The Henry Fund

Henry B. Tippie School of Management

Sam Norman [samuel-norman@uiowa.edu]

Delta Airlines, Inc. (DAL) October 18, 2017

Industrials – Full-Service Airlines Stock Rating Sell
Investment Thesis Target Price $52-56
Henry Fund DCF $55.97
Delta Airlines has proven to be an industry-leading operator among full-service Henry Fund DDM $52.31
air carriers. However, we believe that continued competition from low-cost Relative Multiple $52.65
carriers will limit growth in passenger yields and revenue. These expectations, Price Data
coupled with our projections for rising oil prices, point to limited value at the
Current Price $52.76
company’s current share price of $52.76.
52wk Range $39.05 – 55.75
Drivers of Thesis Consensus 1yr Target $63.29
• We project that total revenue will grow at a CAGR of 3.23% through 2021 Key Statistics
driven by 2.5% annual capacity growth beginning in 2018 and 4-10% annual Market Cap (B) $37.62
growth in fee-related revenue Shares Outstanding (M) 724.03
• Our model assumes that Delta’s load factor will remain constant at 84.6% Institutional Ownership 94.0%
throughout the forecast horizon, as rising demand for air travel is offset by Five Year Beta 1.252
aggressive industry capacity growth Dividend Yield 2.31%
• We believe that revenue growth will be limited by continued price Est. 5yr Growth 5.00%
competition, particularly from low-cost carriers. However, our model Price/Earnings (TTM) 11.00
assumes that Delta’s passenger yield will still rise at a modest rate of 0.5%
Price/Earnings (FY1) 9.64
annually due to strong demand for air travel.
Price/Sales (TTM) 0.95
• We project that oil prices will rise to roughly $57 per barrel by 2021, which
will increase fuel expense and limit profitability. Rising oil prices are Price/Book (mrq) 2.69
especially a threat due to the company’s abandonment of its traditional Profitability
hedging activities. Operating Margin (TTM) 14.68%
Profit Margin (TTM) 8.97%
Risks to Thesis Return on Assets (TTM) 7.05%
• Stronger-than-expected demand, capacity shortages, or an improvement Return on Equity (TTM) 27.36%
in industry pricing power would counteract our expectations for sluggish
DAL Industry Sector
yield growth
35.0
• Any sustained decline in oil prices would lead to stronger-than-expected
30.0
performance, as our model includes expectations for gradually rising oil
and jet fuel prices throughout the forecast horizon
25.0 27.4 28.9
20.0
21.4 20.4
15.0
10.0 13.1
11.0 10.7
Earnings Estimates 5.0 5.5 5.8
Year 2013 2014 2015 2017E 2018E 2019E 0.0
EPS $0.80 $5.81 $5.98 $4.99 $5.41 $5.58 P/E ROE EV/EBITDA
Source: Bloomberg
growth (93.5%) 627.8% 3.0% (16.7%) 8.4% 3.2%
12 Month Performance Company Description
DAL S&P 500 Delta Airlines provides scheduled air
40%
transportation for passengers and cargo over a
30% network of routes throughout the United States
and internationally. The company serves roughly
20% 320 destinations in 60 countries and operates a
mainline fleet of over 800 aircraft while also
10%
maintaining international alliance relationships
0% with over 20 foreign airlines. In addition to
passenger and cargo revenue, Delta earns
-10% ancillary revenue through loyalty programs,
O N D J F M A M J J A S baggage fees, in-flight sales, and its wholly owned
Source: Yahoo Finance oil refinery subsidiary, Monroe Energy, LLC.

Important disclosures appear on the last page of this report.

 EXECUTIVE SUMMARY
Delta Airlines has consistently outperformed other U.S.
full-service air carriers in terms of unit revenue and
operating margins. We expect this trend to continue in the
future, as the company maintains industry-best customer
service, in-flight amenities, and loyalty programs.
However, we believe that full-service carriers will continue
to face pressure from low-cost carriers that will limit
growth in passenger yields. We also believe that steadily
rising oil prices will erode the industry’s profit margins
throughout the forecast horizon, as growing seat mile
capacity will increase price competition among For forward valuation, our analysis examined each of these
competitors and limit firms’ ability to pass rising fuel costs segments separately due to their unique growth drivers.
to customers.
Passenger Revenue
Based on these expectations, we believe that the
company’s current stock price of $52.76 leaves little room Passenger revenue is earned by collecting travel fares on
for upside based on our target price of $52-56. the company’s domestic and international air
transportation routes1. Passenger revenue accounted for
COMPANY DESCRIPTION roughly 85% of total revenue in 2016 and has grown at a
3-year CAGR of 0.84% since 20131. The following chart
Delta Airlines is the world’s largest airline by market shows the geographical breakdown of total passenger
capitalization and maintains a presence in every major revenue in fiscal 2016.
domestic and international market. The company faces
competition from other traditional full-service carriers,
national point-to-point carriers, and numerous domestic
and international discount carriers. DAL competes most
directly with traditional full-service carriers American
Airlines (AAL) and United Airlines (UAL), but also faces
significant competition from Southwest Airlines (LUV), the
world’s largest low-cost air carrier. The following chart
provides more information about the industry’s largest
competitors.

DAL UAL AAL LUV

Market Cap ($B) 37.6 20.5 25.4 31.7
Revenue (TTM - $B) 40.5 37.4 41.1 21.0 Growth in this segment is reliant on growth in airline
Available Seat Miles (B) 251.9 253.6 273.4 148.5 capacity and pricing power. Capacity growth, often
Source: Bloomberg measured by growth in available seat miles (ASMs), is
driven by demand for air transportation. Demand for air
The company earns revenue through three reportable travel is generally measured by growth in revenue
segments: Passenger, Cargo, and Other. The following passenger miles (RPMs) and is largely driven by overall
chart shows each segment’s contribution to total revenue economic activity. Airline RPMs and revenue have closely
in fiscal 2016. tracked GDP growth in recent years, as shown in the
following chart.

