Firm background

Delta airlines

In 1994 Daland Dusters founded the first airlines in the united states of America, since its first
departure from  Hartsfield–Jackson Atlanta International Airport, delta airline grew to be today
the second largest aircraft carrier in the world in terms of scheduled passengers carried, revenue
passenger-kilometers flown and fleet size, in 2018 delta airlines was ranked number 75 in the
Fortune 500 list of the largest United States corporations by total revenue. With their vision and
determination to be the best airline in the world, delta has 8 major city hubs in the united states
and flies over 233 destinations connecting all states of the united states and the six continents
reaching over seventy-five countries and all six inhabited continents, in order to maintain their
position delta airlines was one of the founders of Sky-Team alliance in 2002, which is one of the
biggest three alliances in the world consisting of 20 carriers from five continents. With their logo
"Caring more about you, they emphasized their intentions to be closer to their customer and care
more about providing them with the best flying experience for their money and maintain the
highest safety procedure and the newest aircrafts in their fleets.

Delta airline spent more on investing than any other airlines, in the resent years they entered into
many joint ventures in other airlines such as air-France in 2012, Korean air in 2016 and Virgin
Australia in 2017. 

1. Analyze company performance for three years through a. gearing (the capital
structure) b. dividends policy

A. Gearing (Capital Structure)

Gearing refers to the percentage of debt to the company’s equity it refers to the level of the
company’s liabilities to its capital, it is said to be a measurement of the financial leverage of the
firm, it generally gives an insight to the investor the extent to which the operations are being
funded by loans from lenders versus equity from shareholders, capital structure can be calculated
using different variables, one way is to calculate the net gearing ratio which equals Long term
debt + short term debt bank overdraft over shareholder’s equity, investors often use this ratio to
evaluate the financial fitness and the associated risk in investing in an entity, another way is to
calculate the gearing ratio is by dividing the total debt by the total shareholders'
equity. Expressed as a percentage, the ratio reflects the amount of existing equity that would be
required to pay off all outstanding debts.

Good or bad gearing ratios are hard to be determined, the optimal usually depends on the type of
business sector, the history of the firm and the condition of its competitors however below are
some guidelines for good and bad gearing ratio

1. A gearing ratio below 25%: for well-established corporations, this is usually considered
an optimal percentage low-risk by both investors who analyze the stock for investing
decision both in present and future and for lenders and banks who assess the risk
associated with lending money to the corporations .
2. A gearing ratio above 50%: in business this is considered to be a high gearing ratio or
in other words the operations are geared or levered meaning that a great percentage of the
operation in the such entity depends on debt rather than equity, such company would be
at greater financial risk, because during times of lower profits and higher interest rates,
the company would be more susceptible to loan default and bankruptcy.
3. A gearing ratio between 25% and 50%: for most companies in many business sector,
this is considered and optimal or normal percentage of gearing ratio.

Generally speaking, the capital that comes from creditors is riskier than the capital that
comes from the owners, this due to the fact the regardless of the operations outcome,
creditors must be paid back their money plus interest, this puts the company in a huge
risk specially in times of economic recession which might result in a default, however
debt financing is not always a bad thing if utilized properly it could result in the
expansion of operations, adding new product line, adding new services and acquiring new
ventures as well

Capital structure was calculated for delta airline for the years 2015,2016 and 2017 using the
below formula, a high gearing ratio shows a high
proportion of debt to equity, while a low gearing ratio
shows the opposite and the results are presented in the table below, in addition the debt ratio was
also calculated to determine the percentage of assets covered by debt.

  2017 2016 2015

liab 8,843.00 7,332.00 8,329.00
equity 13,190.00 12,287.00 10,850.00
gearing ratio 67.04% 59.67% 76.76%
.

