Delta Airlines (Financial Analysis)
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Delta Airlines (Financial Analysis)

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Group term project for Financial Accounting (ACCT 201) class.

Group term project for Financial Accounting (ACCT 201) class.
Analysis of Delta Airlines'es financial statements and business overall.

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Delta Airlines (Financial Analysis) Presentation Transcript

  • 1. Ozyegin University Financial Accounting(ACCT 201) Group Project By: Nikolay Zvezdin (B.S. Banking and Finance), Nurbek Seiitkarim (B.S. Business Administration), Chingiz Chyntemirov (B.S. Banking and Finance), Erdi Gultekin (B.S. Computer Science).
  • 2. Content • • • • • • • • • • • • Company Overview Key Facts Historic Firsts Key Historic Facts (Aircraft changes, Bankruptcy, Reorganization, Failed Acquisitions, Coming Out From Bankruptcy) Recent News Industry Overview (Global Market, US Market) Business Model Horizontal Analysis Vertical Analysis Financial Analysis (Nowadays, Delta Vs. Industry) Conclusion Environmental Projects
  • 3. Company Overview • Delta Air Lines, Inc. • Founded as Delta Air Service in 1928 by B. R. Coad and Collett E. Woolman • Slogan: “Keep Climbing” • Headquarter in Atlanta, Georgia, USA • Traded as DAL on NYSE • Current CEO - Richard H. Anderson • Part of SkyTeam Alliance
  • 4. Key Facts • • • • • • • • • • Hubs: 11 Destinations Served: 330 (602 with partners) Countries Served: 65 (116 with partners) Daily flights: 5,800 Annual Passengers: More than 160 million Employees: Nearly 80,000 Liquidity: $5.1 billion (as of 9/30/2012) Annual Revenues (2012): $35.1 billion $3.6 billion merger with NWA WORLD’S LARGERST AIRLINE BY TRAFFIC!
  • 5. Historic Firsts 1924 •The Huff Daland Dusters founded (pre-Delta) 1928 •Merger of Huff Daland Dusters and Delta Airlines. •Renamed to Delta Air Service 1934 •Begins operations as Delta Airlines 1945 •Official corporate name become Delta Airlines, Inc. 1953 •Merger with Chicago and Southern Airlines 1966 •Delta founder C.E. Woolman dies. •Charles H. Dolson becomes CEO 1978 •The Airline Deregulation Act passes
  • 6. Historic Firsts 1979 •Celebration of 50th year service 1981 •Launch of Frequent Flyer Program 1987 •Merger with Western Airlines (4th largest in US history) 1991 •Merger with Pan American World Airways 2000 •Delta is becomes member of the SkyTeam alliance 2001 •U.S. Airspace closed for 2 days after terrorist attacks on September 11th 2006 •Delta declares bankruptcy •Richard H. Anderson becomes CEO
  • 7. Historic Firsts 2007 •Cooperation with US Helicopter 2008 •Delta and Northwest Airlines merge, creating an airline with major operations in every region of the world 2009 •Delta serves six continents with introduction of nonstop flights between Los Angeles and Sydney 2010 •Delta wins approval for first nonstop trans-Pacific service in three decades to Haneda Airport in central Tokyo 2011 •Delta awarded approval to create joint venture with Virgin Australia, greatly expanding options for customers traveling between the U.S. and Australia. 2012 •Delta launches major expansion at New York-LaGuardia Airport, building a new domestic hub at New York's preferred airport for business travelers 2013 •Delta completes $1.4 billion project to enhance and expand Terminal 4 at JFK, creating a state-of-the-art facility for Delta's customers
  • 8. Key Historic Facts (Aircraft changes) • In the early 2000s the company started to change its trijets(3 engine planes) to twinjets(2 engine planes) in order to cut fuel expenses. Now the company uses only twinjets except Boeing747 of Northwest Airlines.
  • 9. Key Historic Facts (Bankruptcy) • In 2004 to avoid bankruptcy Delta Air Lines made a restructuration called“The ClockWork Operation” which cut the workforce and added about 100 new flights from Atlanta. • Moreover, on 31 Jan. 2005 the company closed its hub in Dallas Fort Worth International Airport. • During the same year Delta sold its subdivision Atlantic Southeast Airlines to SkyWest for 425 million dollars. • However, on 14 Sep. 2005 for the first time in its history the company declared about its bankruptcy and had $20.5 billion in debts.