Page 2
 U.S. Airline Revenue and GDP, Q1 2003-Q2 2016
Source: Oliver Wyman – Airline Economic Analysis
Over the medium and long-term, expectations for a
growing U.S. and world economy provide the basis for
long-run aviation traffic growth2. We project that domestic
and worldwide GDP will grow by roughly 3% through 2019
and 2-2.5% in 2020 and 2021, which points towards
continued growth in RPMs for airlines in the future.
The Federal Aviation Administration (FAA) projects that
domestic and international passenger growth for U.S.
carriers will average 1.9% annually over the next twenty
years. The FAA also projects that total U.S. carrier RPMs
will grow by 2.4% annually through 2037, driven by 2.0%
growth in domestic RPMs and 3.4% growth in international
RPMs2. The FAA expects growth in ASMs to generally track
growth in RPMs. The FAA’s RPM and ASM projections are
summarized in the following charts.
Source: FAA Aerospace Forecast (2017-2037)
Page 3
Source: FAA Aerospace Forecast (2017-2037)
During the company’s 3Q 2017 earnings call, Delta’s
management team indicated that available seat mile
growth will be limited to 1% in 2017 due to the company’s
strict focus on improving internal efficiency throughout
the year3. However, management also indicated that it
expects capacity to grow by 2-3% annually for the
foreseeable future beginning in 2018. We believe that
these projections are achievable given expectations for
market demand.
Our model predicts that available seat miles will grow by
1% in 2017 and 2.5% annually throughout the remaining
forecast horizon. In addition, our model assumes that
Delta’s current load factor (RPMs divided by ASMs) of
84.6% will remain constant throughout the forecast
horizon as ASMs increase at the rate of RPM growth. We
believe that this assumption is reasonable given that
Delta’s load factor has remained between 83.8% and
84.9% since 2012 as shown in the chart below.
In addition to capacity growth, passenger revenue growth
is reliant on an airline’s revenue earned per RPM, also
known as passenger mile yield. Yields can be volatile in the
short run in response to capacity constraints and demand
spikes. However, the FAA predicts that total airline system
yields will normalize to an annual growth rate of 2.1% from
2017-20372. We believe that low-cost carriers (LCCs) will
benefit from the majority of yield growth through 2021, as
these airlines have shown the ability to more effectively
capture passenger yield in recent quarters. This trend is
shown in the following chart.
Passenger Yield Trends, Q1 2006-Q2 2016
Source: Oliver Wyman – Airline Economic Analysis
We believe that DAL will struggle to achieve the FAA’s
predicted system yield growth of 2.1% annually, as
industry capacity grows and yield growth continues to be
captured by LCCs. However, our model assumes that
Delta’s passenger mile yield will grow by a modest rate of
0.5% annually throughout the forecast horizon due to
increasing demand for air travel. A summary of our model
assumptions for capacity and yield is provided in the chart
below.
DAL Capacity and Yield, 2014-2021E
ASMs RPMs Passenger Mile Yield
300,000
250,000
ASMs, RPMs
200,000
150,000
100,000
50,000
0 $0.1500
2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Source: DAL 10-K, Henry Fund Estimates
Cargo Revenue
Delta generates cargo revenue using cargo space on
regularly scheduled passenger aircraft. Cargo revenue
accounted for roughly 2% of total revenue in 2016 and has
declined at a compound annual rate of 10.6% since 2013.
Growth in air cargo generally tracks economic growth.
However, air cargo is increasingly being carried by
dedicated freight aircraft as passenger-focused airlines
seek to minimize aircraft size and maximize fuel efficiency.
Our model assumes that cargo revenue will decline by 5%
annually throughout the forecast horizon, as the company
continues to focus its efforts on its main business lines.
Other Revenue
This segment consists of revenue earned from loyalty
programs, administrative fees, on-board sales, and
baggage fees, as well as revenue from several ancillary
revenue streams including aircraft maintenance, repair,
staffing, vacation wholesale, and private jet operations. In
addition, the company’s wholly owned subsidiary, Monroe
Energy, earns revenue from operating an oil refinery near
Philadelphia, Pennsylvania1. Other revenue accounted for
roughly 13.1% of company revenue in 2016 and has grown
at a 3-year CAGR of 10.1% since 20131. The following chart
provides information about the composition of other
revenue by source.
$0.1750
Passenger Mile Yield
$0.1700
$0.1650
$0.1600
DAL’s Monroe Energy refinery produces gasoline, diesel,
$0.1550
and jet fuel1. The company exchanges non-jet fuel
products with third parties for jet fuel1. The Monroe
refinery is mainly used to supply airline operations
throughout the northeastern U.S., including DAL’s New
York Hubs at LaGuardia and JFK airports. Monroe
produced or procured approximately 175,000 barrels of jet
fuel per day in 2016, roughly 60-70% of the company’s
Page 4
daily domestic jet fuel usage1,18. DAL’s management team
believes that Monroe Energy slightly reduces the
company’s market price of jet fuel by eliminating the Revenue Estimates, 2017-2019 ($mm)
refiner’s margin while also ensuring adequate fuel supply
2017 2018 2019
for key operational hubs (see company analysis for more
fuel cost analysis). The refinery also produces revenue Henry Fund Estimates 40,630 42,092 43,619
through the sale of excess non-jet fuel products, which we Analyst Consensus 40,898 42,432 43,832
expect to grow slightly throughout the forecast horizon as Source: Bloomberg, Henry Fund Estimates
oil prices rise.
Company Analysis
However, we believe that growth in Other Revenue will be
driven primarily by growth in fee-related revenue. Delta has consistently outperformed competitors in terms
Growing fee-related revenue is a continuing trend in the of unit revenue in recently years. This outperformance is
airline industry, as competitors increasingly unbundle maintained through best-in-class service and in-flight
service offerings to reduce passenger fares (see markets perks like internet accessibility. In addition, the company
and competition section for more details)4. The following commands higher fares due to its SkyMiles rewards
chart shows the growth of airline service fees since 2007. program, which is generally considered to be the best
rewards program among U.S. full-service carriers1. The
System Service Fees, Q1 2007-Q2 2016 following chart shows the unit revenue performance of
DAL’s peer group in recent years.

Passenger Revenue Per Available Seat Mile ($c)

2014 2015 2016 3-Year Avg.

DAL 14.58 14.10 13.41 14.03
UAL 13.72 13.11 12.40 13.08
AAL 13.97 13.21 12.65 13.28
LUV 13.48 13.02 12.52 13.01
Source: Bloomberg

Source: Oliver Wyman – Airline Economic Analysis The factors that allow DAL to maintain industry-leading
unit revenue figures also contribute to the industry’s
In 2015, Delta became the first American full-service highest unit cost structure. The following chart provides
airline to introduce a “Basic Economy” class, which more detail about unit costs for the largest U.S. airlines.
provides lower fares in exchange for fewer in-flight perks.
Basic Economy has allowed Delta to compete more Total Cost Per Available Seat Mile ($c)
effectively with emerging LCCs and collect a growing
2014 2015 2016 3-Year Avg.
amount revenue from fees related to baggage, seat
DAL 15.92 13.33 12.98 14.08
selection, and on-board purchases. We expect fee revenue
to continue growth throughout the forecast horizon, as UAL 14.85 13.08 12.70 13.54
Delta continues to offer unbundled services to compete AAL 14.45 12.94 12.76 13.38
with LCCs. Our model assumes that other revenue will LUV 12.50 11.18 11.22 11.63
grow by 10% in 2017, 8% in 2018 and 2019, 6% 2020, and Source: Bloomberg
4% in 2021 driven mainly by growth in fee-related
revenue. Delta maintains the industry’s highest fuel cost per ASM
despite its ownership of the Monroe Energy refinery.
The following chart compares our revenue estimates with However, Delta’s management team has indicated the
analyst consensus revenue estimates for fiscal years 2017- company’s fuel cost expense is still lower than it would be
2019. without benefits provided by the Monroe refinery1. The

Page 5
following chart shows fuel cost per available for the LCC Share of Worldwide Seat Capacity, 2006-2016
industry’s largest participants.

Fuel Cost Per Available Seat Mile ($c)

2014 2015 2016 3-Year Avg.

DAL 4.87 3.07 2.38 3.44
UAL 4.75 3.01 2.29 3.35
AAL 4.74 2.77 2.26 3.26
LUV 4.04 2.57 2.46 3.02
Source: Bloomberg

Delta’s unit revenue outperformance has allowed the

company’s operating margins to exceed those of other
traditional full-service airlines. However, LUV’s significant
unit cost advantage leads to the highest operating margin Source: Statista
among large U.S. airlines. The following chart shows
recent operating margin performance for DAL and its peer We believe that LCCs will continue to play an integral part
group. in shaping the competitive landscape of the airline
industry by limiting yield growth for full-service carriers.
Competitor Operating Margins, 2014-2016 However, we believe that the LCC model is not suitable for
long-haul routes where traditional LCC efficiencies such as
2014 2015 2016 3-Year Avg. higher seat density, lower on-board service quality, and
DAL 5.47% 19.17% 17.54% 14.06% higher plane utilization are not as feasible. Our model
UAL 6.10% 13.64% 11.87% 10.54% assumes that Delta’s passenger mile yield will grow at a
AAL 9.96% 15.14% 13.15% 12.75% modest rate of 0.5% throughout the forecast horizon, as
LUV 11.96% 20.77% 18.41% 17.05% strong demand for air travel is combatted by price
Source: Bloomberg competition from LCCs in short and medium-haul routes.
However, we believe that Delta will be able to maintain its
Full-service carriers like Delta lost significant market share load factor of 84.6% throughout the forecast horizon as
to LCCs during the decade prior to 2014. However, the full-service carriers continue to dominate long haul route
penetration of LCCs has slowed from 2014-2016, as falling networks.
fuel prices have allowed full-service carriers to more
effectively compete on price. In addition, full-service Fuel expense has historically been Delta’s largest
airlines have innovated new service offerings to compete operating expense. However, this has changed since 2014
with services offered by LCCs (i.e. Delta’s “Basic Economy” due to steadily falling oil and jet fuel prices1. We project
class). Despite slowing market penetration, LCCs that oil prices will linearly rise from the current price of
accounted for roughly 25% of the world’s air travel market roughly $49 per barrel to a price of roughly $57 per barrel
in 2016. by 2021. Our model projects future fuel prices based on
year-to-date fuel cost per gallon (including refinery-
related benefits) and expected growth in oil prices. We
assume that growth in fuel expense will track growth in oil
prices throughout the forecast horizon. The following
chart shows our model’s assumptions for fuel expense per
ASM throughout the forecast horizon.

