Initiating Coverage
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Delta Air Lines, Inc.: (NYSE:DAL) THE ORANGE VALUE FUND Daniel Brenner | Senior Analyst Delta Air Lines Inc. Airline th October 27 , 2015 Buy DAL Equity Delta Air Lines Inc. DAL Statistics as of 10/26/2015 Exchange: NYSE Security Ticker: DAL Share Price as of 10/26/15 $51.32 Initiating Coverage 52 Week Range $34.61-$51.47 Daniel Brenner | Senior Analyst Anisa Khalouf | Junior Analyst Market Cap $40.11B [email protected] [email protected] Revenue $40.2B Net Income $659M EBITDAR $8.11B Business Description Enterprise Value $45.10B Delta Airlines Inc. (DAL) provides air transportiation for passengers EV/EBITDAR 5.56x and cargo worldwide, operating on its global route network. Delta is among the top six airlines in the United States, accounting for 17% domestic market share, and maintains a major international presence as it provides service to over 334 destinations among 64 countries. DAL operates in two business segments, Airlines and Refinery. DAL’s global route network allows them to operate in every major market, both domestic and international, and is centered around a network of hub and international gateway airports. The airports within this network that DAL operates out of include Amsterdam, Atlanta, Detroit, Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, Seattle, and Tokyo-Narita. Delta’s network is supported by a fleet of aircraft that varies in size and capabiliti$es, thus allowing Delta to adjust aircraft to the demand of the network Investment Thesis • Based on a simplified cash flow model DAL is currently trading at roughly a 20% discount. • DAL strategic investments in international airlines will allow for an increase in international growth in the upcoming years. • DAL is the only airline that owns and operates its own refinery and is benefits significantly from this by lower fuel prices and actually generating profit from the operations of the refinery. • DAL is safe because of their investment grade balance sheet and shareholder friendly management, which plans to return 50% of their cash flows back to shareholder in the next 3 years. 11 ORANGE VALUE FUND – FOR INTERNAL USE ONLY 2 Delta Air Lines, Inc.: (NYSE:DAL) THE ORANGE VALUE FUND Daniel Brenner | Senior Analyst Table of Contents Cover Page………………………………………………………………………………….1 Growth Catalysts………………………………………………………………....……....3-5 Safety and Risk Analysis……………………….………………………………………...6-7 Segments……………………………….……………………………………………............8 Management………...……………..……………………………………………………...9-10 Recent M&A Activity……………………………..………………………………………..11 Partnerships……………………………………………………………………………...11-12 Flight Composition.……………………….………………………………………………...13 Simplified DCF Analysis……………………………………………………………………14 13 ORANGE VALUE FUND – FOR INTERNAL USE ONLY 2 Delta Air Lines, Inc.: (NYSE:DAL) THE ORANGE VALUE FUND Daniel Brenner | Senior Analyst Growth Catalysts: International Equity Investments China: Delta is aggressively trying to expand globally by taking equity interest in international airlines. Delta Air Lines just increase their equity stake in China Eastern Airlines Corp to 3.5% which also included a long-term exclusive partnership. Part of their exclusive partnership is to building a large hub in Shanghai. China Eastern runs 35 flights to four US cities while Delta runs 28 flights to China a week. This exclusive partnership will also allow Delta and China Eastern to collaborate to improve efficiency for both of their airlines. China is the second largest source of foreign tourist for the US and it is expected to be the largest source in the next few years. Delta is concentrated on expanding into China because there still is a lot of growth in China. Just in the past five years their Chinese network has tripled. Delta is making the first equity cooperation deal with a Chinese airline since 2006. This will allow Delta to more efficiently expand into China and allow for significant growth. Latin America: In Latin America, Delta has made strategic equity investments in two major airlines: GOL and AeroMexico. Delta currently has a 4.24% equity stake in AeroMexico. They have the potential to buy up to 58.9 million more shares nu using options they have purchased which mature in May 2016. With the purchase of their equity, Delta also was granted an enhanced operating agreement which allows for seamless use of their routes and planes. AeroMexico is currently the largest domestic airline serving 58 destinations. Delta also expects in the next receive antitrust immunity and establish a joint venture with AeroMexico in the coming months. This will drastically increase the amount of travel and Delta will be able to take advantage of this through AeroMexico. In terms of market share between US and Mexico by seat capacity, American has 24%, United has 