  • 10. Key Historic Facts (Reorganization) • On 22 Sep. 2005 Delta declared about a quick asset restructuration which would reduce the annual expenses to $3 billion by 2007. • Worker salaries were about to be cut at least by 9% and the company planned to fire about 7 to 9 thousand workers. • Reduced the internal flights by 20% and increase the number of profitable international flights by 25%. • On 9 Nov. 2006 Delta invited its 1000 stewards who had been fired earlier.
  • 11. Key Historic Facts (Failed Acquisitions) On 14 Nov. Wall On 10 Jan. 2007 On 15 Nov. 2006 US According to2007 Pardus US Airways Street Journal on 28 AirwaysCapital Group Management LP hedge Jan. 2007 US Airways declared the offer increased that it isof fund made an offer increased theAirDelta wishing to to offer by by 20% buy Lines uniting Delta $10.2 Air Lines for $8 billion. $1 billion more. billion. and United Airlines. It didn’t solve the On 31 Jan. 2007 Delta Despite the profitability problemsDelta However, that both companies creditors again rejected this offer! appearedthis offer. rejected after the rejected the offer. first offer.
  • 12. Key Historic Facts (Coming Out From Bankruptcy) On 25 Apr. 2007 the company`s plan of coming out from bankruptcy was approved by court. On 30 Apr. 2007 old shares of the company were cancelled, and on 3 may new shares appeared in NYSE. After quitting the bankruptcy Delta declared about a 50% increase of flights from LAX.
  • 13. Recent News • Delta Airlines and Alaska Airlines fight for the Seattle hub. • Delta Airlines seeks $5.9M loan to renovate call center. • Delta to recognize Top Employees at Annual Chairman's Club Gala. • Delta lowered its fuel costs that lead to big returns.
  • 14. Industry Overview (Global Market) • 2000 Airlines operating more than 23,000 aircrafts, providing services to over 3,700 airports. • In 2006 there were 28 million scheduled flight departures and carried over 3 billion passengers. • Growth of world air travel has averaged approximately 5% per year over the last 30 years. • Annual growth in air travel expected to double over the next 15 years. • IATA projects overall airline profits of $12.7 billion for 2013, with 3.13 billion passengers in total. The forecast is higher than the previous estimate of $10.6 billion.
  • 15. Industry Overview (US Market) • 100 certified passenger airlines operate over 11M flight departures per year. • There were 745M in 2006. • $160B in total revenues. • 545,000 employees and over 8,000 aircrafts operating 31,000 flights per day. • According to recent estimates, commercial aviation contributes 8% to the US GDP.
  • 16. Industry Overview • During the period of 2001-2011, 4 biggest airlines went bankrupt. They were: US Airways, United Airlines, Northwest Airlines, American Airlines, Delta Airlines. Stock Close Prices for the Period 2001-2012 60 50 40 30 20 10 0 US Airways Group, Inc. United Continental Holdings, Inc. AMR Corporation Delta Air Lines Inc.
  • 17. Industry Overview Industry Airline Revenue Growth (Adjusted for Inflation) Source: EIU/IATA Economic Briefing 2008
  • 18. Industry Overview Top 4 Airlines by Passenger Count in North America Rank Airline 2013 (YTD) 2012 2011 Fleet Destination s Alliance 1 Delta Airlines 138,768,505 164,571,529 163,838,348 719 330 SkyTeam 2 United Airlines 116,804,000 140,441,000 141,799,000 705 374 Star Alliance 3 American Airlines 91,153,375 107,806,578 106,013,737 608 239 Oneworld 4 US Airways 54,204,183 62,524,816 60,854,368 344 206 Star Alliance
  • 19. Business Model Network & Operations Market & Customers Partner Network Customer Relations Producers, Suppliers, Partners, Employees Resources Fuel Distribution Labour Airports Maintenance Planes Support Activities Logistics Operations Development Sales & Marketing Strategy IT Service Costs HR, R&D, Finance, Hubs, Fuel, etc. Service (CSR), Employees, Sales, PR Value Proposition Air Transportation Cargo Entertainment Food Skymilles Training & Consulting Advertising Margin (Revenue-Costs) $35.6 billion Creating Value Channels Delta.com Internet Phone Terminal Partner Airlines In-flight Service Customers Passengers Travel Agents E-commerce Advertisers Revenue Passengers, Entertainment, etc. $36.6 billion $1 billion Capturing Value