Page 6
 Fuel Expense Per ASM, 2014-2021E
carriers will continue to pose a significant threat to unit
revenue growth in the years to come. In addition, we
Fuel Expense Per ASM believe that steadily rising fuel costs will tighten current
6.00 industry margins throughout the forecast horizon. For
5.00 these reasons, our EPS projections are slightly less
4.00
optimistic than analyst consensus EPS estimates.
$ Cents

3.00
RECENT DEVELOPMENTS
2.00

1.00
0.00
2014 2015 2016 2017E 2018E 2019E
Source: DAL 10-K, Henry Fund Estimates
Delta currently targets non-fuel expense growth of less
than 2% annually and the company’s cost per available
seat mile excluding fuel has grown at a CAGR of 0.9% since
20121. Our model assumptions result in non-fuel CASM
growth at a CAGR of roughly 1.0% throughout the forecast
horizon.
Salaries and related expenses, Delta’s largest non-fuel
expense, increased from 21.6% of sales in 2015 to 25.3%
of sales in 2016, primarily due to a newly ratified pilot
contract. Pilots constitute the majority of the company’s
unionized labor and the new contract included an 18%
increase in pilot wages1. DAL’s 2016 pilot contract
becomes amendable in 2019 and we believe that
continued growth in industry profitability may lead to
further wage increases as contracts are renegotiated.
However, we do not include this scenario in our model
assumptions due to its speculative nature.
Our EPS projections are included below and are compared
to analyst consensus EPS figures for 2017-2019.
EPS Projections, 2017-2019
2017E 2018E 2019E
Henry Fund Estimates $4.99 $5.41 $5.58
Analyst Consensus $5.04 $5.59 $5.97
Source: Bloomberg, Henry Fund Estimates
Overall, we believe that Delta and other full-service
airlines will remain profitable in the next five years to due
to relatively low oil prices and growing air traffic. In
addition, we believe that Delta has a proven history as the
industry’s most efficient full-service operator and will
continue to generate the highest margins among full-
service carriers. However, we believe that low-cost
Q3 2017 Earnings
2020E 2021E
On October 11th, 2017, Delta reported adjusted EPS of
$1.57 for Q3 2017. This figure beat analyst consensus EPS
estimates of $1.52 by 3.2%5. Operating revenue increased
5.5% year-over-year despite a $140 million reduction due
to Hurricane Irma. Growth in operating revenue was
driven by year-over-year passenger unit revenue growth
of 1.9% passenger and an 18.4% year-over-year increase in
other revenue. In addition to strong Q3 performance,
management indicated that it expects 2-4% unit revenue
growth during Q45.
We project that passenger yields for fiscal 2017 will be
$0.1593. This represents an increase from the company’s
passenger yield of $0.1580 through the nine months
ended September 30th, 2017. We believe that this yield for
fiscal 2017 is reasonable given management’s guidance for
continued growth in the fourth quarter. In addition, we
believe that our annual capacity growth projections of 1%
are reasonable given management’s affirmation of these
previously guided figures during the Q3 earnings call.
Bombardier Tariff Dispute
In September, The U.S. Commerce Department proposed
tariffs that would potentially quadruple the price of
Bombardier’s C-Series planes for U.S. buyers. Tariff
proposals come after complaints from Boeing that claim
the Canadian aircraft manufacturer is benefiting from
unfair government subsidies which allow for below-
market price points for its C-Series aircraft. The proposed
tariffs will not take effect unless approved by the U.S.
International Trade Commission in early 20186.
Delta has purchase commitments for 75 C-Series aircraft
with deliveries slated to begin in the spring of 2018. Delta’s
management team indicated in its Q3 2017 earnings call
that it does not expect to pay any tariffs on Bombardier C-
Series aircraft orders, as Boeing does not manufacture a

Page 7
competing jet and therefore experienced no competitive Delta will repurchase $1.25 billion worth of shares each
disadvantage3. year through 2021.

The general market consensus is that Boeing and the U.S.
Commerce Department do not have a particularly strong
case for the imposition of tariffs. Therefore, we believe
that this event will have no material impact on Delta’s
financial performance and we have not incorporated
tariffs in our valuation assumptions.
Hurricanes and Network Disruption
Lastly, Delta has devoted significant capital to paying down
its underfunded pension. Delta’s management team has
committed to funding $1.2 billion in pension liabilities in
2017 and aims to have the company’s pension plan 80%
funded by 2020. Further funding of the company’s pension
plan will promote capital structure flexibility, which has
historically been more limited than that of competitors
that emerged from bankruptcy (UAL and AAL).

During Q3 2017, Delta incurred a $120 million reduction in
pretax income due to network disruptions caused by
Hurricane Irma hitting the Caribbean, Florida, and
specifically the firm’s main hub in Atlanta, Georgia3. Delta
also operated nine humanitarian flights, added more than
12,000 additional seats to impacted cities, and shipped
more than 600,000 pounds of relief supplies. In addition,
the Delta Airlines Foundation contributed $2.75 million to
American Red Cross relief efforts3. The network
disruptions were quickly resolved and we believe that the
reputational benefit of the firm’s hurricane response will
make up for all losses incurred. Hurricane-related events
are not expected to have any long-term material impact.
MARKETS AND COMPETITION
The airline industry is mature and has been shaped by a
series of significant mergers over the past decade. These
mergers have yielded fewer and larger airlines that have
demonstrated more discipline concerning fare levels and
capacity expansion8. These characteristics, coupled with
falling fuel prices beginning in 2014, led to record
profitability for the airline industry in 2016.
U.S. Airline Industry Consolidation

INDUSTRY TRENDS
Improved Profitability
The airline industry experienced record profitability in
2016, recording roughly $35.6 billion in annual profits 7.
Record profitability comes at a time of low fuel prices that
have widened margins for firms within an industry that has
become adept at controlling costs.

Improved profitability has allowed many airlines to

aggressively return capital to shareholders. Delta began
paying dividends in 2013 and has increased its dividend by
at least 50% annually since. We project that dividends will
grow by 5% annually throughout our forecast horizon, as
the firm’s history of 50% dividend growth is unsustainable
in the long-run. Source: PwC – 2017 Commercial Aviation Trends
In addition to dividends, Delta has returned significant Traditional full-service carriers continue to face fare
capital to shareholders through share repurchases. The pressure from the presence of LCCs. It is estimated that
company repurchased more than $2 billion worth of LCCs now account for 25% of all global flights and have
shares in 2015 and 2016 and recently approved another $5 shown to be particularly disruptive in markets for short
billion repurchase plan through 20201. We project that and medium-haul flights. These routes allow for LCCs to
exploit cost efficiencies through higher seat density, low

Page 8
service costs, higher aircraft utilization, and lower staff
compensation9. The following chart shows LCC labor
structures relative to those of full-service carriers.

U.S. Carrier System Labor Unit Costs, 2014-2016

U.S. Airlines – System Fuel Prices, 2009-2016

Source: Oliver Wyman – Airline Economic Analysis Source: Oliver Wyman – Airline Economic Analysis

We believe that LCCs will continue to be a transformative
factor in the airline industry, suppressing passenger yields
and limiting fare growth for traditional airlines.
Traditional carriers have begun to offer more LCC-like
services to more effectively compete on price, most
notably through the introduction of a “Basic Economy”
class. These service offerings seek to reduce fare prices at
the expense of additional flight perks, including free
baggage, seat choice, and cancellation refunds. Due to
these service offerings, traditional carriers have
experienced rapid growth in fee-related revenue.
In addition to new service offerings, carriers seek to avoid
ticket commoditization by offering personalized service
through loyalty programs. Traditional airlines also hope to
boost revenue by leveraging access to travelers to cross-
sell lodging, rental cars, and full vacation packages through
direct sales channels.
Low fuel prices have also prompted several of the
industry’s largest players, including Delta Airlines, United
Airlines, and American Airlines, to abandon fuel hedging
programs10. Decreased hedging activity leaves the industry
more vulnerable to future increases in the price of jet fuel.
Labor costs have replaced fuel costs as the industry’s
largest operating expense in recent years, as many
industry participants have restructured contracts with
pilot and flight attendant unions since 2014, a period of
peak industry profitability. The following chart provides
more detail about overall industry cost structures among
traditional carriers and LCCs.
U.S. System CASM by Group, Q2 2015/2016

Constant fare pressure places a premium on cost control

for industry participants. Historically, fuel was the
industry’s largest and most volatile operating expense.
However, this has changed in recent years as steadily
falling fuel prices have allowed for expanded operating
margins and profitability. The following chart provides
more detail about fuel cost trends within the airline
industry.
Source: Oliver Wyman – Airline Economic Analysis

Moving forward, we expect that firms will continue to

compete mainly on price despite efforts to reduce the
Page 9
commoditization of service offerings. We believe that this
price competition will limit yield growth for both
traditional airlines and LCCs. Our model assumes that
Delta’s passenger mile yield will grow at a modest rate of
0.50% throughout the forecast horizon, as strong demand
for air travel is combatted by continued price competition
among market participants.
Peer Comparisons
Important operating and valuation statistics for firms in
DAL’s peer group are shown below.
industry-leader Southwest. In addition, we believe that the
industry has reached peak profitability and will soon
become subject to stagnant passenger yields and steadily
rising fuel costs. We believe that these factors will
contribute to declining profitability over the forecast
horizon.
ECONOMIC OUTLOOK
GDP

DAL UAL AAL LUV

Market Cap ($B) 37.62 20.54 25.36 31.74
Revenue (TTM - $B) 40.46 37.39 41.11 20.97
Average Fleet Age (Years) 17.00 13.90 10.00 10.90
Operating Margin (TTM) 14.68% 12.68% 11.81% 17.33%
Debt to Total Assets 40.40% 46.61% 31.11% 12.70%
Trailing P/E 11.00 8.38 10.02 15.23 Source: U.S. Bureau of Economic Analysis
Forward P/E 9.63 9.72 10.40 15.01
EV/EBITDA 5.06 4.86 5.97 6.56 U.S. GDP grew by 3.1% in the second quarter of 2017, a
sign of continued economic strength. As mentioned,
Source: Bloomberg
demand for air travel is closely related to GDP growth in
Delta has historically leveraged its superior customer underlying markets.
relationships and loyalty program to achieve the highest
We project that GDP will continue to grow between 2.5-
operating margins among traditional full-service carriers.
3% in the coming years due to growth in overall economic
However, the company has been unable to replicate the
activity. Due to these GDP growth expectations, we
operating margins of Southwest, the industry’s
believe that Delta’s RPMs and ASMs will grow by an annual
operational gold standard. We believe that DAL will
rate of 2.5% from 2018 through 2021. We also believe that
continue to outperform UAL and AAL but lag LUV in terms
GDP growth will allow modest annual growth in passenger
of margin performance. Therefore, we believe the market
mile yield of 0.5% despite continued fare pressure from
is fairly valuing industry peers based on relative multiple
LCCs.
measures.