Gearing Ratio

  2017 2016 2015

Assets 53,292 51,261 53,134
Liabilities 40,102 38,974 42,284
Equity 13,190 12,287 10,850
debt ratio 75.2% 76% 79.5%
Debt Ratio

As stated before a good or bad capital structure ratio depends on the type of industry, according
to a study conducted by Steven Nickolas in 2015 the average gearing ratio in the regional airline
industry is 78.16% , as the table shows Delta airline has lower percentages when compared to the
average airline sector

1. Year 2015: in this year delta airline had 76.76% gearing ratio which was slightly lower
than the average rate in the airlines sector, this indicates that delta tends to use debt to
finance their activities less than the others in the sector, also debt ratio shows a
percentage of 79.5% which means that the greater portion of their assets is financed by
debt rather than equity, in 2009 delta announced their balance sheet improvement
strategy to reduce their debt and managed to reduce it by 11 billion, which has
significantly lowered their annual interest expense, and as a result of these efforts delta
has received upgrades to their credit ratings by all three rating agencies including
investment grade ratings from Mody’s and Fitch. As stated above delta airlines had long
term plans that started in 2009 to increase the fitness of their financial position and to
reduce their debt, one of their goals was to achieve an annual free cash flow of four to
five billion, this goal was achieved in 2015 and as a will be utilized in the future to
increase their investments and to reduce their debt paying off their long term loans.
 2. Year 2016: during this year Delta airlines enhanced their net gearing ratio and reduced it
by more than 22 percent to the previous year and remained on top of the average capital
structure ratio in the industry, this indicates that delta is still working on their long term
strategy to reduce debt, and are using the free cash flow to pay off their long term debt,
this also shows that management is trying to balance the usage of equity and debt in
operation, during this year delta managed to reduce their long term liabilities by more
than one billion dollars. Delta’s debt ratio during 2016 has slightly enhanced with 4.4%
decrease from the previous year this is also another indicator that the company is working
toward achieving their strategic goal and enhancing their financial position.

3. Year 2017: this year had a gearing ratio of 67 % which is slightly higher than previous
year but remains on top of the average airline sector, during this year delta’s long term
liabilities increased but their equity also increased, the increase of liabilities was due to
the investments they made during the year, as for the equity it increased due to the
increase in retained earnings from 7,9 billion in 2016 to 9.6 billion in 2017.

B. Dividends policy

Not only delta was aiming to reduce their debt levels and invest more in the business, but also
they have been aiming to increase their capital return to shareholders, in fact during 2016 delta
paid more than 3 billion dollars through dividends and share repurchases.in 2013 Delta’s board
of directors initiated a quarterly dividends program, the goal was to distribute 6% each quarter of
a fiscal year this percentage increased more than one time during the last three years, the table
below shows the amount distributed each quarter from 2015 to 2017

fiscal year 2017 dividends declared and paid per share

quarter 1 $0.305
quarter 2 $0.305
quarter 3 0.2025$
quarter 4 0.2025$
fiscal year 2016 dividends declared and paid per share
quarter 1 0.2025$
 quarter 2 0.2025$
quarter 3 0.135$
quarter 4 0.135$
fiscal year 2015 dividends declared and paid per share
quarter 1 0.135$
quarter 2 0.135$
quarter 3 0.09$
quarter 4 0.09$

This table indicates that delta is distributing more each year and are more committed to their long
term policy to enhance their financial position

Unlike interest paying dividends is depends on the board of directors decision, thus the company
that chooses to pay dividends is usually financially healthy and is operating well and gaining
enough income, dividends is that part of net income that the company chooses not retain to the
next year but rather distribute it to the stockholders, investors seek to invest in companies to
achieve both capital yields (what they can get from selling their investment for higher prices than
the one they paid) or for dividends yield which they get from the dividends distributed, thus the
amount of dividends is directly correlated with the stock price and the more the company
distributes the higher the stocks will be

In order to assess the dividends, the payout ratio will be used for each of the three years in this
study

Payout Ratio: is the percentage of net income that the company pays out as dividends to
common shareholders, a payout ratio of 12 % for example means for every 1 dollar of net
income 12% is being distributed to shareholders, generally speaking companies in the early
stages of their life tend to have lower payout ratios, this because such companies tend to take
most of the income generated from operations and reinvesting it to grow the business, while on
the contrary companies in mature stages of their life tend to distribute more in order to attract
more investors to invest in their shares for most analysts The payout ratio is a key financial
metric used to determine the sustainability of a company’s dividend payments, the more stable
the less risky the company is.
Payout ratio can be calculated either by dividing the dividends per share over earning per share
or by dividing total dividends distributed over net income after deducting dividends for preferred
shares, this study will use the first approach and will calculate the payout ratio for the years
2015,2016 and 2017.