19%, Delta has 9%, and AeroMexico has 19%. But after the planned joint venture AeroMexico and Delta would leap frog to the top and have the most market share. The second airline Delta has invested in within the Latin America area is GOL. GOL is the second largest Brazilian airline. Recent, 13-G shows that Delta increased their equity positon in GOL to 9.5% by purchased conditional voting preferred shares. Delta also is the guarantor for a 5 year $300 million term loan which is secured by GOL’s owner’s interest in Smiles, which is GOL’s publicly traded loyalty program. Also, once the open skies agreement is established between Brazil and the US, Delta plans on filing for antitrust immunity as soon as that is established. Overall, in Latin America Delta has taken major steps to try and expand their market share. They also bought these equity interest when the prices were very depressed, which shows managements market awareness. They are full invested in these companies and have said they advising them and helping them build up their airline. By the end of next year they will have an immunized profit sharing joint venture with the leading carriers in the two largest markets in Latin America. 14 ORANGE VALUE FUND – FOR INTERNAL USE ONLY 2 Delta Air Lines, Inc.: (NYSE:DAL) THE ORANGE VALUE FUND Daniel Brenner | Senior Analyst Virgin Atlantic Delta has made a significant strategic equity investment in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airlines, holding a 49% stake in the company. This investment allows Delta to obtain greater access to United Kingdom hubs and increase mobility across the transatlantic by offering an increased number of flights via codesharing. Customers of Delta now have choices between a greater number of routes across the transatlantic, particularly flights between New York and London, one of the most highly traveled business routes. In the summer of 2015, the airlines jointly offered 10 flights per day between these two cities, with departures every 30 minutes from New York-JFK. During the first 12 months of the joint venture, Delta and Virgin Atlantic together flew more than 4 million passengers between the U.S. and U.K. and are continuing this standard of growth into the fourth quarter. There are a total of 39 transatlantic flights flown on the joint venture per day. New routes have been launched since the start of DAL and Virgin Atlantic’s joint venture including Seattle and Philadelphia to London and New York to Manchester, allowing DAL to tap into these highly traveled European gateway airports. Operational Efficiency: The table below shows the operational efficiency of Delta. Their load factor, price of jet fuel, and yield per RPM are the some of the highest of any competitor. There are few factors that contribute to the exceptional operational efficiency of Delta. One huge factor, is that they have the best maintenance team in the industry. Management boasts about their superior maintenance team. Even though their aircrafts are an average age of around 17 years they are still operate more efficiently than their competitors. Another reason, that they are operating so efficient is because they are actually keeping capacity relatively flat. At first this might seem like an unfavorable thing but it is actually part of their strategy moving forward. They are restructuring their routes and fleet so that each plan gets the highest utilization and generate the most revenue from their ASM. Company ASM (millions) Load Factor Yield Per RPM CASM (cents) Price/Gallon Delta Airlines 239,676 86.8% 16.24 13.07 1.80 American Airlines 265,657 83.3% 16.28 12.83 1.90 Southwest Airlines 131,004 84.6% 15.72 11.04 2.02 United Continetal 246,021 83.9% 15.98 13.09 2.17 Alaska Air Group 36,078 84.9% 14.56 10.70 2.12 Jetblue 44,994 85.6% 14.28 10.86 2.13 Hawaiian 17,062 80.8% 13.92 10.80 1.94 Competitors Average 140,070 84.3% 15.28 11.77 2.01 15 ORANGE VALUE FUND – FOR INTERNAL USE ONLY 2 Delta Air Lines, Inc.: (NYSE:DAL) THE ORANGE VALUE FUND Daniel Brenner | Senior Analyst Refinery Segment Delta is the only airline that has their own in-house refinery. In 2013, Delta purchased Monroe refinery for $180 million. Monroe produces 200,000 barrels per day and 40,000 of which is jet fuel. Monroe energy provides roughly 30% of the daily fuel consumption of all the hubs in New York on a daily basis. For the first time since 2013, which is when Delta purchased the refinery, it has become profitable. It is projected that by the end of 2015 that the refinery will have generated $320 million in profit. This refinery allows Delta to have a competitive advantage against all other competitors. They currently lead the industry on a per-barrel cost basis of $1.8/barrel as seen in the table above. They project that their price per barrel to get down $1.75 by next quarter.