DAL continues to be burdened by a $13.4 billion Interest Rates

underfunded pension liability unlike competitors. This
underfunded pension liability is effectively a form of debt
and brings the company’s debt-to-total assets ratio in line
with UAL and AAL. However, the company plans to have
its pension plan 80% funded by 2020 and has received
multiple credit rating upgrades since 2014. These
upgrades have given Delta an investment grade rating at
each of the three main rating agencies11.

We believe that Delta will continue to be the best Ten-year treasury rates have risen throughout 2017 due to
operational performer among U.S. full-service carriers in two Federal Reserve rate hikes and currently sit at 2.34%.
the years to come. However, we believe that the company We believe that the Federal Funds Rate will be increased
will still struggle to match the margin performance of once more in 2017 and twice in 2018. We believe that

Page 10
these rate increases will bring the ten-year treasury rate to
roughly 3.3-3.5% by the end of 2019.
Rising interest rates have the potential to slow economic
growth, which is closely related to airline traffic. However,
we believe that rate increases will only occur if economic
indicators remain strong. In addition, we believe that the
market expects rate increases in 2018 and is already
including these increases into its economic expectations.
Therefore, we believe that rising interest rates will have
little effect on the economy’s ability to achieve our growth
expectations of 2.5-3% throughout the forecast horizon.
Unemployment
Unemployment Rate, Seasonally Adjusted
Source: U.S. Bureau of Labor Statistics
Unemployment is another key indicator of economic
strength. U.S. unemployment declined to 4.2% in
September despite non-farm payrolls declining by 33,000
jobs. We project that unemployment will steadily rise to
4.5-5% by the end of our forecast horizon. However, we
believe that this increase in unemployment will have little
material impact on the industry, as expected
unemployment rates are still low relative to historical
figures. In addition, slightly rising unemployment has the
potential to mitigate labor cost pressure throughout the
forecast horizon.
Page 11
Oil Prices
Source: Nasdaq
Oil prices are critical for Delta and other industry
participants, particularly given firms’ decisions to forego
fuel hedging programs. We believe that oil prices will rise
steadily over the next five years to roughly $57 by 2021.
Our model incorporates these expectations by assuming
Delta’s fuel expense will grow proportionally to growth in
underlying oil prices. We assume that oil prices will grow
linearly from current prices to a price of $57 per barrel by
2021.
INVESTMENT POSITIVES
• Delta Airlines is the strongest operator among U.S.
full-service airlines, which we expect to continue in the
foreseeable future
• We project that airline industry profitability will
continue throughout the forecast horizon despite
yield pressure and rising fuel costs
• The company benefits from a history of outstanding
customer service, a strong in-flight experience, and
the industry’s best loyalty program
INVESTMENT NEGATIVES
• We believe that unit revenue growth will slow in the
coming years, as expanding capacity and competition
from low-cost carriers suppresses yield growth
• Delta recently abandoned its fuel hedging program,
which could hurt future profitability due to our
expectations for rising oil prices
 VALUATION
Our revenue growth assumptions are based on the
analysis detailed throughout previous sections of this
report. Our segment-specific assumptions result in annual
revenue growth of 2.5% in 2017, 3.6% in 2018 and 2019,
3.4% in 2020, and 3.1% in 2021.
We project fuel prices based on our oil price expectations.
We believe that oil prices will rise from current prices of
roughly $49 to roughly $57 per barrel by 2021. Our model
assumes that growth in fuel costs will track growth in
underlying oil prices, which we assume increase linearly
from current levels to $57 per barrel by 2021.
Remaining operating expense items are forecasted based
on historical levels (% of sales method). Analysis of
historical financial statements indicates that these line
items tend to vary with sales levels.
Our model assumes that the company will grow its
dividend by 5% annually throughout the forecast horizon.
In addition, we expect that company to repurchase $1.25
billion worth of shares each year from 2017 through 2021,
which is in-line with management’s repurchase
expectations. The previously disclosed dividend and
repurchase assumptions result in a total payout ratio
between 51-53% throughout the forecast horizon.
Our revenue projections are slightly below consensus
revenue estimates, which is reasonable given our
expectations for lower-than-expected yield growth over
the forecast horizon. Our EPS projections also fall below
analyst consensus estimates, partially because of our less
aggressive repurchase assumptions.
We forecast capital expenditures based on management’s
guidance of normal capex of roughly $3.5 billion annually.
These capex assumptions are in-line with analyst
consensus capex assumptions throughout the forecast
horizon.
Delta’s cost of debt is estimated using the YTM of a Delta
corporate bond with a modified duration of six years, a
similar timeframe as our five-year forecast horizon.
We estimate the firm’s cost of equity using the CAPM. We
use the current 30-year treasury rate of 2.80% as a proxy
for the risk-free rate. Our model assumes a beta of 1.252,
which is the firm’s five-year weekly beta. We also assume
a market risk premium of 4.8%.
Page 12
Our DCF model yields a target price of $55.97 based on
these assumptions. Relative valuation yields a target price
of $52.65 based on competitor P/E multiples and our EPS
estimates. We believe that the DCF model and relative
valuation are the most appropriate measure of value for
the firm. However, our DDM also yielded a similar target
price of $52.31.
Our final target price of $52-56 is below the analyst
consensus target price of $63.29. Our target price is below
analyst estimates mainly because of our less optimistic
outlook for unit revenue growth, as well as our
incorporation of rising oil prices throughout the forecast
horizon.
KEYS TO MONITOR
Moving forward, the company’s ability to capture
passenger yield will be a key determinant for the firm’s
intrinsic value. We believe that the market is currently
overly optimistic about the firm’s unit revenue and
expenses in the future, which lead to our expectations for
lower-than-street profitability. The discrepancy is
particularly strong towards the end of the forecast
horizon. Our thesis may be proven wrong if the firm is able
to significantly differentiate its product offerings and avoid
intense price competition. However, we believe that this
outcome is unlikely.
Our recommendation is also based on expectations for
rising jet fuel prices and compressed industry profitability.
A lack of oil price appreciation or a significant decline in oil
prices would be detrimental to our investment thesis.
REFERENCES
1. DAL 2016 10-K
2. Federal Aviation Administration: Aerospace Forecast
2017-2037
3. DAL Q3 2017 Earnings Call
4. The Wall Street Journal: “New Fares and Fees Seen
Lifting Airline Revenues” (2017)
5. The Wall Street Journal: “Delta Airlines Announces
September Profit” (2017)
6. The Wall Street Journal: “Delta Will Take Delivery of
Bombardier Jets” (2017)
7. The Wall Street Journal: “Airline Profits Reach Record
Highs before 2017 Descent” (2016)
8. PwC: 2017 Commercial Aviation Trends
9. AT Kearney: Low Cost Air Travel Enters the Next Stage
10. The Wall Street Journal: “Airlines Pull Back on
Hedging Costs” (2016)
11. DAL Press Release: “Delta Achieves Third
Investment Grade Credit Rating” (2017)
12. Oliver Wyman: Airline Economic Analysis
(2016/2017)
13. Bloomberg
14. Statista
15. U.S. Bureau of Economic Analysis
16. U.S. Bureau of Labor Statistics
17. Nasdaq
18. IHS Markit: “Monroe Energy Case Study”

IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.