  2017 2016 2015

earnings per share (EPS) 4.97 5.82 5.68
dividends per share (DPS) 1.02 0.68 0.45
Payout ratio 20.52% 11.68% 7.92%

The table shows that delta airline is in an increase pace of distributing dividends as the
percentage has more than doubled in the last three years

1. Year 2015: during this year Delta had a net income 4,526 billion dollars, distributed 9%
in the first two quarters and increased by 50 % in the last two quarters, distributing 13.5%
this trend follows their quarter dividends strategy which aims to distribute stable
dividends every quarter of the year, for 2015 the payout ratio was almost 8% which mean
that for every 1 dollar of income 8 cents were distributed.

2. Year 2016: during this year delta had a net income 4,373 billion dollars, they distributed
13.5% in the first two quarters, and then increased it by more than 50% to distribute
20.25 % in the last two quarters of the year, the payout ratio was 11.68% which
resembles a 47 % increase from the previous year

3. Year 2017: 2017 witnessed even more dividends distributed, during the year delta had a
net income of 3,577 billion and distributed 20.25% in the first two quarters only to
increase with almost 50% as in the last two quarters they distributed 30.5%, the payout
ratio had a massive increase of 75 % to reach 20.52%.

Those huge amounts of dividends distributed indicates that the company is financially
healthy and will continue this trend in distributing in the upcoming future.
 the below table summarizes operation results and financial position for Delta airlines in
the last three years

  2017 2016 2015

EBIT 6,114 6,952 7,802
Net Profit 3,577 4,373 4,526
 
Equity 13,910 19,435 21,039
Debt 34,407 31,826 3,295
Interest Paid 396 388 481
Dividends paid 731 509 359

1f

Conclusion

Delta airlines started a strategy to enhance their financial position, their strategy contained two
main aspects, the first aspects was to enhance their capital structure, in order to do so delta sat
two main goals the first was to generate 9 billion of cash from operation each year among this
cash they wanted to 4-5 billion of free cash flow, half of this free cash was used to pay off their
long term debt, the other goal was to attract more investors to buy their shares, in order to so
delta started a quarterly distribution plan where they distributes dividends to their shareholder
four times a year, at the launch of this plan in 2013 their initial goal was to distribute
6%,however in quarter 4 of 2017 they distributed as more than 30% which is more than five
times than the original goal

The second aspect of their plan is to invest as much as possible in the business, to achieve this,
the management planned to invest the other 50% of the free cash flow mentioned above in
multiple joint ventures and alliances

In 2015 delta started to operate transatlantic joint ventures Virgin Australia and its affiliated
carriers with respects to operations on transpacific routes between north America and
Australia/New Zealand
In 2016 delta started to operate a transatlantic joint ventures with Virgin Atlantic airways with
respect to non-stop routes between the United Kingdom and north America, also in addition to
that delta owns 49 equity stake in virgin airways.

In 2017 delta acquired a 49% non-controlling equity in Grupo Aeroméxico, S.A.B. de C.V.

which is a Mexican airlines and started to operate a joint venture with them in respect of flights
between the US and Mexico

References

1. http://www.annualreports.com/HostedData/AnnualReportArchive/d/NYSE_DAL_2016.p
df
2. http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_DAL_2017.pdf#
DAL1231201710K_HTM_S0A09F0A81F045F95B8DF4D8A7BAA539A
3. kenton, w. (2019). Gearing. [online] Investopedia. Available at:
https://www.investopedia.com/terms/g/gearing.asp [Accessed 8 Jan. 2019].
4. white, C. (2019). What is a good or bad gearing ratio?. [online] Investopedia. Available at:
https://www.investopedia.com/ask/answers/121814/what-good-gearing-ratio.asp 
5.  kenton, w. (2019). Gearing. [online] Investopedia. Available at:
https://www.investopedia.com/terms/g/gearing.asp