of 0.52% reflects the massive decay that this (in million USD) particular business division has been in for more than four years. Figure 2 further visualizes the evolution of operating revenue. Delta’s extensive route network is based on a system of domestic hubs, most important of which are Atlanta, Boston, Detroit, Los Angeles, Minneapolis-St. Paul, New York JFK, New York LaGuardia, Salt Lake City and Seattle, as well as international gateway airports, such as Amsterdam, London-Heathrow, Paris-Charles de Gaulle and Tokyo-Narita. Delta’s operations in these markets include flights, gathering and distributing traffic from Source: Company Data the geographic regions surrounding the hub or gateway to domestic or international cities or other hubs and gateways. Figure 3 provides an overview of the percentages of Delta’s total domestic flights and passengers that were Figure 3: Delta’s US hubs’ share of 2015 domestic passengers and flights processed through each one of its nine US hubs in 2015. The fact that an apportioned to hubs astonishing 60% of inland flights and passengers were apportioned to these hubs indicates a strong dependency that has persisted for more than five straight years and suggests a fundamental operational risk. In addition to air transportation, the airline segment provides other ancillary airline services, such as maintenance and repair services (MRO) for third parties. Delta’s air travel services are sold through various distribution channels, including Source: US Bureau of Transportation 1 http://news.delta.com/corporate-stats-and-facts 2 The mean annual growth rate over a time period longer than one year is referred to as compound annual growth rate. It is calculated by dividing the value at the end of a period by the value at the beginning, raising it to the power of one divided by the length of the period and subtracting one from the result. PAGE 3/32 DELTA AIR LINES, INC. COMPANY REPORT telephone reservations, online travel agencies and digital channels, such as mobile and delta.com. Delta’s refinery segment produces gasoline, diesel and jet fuel. Its wholly owned Figure 4: Division of Delta’s route network Monroe Energy subsidiary runs the Trainer refinery located near Philadelphia, into four geographic regions Pennsylvania. The refinery facilities include pipelines and terminal assets allowing the supply of jet fuel from its own production as well as from third party suppliers Phillips 66 or BP to the airline segment.3 As of October/November 2016 the flight network of Delta Air Lines encompasses a total of 2,052 routes. These can be split into 64% domestic routes, connecting cities in the contiguous and
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