Page 13
Delta Airlines, Inc.
Revenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Revenue Projections
Passenger 34,954 34,782 33,777 34,282 35,318 36,382 37,478 38,607
Cargo 934 813 668 635 603 573 544 517
Other 4,474 5,109 5,194 5,713 6,170 6,664 7,064 7,347
Total revenue 40,362 40,704 39,639 40,630 42,092 43,619 45,086 46,471

YoY Growth
Total passenger revenue 6.11% -0.49% -2.89% 1.50% 3.02% 3.01% 3.01% 3.01%
Cargo revenue -0.32% -12.96% -17.84% -5.00% -5.00% -5.00% -5.00% -5.00%
Other operating revenue 14.89% 14.19% 1.66% 10.00% 8.00% 8.00% 6.00% 4.00%
Total revenue 6.85% 0.85% -2.62% 2.50% 3.60% 3.63% 3.36% 3.07%

Passenger Revenue Projections

Available seat miles 239,676 246,764 251,867 254,386 260,745 267,264 273,946 280,794
Load factor 84.67% 84.95% 84.61% 84.60% 84.61% 84.61% 84.61% 84.61%
Revenue passenger miles 202,925 209,625 213,098 215,210 220,610 226,125 231,778 237,573
Passenger mile yield $0.1723 $0.1659 $0.1585 $0.1593 $0.1601 $0.1609 $0.1617 $0.1625
Total passenger revenue 34,954 34,782 33,777 34,282 35,318 36,382 37,478 38,607

YoY Growth
Available seat miles 2.98% 2.96% 2.07% 1.00% 2.50% 2.50% 2.50% 2.50%
Load factor 1.06% 0.33% -0.40% -0.01% 0.01% 0.00% 0.00% 0.00%
Revenue passenger miles 4.07% 3.30% 1.66% 0.99% 2.51% 2.50% 2.50% 2.50%
Passenger mile yield 1.96% -3.67% -4.47% 0.50% 0.50% 0.50% 0.50% 0.50%
Total passenger revenue 6.11% -0.49% -2.89% 1.50% 3.02% 3.01% 3.01% 3.01%

Segment Percentage of Total Revenue

Total passenger revenue 86.6% 85.5% 85.2% 84.4% 83.9% 83.4% 83.1% 83.1%
Cargo revenue 2.3% 2.0% 1.7% 1.6% 1.4% 1.3% 1.2% 1.1%
Other operating revenue 11.1% 12.6% 13.1% 14.1% 14.7% 15.3% 15.7% 15.8%
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Delta Airlines, Inc.
Income Statement ($mm)

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Total operating revenue 40,362 40,704 39,639 40,630 42,092 43,619 45,086 46,471
Salaries & related costs 8,120 8,776 10,034 10,285 10,655 11,041 11,413 11,763
Aircraft fuel & related taxes 11,668 6,544 5,133 6,774 6,884 7,291 7,709 8,141
Regional carriers expense 5,237 4,241 4,311 4,326 4,482 4,644 4,801 4,948
Contracted services 1,749 1,848 1,991 2,041 2,114 2,191 2,265 2,334
Depreciation & amortization 1,771 1,835 1,902 1,937 2,063 2,179 2,285 2,344
Aircraft maintenance materials & outside repairs 1,828 1,848 1,823 1,869 1,936 2,006 2,074 2,137
Passenger commissions & other selling expenses 1,700 1,672 1,710 1,753 1,816 1,882 1,945 2,005
Landing fees & other rents 1,442 1,493 1,490 1,527 1,582 1,640 1,695 1,747
Profit sharing 1,085 1,490 1,115 1,143 1,184 1,227 1,268 1,307
Passenger service 810 872 907 900 932 966 999 1,029
Aircraft rent 233 250 285 292 303 314 324 334
Restructuring & other items 716 35 - - - - - -
Other operating expense 1,797 1,998 1,986 2,015 2,087 2,163 2,236 2,305
Operating income (loss) 2,206 7,802 6,952 5,769 6,053 6,076 6,073 6,077
Interest expense, net 650 481 388 415 424 432 434 437
Amortization of debt discount, net - - - - - - - -
Loss on extinguishment of debt 268 - - - - - - -
Miscellaneous, net 216 164 (72) - - - - -
Income (loss) before income taxes 1,072 7,157 6,636 5,353 5,629 5,644 5,639 5,640
Income tax provision (benefit) 413 2,631 2,263 1,825 1,920 1,925 1,923 1,923
Net income (loss) 659 4,526 4,373 3,528 3,710 3,719 3,716 3,716

Year end shares outstanding - basic 825 779 731 707 686 666 648 632
Net earnings (loss) per share - basic $0.80 $5.81 $5.98 $4.99 $5.41 $5.58 $5.73 $5.88
Dividends per share $0.30 $0.46 $0.70 $0.73 $0.77 $0.81 $0.85 $0.89
Delta Airlines, Inc.
Balance Sheet ($mm)

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Cash & cash equivalents 2,088 1,972 2,762 2,878 3,291 3,822 4,849 5,783
Short-term investments 1,217 1,465 487 499 517 536 554 571
Restricted cash, cash equivalents & short-term investments - - - - - - - -
Accounts receivable, net 2,297 2,020 2,064 2,148 2,225 2,306 2,384 2,457
Hedge margin receivable 925 119 - - - - - -
Fuel inventory 534 379 519 483 500 518 536 552
Expendable parts & supplies inventories, net 318 318 372 340 352 365 377 388
Hedge derivatives asset 1,078 1,987 393 - - - - -
Deferred income taxes, net 3,275 - - - - - - -
Prepaid expenses & other current assets 733 796 854 835 865 896 927 955
Total current assets 12,465 9,056 7,451 7,182 7,750 8,443 9,625 10,706
Property & equipment, net 21,929 23,039 24,375 25,958 27,415 28,756 29,490 30,166
Goodwill 9,794 9,794 9,794 9,794 9,794 9,794 9,794 9,794
Indentifiable intangibles, net 4,603 4,861 4,844 4,824 4,804 4,784 4,764 4,744
Deferred income taxes, net 4,320 4,956 3,064 2,421 1,779 1,136 493 -
Other noncurrent assets 1,010 1,428 1,733 1,406 1,457 1,510 1,560 1,608
Total assets 54,121 53,134 51,261 51,585 52,998 54,422 55,727 57,018

Current maturities of long-term debt & capital leases 1,216 1,563 1,131 1,173 1,197 1,218 1,225 1,234
Air traffic liability 4,296 4,503 4,626 4,742 4,912 5,090 5,262 5,423
Accounts payable 2,622 2,743 2,572 2,636 2,731 2,830 2,925 3,015
Accrued salaries & related benefits 2,266 3,195 2,924 2,997 3,105 3,218 3,326 3,428
Hedge derivatives liability 2,772 2,581 688 - - - - -
Frequent flyer deferred revenue 1,580 1,635 1,648 1,689 1,750 1,813 1,874 1,932
Taxes payable - - - - - - - -
Fuel card obligation - - - - - - - -
Other accrued liabilities 2,127 1,306 1,650 1,691 1,752 1,816 1,877 1,934
Total current liabilities 16,879 17,526 15,239 14,928 15,447 15,986 16,489 16,967
Long-term debt & capital leases 8,561 6,766 6,201 6,335 6,465 6,581 6,617 6,663
Pension, postretirement & related benefits 15,138 13,855 13,378 12,178 10,978 9,778 8,578 7,378
Frequent flyer deferred revenue 2,602 2,246 2,278 2,288 2,371 2,457 2,539 2,617
Deferred income taxes, net - - - - - - - -
Other noncurrent liabilities 2,128 1,891 1,878 1,906 1,975 2,046 2,115 2,180
Total noncurrent liabilities 28,429 24,758 23,735 22,707 21,788 20,862 19,850 18,839
Common Stock 12,981 10,875 12,294 12,301 12,309 12,316 12,324 12,331
Retained earnings (accumulated deficit) 3,456 7,623 7,903 10,913 14,096 17,278 20,446 23,600
Accumulated other comprehensive income (loss) (7,311) (7,275) (7,636) (7,636) (7,636) (7,636) (7,636) (7,636)
Treasury stock, at cost (313) (373) (274) (1,524) (2,774) (4,024) (5,274) (6,524)
Total stockholders' equity (deficit) 8,813 10,850 12,287 14,055 15,995 17,935 19,859 21,771
Total liatilitries and stockholders' equity 54,121 53,134 51,261 51,691 53,231 54,782 56,198 57,577
Delta Airlines, Inc.
Cash Flow Statement ($mm)

Fiscal Years Ending Dec. 31 2012 2013 2014 2015 2016

Net income (loss) 1,009 10,540 659 4,526 4,373
Depreciation & amortization 1,565 1,658 1,771 1,835 1,902
Amortization of debt discount (premium), net 193 154 59 - -
Fuel hedge derivative instruments 209 114 - - -
Hedge derivative contracts - - 2,186 (1,366) (342)
Deferred income taxes 17 7,991 414 2,581 2,223
Pension, postretirement & postemployment expense in excess of (less than) payments 208 624 (723) (1,013) (717)
Equity-based compensation expense 54 - - - -
Restructuring & other items 184 285 758 35 -
Loss (gain) on extinguishment of debt 56 - 268 22 -
Equity investment loss (earnings) - - 106 (35) (160)
SkyMiles used pursuant to advance purchase under American Express Agreements 333 333 - - -
Receivables 116 90 (302) (56) (147)
Restricted cash & cash equivalents 51 231 62 7 (11)
Fuel inventory 451 87 172 155 (140)
Hedge margin - - (922) 806 81
Prepaid expenses & other current assets 134 28 58 (102) (26)
Air traffic liability 216 426 174 207 123
Frequent flyer deferred revenue 115 121 (238) (301) 45
Profit sharing - - - 734 (383)
Accounts payable & accrued liabilities 899 213 228 (201) 285
Other assets & liabilities 66 36 - - -
Other operating activities, net 34 185 217 93 99
Net cash flows from operating activities 2,476 4,504 4,947 7,927 7,205

Property & equipment additions - flight equipment, including advance payments (1,196) (2,117) (1,662) (2,223) (2,617)
Property & equipment additions - ground property & equipment, including technology (772) (451) (587) (722) (774)
Purchase of short-term investments - - - - (1,707)
Purchase of Virgin Atlantic shares - (360) - (500) -
Purchase of investments (958) (959) (1,795) (998) -
Redemption of investments 1,019 1,117 1,533 739 -
Redemption of short-term investments - - - - 2,686
Acquisition of London-Heathrow slots - - - (276) -
Proceeds for sales of E190 aircraft - - - - 226
Other investing activities, net (55) 14 48 25 31
Net cash flows from investing activities (1,962) (2,756) (2,463) (3,955) (2,155)

Payments on long-term debt & capital lease obligations (2,864) (1,461) (2,928) (2,558) (1,709)
Repurchase of common stock - (250) (1,100) (2,200) (2,601)
Cash dividends - (102) (251) (359) (509)
Fuel card obligation 137 147 - (340) 211
Payments on hedge derivative contracts - - - (71) (451)
Proceeds from hedge derivative contracts - - - 429 291
Proceeds from long-term obligations 1,965 268 1,020 1,038 450
Debt issuance costs (41) - - - -
Other financing activities, net 48 78 19 (27) 58
Net cash flows from financing activities (755) (1,320) (3,240) (4,088) (4,260)

Net increase (decrease) in cash & cash equivalents (241) 428 (756) (116) 790

Cash & cash equivalents at beginning of year 2,657 2,416 2,844 2,088 1,972
Cash & cash equivalents at end of year 2,416 2,844 2,088 1,972 2,762
Delta Airlines, Inc.
Forecasted Cash Flow Statement ($mm)

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E

Net income 3,528 3,710 3,719 3,716 3,716
Depreciation & amortization 1,937 2,063 2,179 2,285 2,344
Short-term investments (12) (18) (19) (18) (17)
Restricted cash, cash equivalents & short-term investments - - - - -
Accounts receivable, net (84) (77) (81) (78) (73)
Hedge margin receivable - - - - -
Fuel inventory 36 (17) (18) (17) (16)
Expendable parts & supplies inventories, net 32 (12) (13) (12) (12)
Hedge derivatives asset 393 - - - -
Deferred income taxes, net - - - - -
Prepaid expenses & other current assets 19 (30) (31) (30) (28)
Air traffic liability 116 171 178 171 162
Accounts payable 64 95 99 95 90
Accrued salaries & related benefits 73 108 113 108 102
Hedge derivatives liability (688) - - - -
Frequent flyer deferred revenue 52 143 150 144 136
Taxes payable - - - - -
Fuel card obligation - - - - -
Other accrued liabilities 41 61 64 61 58
Deferred tax assets, net 643 643 643 643 493
Net cash from operating activities 6,150 6,838 6,982 7,068 6,954

Capital expenditures (3,500) (3,500) (3,500) (3,000) (3,000)

Other noncurrent assets 327 (51) (53) (51) (48)
Net cash from investing activities (3,173) (3,551) (3,553) (3,051) (3,048)

Current maturities of long-term debt & capital leases 42 24 22 7 9

Long-term debt & capital leases 134 130 116 36 46
Pension, postretirement & related benefits (1,200) (1,200) (1,200) (1,200) (1,200)
Other noncurrent liabilities 28 69 72 69 65
ESOP exercises 7 7 7 7 7
Share repurchases (1,250) (1,250) (1,250) (1,250) (1,250)
Dividends paid (623) (654) (665) (659) (650)
Net cash from financing activities (2,862) (2,874) (2,899) (2,990) (2,972)

Net change in cash 116 413 531 1,027 934

Beginning cash 2,762 2,878 3,291 3,822 4,849

Ending cash 2,878 3,291 3,822 4,849 5,783
Delta Airlines, Inc.
Common Size Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Total operating revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Salaries & related costs 20.12% 21.56% 25.31% 25.31% 25.31% 25.31% 25.31% 25.31%
Aircraft fuel & related taxes 28.91% 16.08% 12.95% 16.67% 16.36% 16.71% 17.10% 17.52%
Regional carriers expense 12.98% 10.42% 10.88% 10.65% 10.65% 10.65% 10.65% 10.65%
Contracted services 4.33% 4.54% 5.02% 5.02% 5.02% 5.02% 5.02% 5.02%
Depreciation & amortization 4.39% 4.51% 4.80% 4.77% 4.90% 5.00% 5.07% 5.04%
Aircraft maintenance materials & outside repairs 4.53% 4.54% 4.60% 4.60% 4.60% 4.60% 4.60% 4.60%
Passenger commissions & other selling expenses 4.21% 4.11% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31%
Landing fees & other rents 3.57% 3.67% 3.76% 3.76% 3.76% 3.76% 3.76% 3.76%
Profit sharing 2.69% 3.66% 2.81% 2.81% 2.81% 2.81% 2.81% 2.81%
Passenger service 2.01% 2.14% 2.29% 2.22% 2.22% 2.22% 2.22% 2.22%
Aircraft rent 0.58% 0.61% 0.72% 0.72% 0.72% 0.72% 0.72% 0.72%
Restructuring & other items 1.77% 0.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other operating expense 4.45% 4.91% 5.01% 4.96% 4.96% 4.96% 4.96% 4.96%
Operating income (loss) 5.47% 19.17% 17.54% 14.20% 14.38% 13.93% 13.47% 13.08%
Interest expense, net 1.61% 1.18% 0.98% 1.02% 1.01% 0.99% 0.96% 0.94%
Amortization of debt discount, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Gain (loss) on extinguishment of debt 0.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Miscellaneous, net 0.54% 0.40% -0.18% 0.00% 0.00% 0.00% 0.00% 0.00%
Income (loss) before income taxes 2.66% 17.58% 16.74% 13.18% 13.37% 12.94% 12.51% 12.14%
Income tax provision (benefit) 1.02% 6.46% 5.71% 4.49% 4.56% 4.41% 4.27% 4.14%
Net income (loss) 1.63% 11.12% 11.03% 8.68% 8.81% 8.53% 8.24% 8.00%
Delta Airlines, Inc.
Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Cash & cash equivalents 5.17% 4.84% 6.97% 7.08% 7.82% 8.76% 10.75% 12.44%
Short-term investments 3.02% 3.60% 1.23% 1.23% 1.23% 1.23% 1.23% 1.23%
Restricted cash, cash equivalents & short-term investments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Accounts receivable, net 5.69% 4.96% 5.21% 5.29% 5.29% 5.29% 5.29% 5.29%
Hedge margin receivable 2.29% 0.29% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Fuel inventory 1.32% 0.93% 1.31% 1.19% 1.19% 1.19% 1.19% 1.19%
Expendable parts & supplies inventories, net 0.79% 0.78% 0.94% 0.84% 0.84% 0.84% 0.84% 0.84%
Hedge derivatives asset 2.67% 4.88% 0.99% 0.00% 0.00% 0.00% 0.00% 0.00%
Deferred income taxes, net 8.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Prepaid expenses & other current assets 1.82% 1.96% 2.15% 2.06% 2.06% 2.06% 2.06% 2.06%
Total current assets 30.88% 22.25% 18.80% 17.68% 18.41% 19.36% 21.35% 23.04%
Property & equipment, net 54.33% 56.60% 61.49% 63.89% 65.13% 65.92% 65.41% 64.91%
Goodwill 24.27% 24.06% 24.71% 24.11% 23.27% 22.45% 21.72% 21.08%
Indentifiable intangibles, net 11.40% 11.94% 12.22% 11.87% 11.41% 10.97% 10.57% 10.21%
Deferred income taxes, net 10.70% 12.18% 7.73% 5.96% 4.23% 2.60% 1.09% 0.00%
Other noncurrent assets 2.50% 3.51% 4.37% 3.46% 3.46% 3.46% 3.46% 3.46%
Total assets 134.09% 130.54% 129.32% 126.96% 125.91% 124.77% 123.60% 122.70%

Current maturities of long-term debt & capital leases 3.01% 3.84% 2.85% 2.89% 2.84% 2.79% 2.72% 2.65%
Air traffic liability 10.64% 11.06% 11.67% 11.67% 11.67% 11.67% 11.67% 11.67%
Accounts payable 6.50% 6.74% 6.49% 6.49% 6.49% 6.49% 6.49% 6.49%
Accrued salaries & related benefits 5.61% 7.85% 7.38% 7.38% 7.38% 7.38% 7.38% 7.38%
Hedge derivatives liability 6.87% 6.34% 1.74% 0.00% 0.00% 0.00% 0.00% 0.00%
Frequent flyer deferred revenue 3.91% 4.02% 4.16% 4.16% 4.16% 4.16% 4.16% 4.16%
Taxes payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Fuel card obligation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other accrued liabilities 5.27% 3.21% 4.16% 4.16% 4.16% 4.16% 4.16% 4.16%
Total current liabilities 41.82% 43.06% 38.44% 36.74% 36.70% 36.65% 36.57% 36.51%
Long-term debt & capital leases 21.21% 16.62% 15.64% 15.59% 15.36% 15.09% 14.68% 14.34%
Pension, postretirement & related benefits 37.51% 34.04% 33.75% 29.97% 26.08% 22.42% 19.03% 15.88%
Frequent flyer deferred revenue 6.45% 5.52% 5.75% 5.63% 5.63% 5.63% 5.63% 5.63%
Deferred income taxes, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other noncurrent liabilities 5.27% 4.65% 4.74% 4.69% 4.69% 4.69% 4.69% 4.69%
Total noncurrent liabilities 70.44% 60.82% 59.88% 55.89% 51.76% 47.83% 44.03% 40.54%
Common Stock 32.16% 26.72% 31.01% 30.28% 29.24% 28.24% 27.33% 26.54%
Retained earnings (accumulated deficit) 8.56% 18.73% 19.94% 26.86% 33.49% 39.61% 45.35% 50.79%
Accumulated other comprehensive income (loss) -18.11% -17.87% -19.26% -18.79% -18.14% -17.51% -16.94% -16.43%
Treasury stock, at cost -0.78% -0.92% -0.69% -3.75% -6.59% -9.23% -11.70% -14.04%
Total stockholders' equity (deficit) 21.83% 26.66% 31.00% 34.59% 38.00% 41.12% 44.05% 46.85%
Total liatilitries and stockholders' equity 134.09% 130.54% 129.32% 127.22% 126.46% 125.59% 124.65% 123.90%
Delta Airlines, Inc.
Value Driver Estimation

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
EBITA
Sales 40,362 40,704 39,639 40,630 42,092 43,619 45,086 46,471
Salaries & related costs 8,120 8,776 10,034 10,285 10,655 11,041 11,413 11,763
Aircraft fuel & related taxes 11,668 6,544 5,133 6,774 6,884 7,291 7,709 8,141
Regional carriers expense 5,237 4,241 4,311 4,326 4,482 4,644 4,801 4,948
Contracted services 1,749 1,848 1,991 2,041 2,114 2,191 2,265 2,334
Depreciation & amortization 1,771 1,835 1,902 1,937 2,063 2,179 2,285 2,344
Aircraft maintenance materials & outside repairs 1,828 1,848 1,823 1,869 1,936 2,006 2,074 2,137
Passenger commissions & other selling expenses 1,700 1,672 1,710 1,753 1,816 1,882 1,945 2,005
Landing fees & other rents 1,442 1,493 1,490 1,527 1,582 1,640 1,695 1,747
Profit sharing 1,085 1,490 1,115 1,143 1,184 1,227 1,268 1,307
Passenger service 810 872 907 900 932 966 999 1,029
Aircraft rent 233 250 285 292 303 314 324 334
Other operating expense 1,797 1,998 1,986 2,015 2,087 2,163 2,236 2,305
Implied interest on operating leases 348 350 353 375 397 416 427 436
EBITA 2,574 7,487 6,599 5,393 5,657 5,660 5,646 5,640

Adjusted Taxes
Federal tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
State tax rate 2.0% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%
Decrease in valuation allowance -2.4% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Foreign tax rate differential 0.0% 0.0% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0%
Income tax allocation 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other 3.9% 0.2% -0.7% -0.7% -0.7% -0.7% -0.7% -0.7%
Marginal Tax Rate 38.5% 36.8% 34.1% 34.1% 34.1% 34.1% 34.1% 34.1%

Income tax expense 413 2,631 2,263 1,825 1,920 1,925 1,923 1,923
Plus Tax shield on restructuring expense 276 13 - - - - - -
Plus Tax shield on interest expense 250 177 132 142 145 147 148 149
Plus Tax shield on amortization of debt discount - - - - - - - -
Plus Tax shield on debt extinguishment loss 103 - - - - - - -
Plus Tax shield on miscellaneous expenses 83 60 (25) - - - - -
Plus Tax on lease interest 134 129 120 128 135 142 145 149
Total Adjusted Taxes 1,259 3,010 2,491 2,095 2,199 2,214 2,216 2,221
Plus Change in Deferred Taxes (867) 2,639 1,892 643 643 643 643 493
NOPLAT 447 7,116 6,000 3,941 4,100 4,089 4,073 3,913

Net Invested Capital

Normal cash (max of 5% of sales) 2,018 1,972 1,982 2,032 2,105 2,181 2,254 2,324
Plus Restricted cash, cash equivalents & short-term investments - - - - - - - -
Plus Accounts receivable, net 2,297 2,020 2,064 2,148 2,225 2,306 2,384 2,457
Plus Fuel inventory 534 379 519 483 500 518 536 552
Plus Expendable parts & supplies inventories, net 318 318 372 340 352 365 377 388
Plus Prepaid expenses & other current assets 733 796 854 835 865 896 927 955
Minus Air traffic liability 4,296 4,503 4,626 4,742 4,912 5,090 5,262 5,423
Minus Accounts payable 2,622 2,743 2,572 2,636 2,731 2,830 2,925 3,015
Minus Accrued salaries & related benefits 2,266 3,195 2,924 2,997 3,105 3,218 3,326 3,428
Minus Frequent flyer deferred revenue 1,580 1,635 1,648 1,689 1,750 1,813 1,874 1,932
Minus Taxes payable - - - - - - - -
Minus Fuel card obligation - - - - - - - -
Minus Other accrued liabilities 2,127 1,306 1,650 1,691 1,752 1,816 1,877 1,934
Net Operating Working Capital (6,991) (7,897) (7,629) (7,919) (8,204) (8,501) (8,787) (9,057)
Plus Net PP&E 21,929 23,039 24,375 25,958 27,415 28,756 29,490 30,166
Plus Identifiable intangibles 4,603 4,861 4,844 4,824 4,804 4,784 4,764 4,744
Plus Other noncurrent assets 1,010 1,428 1,733 1,406 1,457 1,510 1,560 1,608
Plus Capitalized PV of operating leases 10,689 10,736 10,814 11,516 12,163 12,758 13,084 13,384
Minus Frequent flyer deferred revenue 2,602 2,246 2,278 2,288 2,371 2,457 2,539 2,617
Minus Other noncurrent liabilities 2,128 1,891 1,878 1,906 1,975 2,046 2,115 2,180
Net Invested Capital 26,510 28,030 29,981 31,591 33,289 34,803 35,456 36,048

ROIC
NOPLAT 447 7,116 6,000 3,941 4,100 4,089 4,073 3,913
Beginning IC 26,550 26,510 28,030 29,981 31,591 33,289 34,803 35,456
ROIC 1.7% 26.8% 21.4% 13.1% 13.0% 12.3% 11.7% 11.0%

FCF
NOPLAT 447 7,116 6,000 3,941 4,100 4,089 4,073 3,913
Minus Change in IC (40) 1,520 1,952 1,609 1,698 1,514 654 591
FCF 487 5,596 4,049 2,331 2,402 2,575 3,419 3,321

EP
Beginning IC 26,550 26,510 28,030 29,981 31,591 33,289 34,803 35,456
ROIC 1.7% 26.8% 21.4% 13.1% 13.0% 12.3% 11.7% 11.0%
WACC 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
EP (1,326) 5,346 4,129 1,939 1,991 1,866 1,749 1,545
Delta Airlines, Inc.
Weighted Average Cost of Capital (WACC) Estimation

Pre-tax cost of debt 3.26%

Marginal tax rate 34.10%
After-tax of debt 2.15%
Current maturities of long-term debt & capital leases 1,131,000,000
Long-term debt & capital leases 6,201,000,000
PV of operating leases 10,814,297,787
Market value of debt 18,146,297,787

30-year treasury rate 2.80%

Beta 1.25
Market risk premium 4.80%
Cost of equity 8.81%
Shares outstanding 730,737,709
Share price $52.76
Market value of equity 38,553,721,527

Market value of debt and equity 56,700,019,314

Debt/total market value 32.00%
Equity/total market value 68.00%
WACC 6.68%
Delta Airlines, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:
CV Growth 3.00%
CV ROIC 11.04%
WACC 6.68%
Cost of Equity 8.81%

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E

DCF Model
NOPLAT 3,941 4,100 4,089 4,073
3,913
Beginning IC 29,981 31,591 33,289 34,803
35,456
Ending IC 31,591 33,289 34,803 35,456
36,048
Change in IC 1,609 1,698 1,514 654
591
FCF 2,331 2,402 2,575 3,419
3,321
Terminal Value 77,467
PV of FCF 2,185 2,111 2,121 2,640 59,817

Value of Operating Assets 68,874

Plus Excess Cash 780

Plus ST investments 487
Plus Hedge derivatives asset 393
Minus Total debt and capital leases 7,332
Minus Hedge derivatives liability 688
Minus Pension, postretirement & related benefits 13,378
Minus PV of operating leases 10,814
Minus PV of employee stock options 76
Value of equity 38,246
Shares outstanding 731
Intrinsic value (12/31/16) $52.34
Intrinsic value today $55.97

EP Model
NOPLAT 3,941 4,100 4,089 4,073 3,913
Beginning IC 29,981 31,591 33,289 34,803 35,456
ROIC-WACC 6.5% 6.3% 5.6% 5.0% 4.4%
EP 1,939 1,991 1,866 1,749 1,545
Terminal Value 42,011
PV of EP 1,817 1,749 1,537 1,350 32,439

Total PV of EP 38,893
PlusBeginning IC 29,981
Value of Operating Assets 68,874

Plus Excess Cash 780

Plus ST investments 487
Plus Hedge derivatives asset 393
Minus Total debt and capital leases 7,332
Minus Hedge derivatives liability 688
Minus Pension, postretirement & related benefits 13,378
Minus PV of operating leases 10,814
Minus PV of employee stock options 76
Value of equity 38,246
Shares outstanding 731
Intrinsic value (12//31/16) $52.34
Intrinsic value today $55.97
Delta Airlines, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E

EPS $4.99 $5.41 $5.58 $5.73 $5.88

Key Assumptions
CV growth 3.00%
CV ROE 10.00%
Cost of Equity 8.81%

Future Cash Flows

P/E Multiple (CV Year) 12.05
EPS (CV Year) $5.88
Future Stock Price $70.85
Dividends Per Share $0.73 $0.77 $0.81 $0.85 $0.89
Future Cash Flows $0.73 $0.77 $0.81 $0.85 $71.74

Discounted Cash Flows $0.67 $0.65 $0.63 $0.60 $47.03

Intrinsic Value (12/31/17) $48.91

Delta Airlines, Inc.
Relative Valuation Models
EPS EPS SPS SPS
Ticker Company Price 2017E 2018E P/E 17 P/E 18 2017E 2018E P/S 17
AAL American Airlines Group $50.73 $4.65 $5.16 10.9 9.8 85.8 89.0 0.59
UAL United Continental Holdings $64.47 $6.42 $7.10 10.0 9.1 122.7 127.8 0.53
ALK Alaska Air Group $80.84 $7.54 $7.86 10.7 10.3 64.7 70.3 1.25
HA Hawaiian Holdings $37.95 $5.52 $4.54 6.9 8.4 50.2 51.8 0.76
Average 10.6 9.7 0.6

DAL Delta Airlines, Inc. $52.76 $4.99 $5.41 10.6 9.8 57.4 61.4 0.9

Implied Value:
Relative P/E (EPS17) $ 52.65
Relative P/E (EPS18) $ 52.63
Relative P/S (SPS17) $ 38.31
Prelative P/S (SPS18) $ 36.94
Delta Airlines, Inc.
Key Management Ratios

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Liquidity Ratios
Current Ratio (CA/CL) 0.74 0.52 0.49 0.48 0.50 0.53 0.58 0.63
Quick Ratio (Cash & Receivables/CL) 0.26 0.23 0.32 0.34 0.36 0.38 0.44 0.49
Cash Ratio (Cash/CL) 0.12 0.11 0.18 0.19 0.21 0.24 0.29 0.34
Operating Cash Flow Ratio (OCF/CL) 0.29 0.45 0.47 0.41 0.44 0.44 0.43 0.41

Activity or Asset-Management Ratios

Receivables Turnover (Sales/Avg Receivables) 20.67 18.86 19.41 19.29 19.25 19.25 19.23 19.20
Fixed Asset Turnover (Sales/Avg Net PP&E) 1.84 1.81 1.67 1.61 1.58 1.55 1.55 1.56
Total Asset Turnover (Sales/Avg Total Assets) 0.76 0.76 0.76 0.79 0.80 0.81 0.82 0.82

Financial Leverage Ratios

Debt to Total Assets (ST & LT Debt/Total Assets) 0.46 0.42 0.40 0.38 0.35 0.32 0.29 0.27
Debt to Equity (ST & LT Debt/Total Equity) 2.83 2.04 1.69 1.40 1.17 0.98 0.83 0.70
Interest Coverage (EBIT/Interest Expense) 2.65 15.88 18.10 13.89 14.28 14.08 14.00 13.91

Profitability Ratios
Operating Margin (Operating Income/Sales) 5.47% 19.17% 17.54% 14.20% 14.38% 13.93% 13.47% 13.08%
Net Profit Margin (NI/Sales) 1.63% 11.12% 11.03% 8.68% 8.81% 8.53% 8.24% 8.00%
ROE (NI/Avg Equity) 6.44% 46.04% 37.80% 26.78% 24.69% 21.92% 19.67% 17.85%
ROA (NI/Avg Assets) 1.24% 8.44% 8.38% 6.86% 7.09% 6.92% 6.75% 6.59%

Industry Ratios
PRASM ($c) 14.58 14.10 13.41 13.48 13.55 13.61 13.68 13.75
TRASM($c) 16.84 16.50 15.74 15.97 16.14 16.32 16.46 16.55
CASM ($c) 15.92 13.33 12.98 13.70 13.82 14.05 14.24 14.39
CASM Excluding Fuel ($c) 11.05 10.68 10.94 11.04 11.18 11.32 11.43 11.49
Fuel Expense Per ASM 4.87 2.65 2.04 2.66 2.64 2.73 2.81 2.90

Payout Policy Ratios

Dividend Payout Ratio 38.09% 7.93% 11.64% 14.67% 14.20% 14.45% 14.77% 15.12%
 Regional Carriers Expense as % of Sales Pretax Cost of Debt
55.97 8.00% 9.00% 10.65% 11.00% 12.00% 55.97 2.50% 3.00% 3.26% 3.50% 4.00%
Sales and Related Costs as % of Sales 23.00% 108.93 98.12 80.30 76.49 65.67 Cost of Equity 7.00% 115.69 108.65 105.22 102.20 96.27
24.00% 98.42 87.60 69.78 65.97 55.15 8.00% 79.64 75.38 73.27 71.40 67.67
25.31% 84.60 73.79 55.97 52.16 41.34 8.81% 60.56 57.50 55.97 54.60 51.87
26.00% 77.38 66.57 48.75 44.94 34.12 10.00% 41.20 39.15 38.12 37.19 35.31
27.00% 66.87 56.05 38.23 34.42 24.94 11.00% 29.68 28.12 27.34 26.64 25.21

Equity Risk Premium CV ROIC

55.97 0.04 0.045 0.048 0.05 0.055 55.97 9.00% 10.00% 11.04% 12.00% 13.00%
Beta 0.75 178.34 148.73 134.51 126.15 108.34 CV Growth 1.00% 37.65 38.52 39.25 39.82 40.31
1 113.84 93.94 84.25 78.51 66.21 2.00% 41.95 44.05 45.82 47.20 48.41
1.252 78.30 63.32 55.97 51.60 42.18 3.00% 48.58 52.59 55.97 58.60 60.91
1.5 56.15 44.07 38.12 34.57 26.88 4.00% 60.16 67.50 73.70 78.51 82.74
1.75 40.66 30.53 25.51 22.51 15.99 5.00% 85.56 100.20 112.56 122.16 130.61

55.97 55.97
2017 CapEx Assumption ($mm) -2500 60.55 WACC 5.00% 140.49
-3000 58.26 6.00% 78.74
-3500 55.97 6.68% 55.97
-4000 53.68 7.00% 47.85
-4500 51.39 8.00% 29.31

55.97
2017 Fuel Price Per Gallon ($) 1.40 79.48
1.50 67.72
1.60 55.97
1.70 44.22
1.80 32.47