  • 20. Horizontal Analysis Changes in Income Statement over the period of 2010-2012 Item % Change over 3 years Total Operating Revenue 15.5% Cargo 16.7% Passenger Revenue 16.5% Total Operating Expense 16.8% Fuel Expense 33.7% Aircraft Rent -29.7% Interest Expense -16.2% Other Expenses -28.5% Tax Expenses Net Income 6.7% 70.2%
  • 21. Horizontal Analysis Changes in Balance Sheet over the period of 2010-2012 Asset % change Liability & Stockholders’ Equity % change Total Assets 3.2% Total Liabilities 10.4% Property & Equipment 2.0% Current Maturities of Long-Term Debt -21.5% Inventories 27.0% Long-Term Debt -15.9 Cash -16.5% Accounts Payable 33.9% Short-Term Investments 33.4% Other Accrued Liabilities 142.0% Accounts Receivable 16.3% Paid-in Capital 1.0% Prepaid Expenses 69.4% Total Stockholders’ Equity -137.6%
  • 22. Vertical Analysis Revenue (2012) Passenger Revenue 3% Cargo Expenses (2012) Fuel Salaries Contract Carrier Arrangements Maintenance and Repairs Passenger comissions Aircraft Rent Other Other 10% 25% 1% 4% 6% 87% 28% 20% 16%
  • 23. Vertical Analysis Assets 2.2% 5.4% 14.8% 3.8% 0.9% 4.4% 4% Cash 5% 46.5% Prepaid Expenses 25% Other Long-Term Debt Pension 36% Other Stockholders' Deficit Property & Equipment Goodwill Current Maturities of Long-Term Debt Accounts Paybale Accrued Salaries Inventory 22.0% 4% 26% Short-Term Investments Accounts Receivable Liabilities 32% 52% 16% Additional Paid-in Capital Accumulated Deficit Other
  • 24. Financial Analysis Delta Airlines, Inc. Income Statement Dec 31, 2010 Dec 31, 2011 Dec 31, 2012 Total Revenue Cost of Revenue Gross Profit 31,755,000 17,358,000 14,397,000 35,115,000 20,907,000 14,208,000 36,670,000 21,658,000 15,012,000 Operating Expenses SG&A Non Recurring Others Operating Income 10,219,000 450,000 1,511,000 2,217,000 10,468,000 242,000 1,523,000 1,975,000 10,820,000 452,000 1,565,000 2,175,000 (640,000) 1,577,000 969,000 608,000 15,000 202,000 (305,000) 1,670,000 901,000 769,000 (85,000) 786,000 (338,000) 1,837,000 812,000 1,025,000 16,000 891,000 593,000 854,000 Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Net Income From Continuing Operations Net Income 1,009,000
  • 25. Financial Analysis Delta Airlines, Inc. Balance Sheet Dec 31, 2010 Dec 31, 2011 Dec 31, 2012 Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Property Plant and Equipment Goodwill Intangible Assets Other Assets Total Assets Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Total Liabilities Stockholders’ Equity Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity 3,301,000 718,000 1,811,000 318,000 1,159,000 20,307,000 9,794,000 4,749,000 1,031,000 43,188,000 2,962,000 958,000 2,024,000 535,000 1,250,000 20,223,000 9,794,000 4,751,000 1,002,000 43,499,000 2,791,000 958,000 2,156,000 1,023,000 1,344,000 20,713,000 9,794,000 4,679,000 1,092,000 44,550,000 4,316,000 2,073,000 4,996,000 13,179,000 13,026,000 4,701,000 42,291,000 5,110,000 1,944,000 5,647,000 11,847,000 15,619,000 4,728,000 44,895,000 5,686,000 1,627,000 5,957,000 11,082,000 17,654,000 4,675,000 46,681,000 (9,252,000) (199,000) 13,926,000 (3,578,000) (8,398,000) (231,000) 13,999,000 (6,766,000) (7,389,000) (234,000) 14,069,000 (8,577,000)
  • 26. Financial Analysis Delta Airlines, Inc. Cash Flow Statement Dec 31, 2010 Dec 31, 2011 Dec 31, 2012 Net Income Operating Activities, Cash Flows Provided By or Used In Depreciation Adjustments To Net Income Changes In Accounts Receivables Changes In Liabilities Changes In Inventories Changes In Other Operating Activities Total Cash Flow From Operating Activities Investing Activities, Cash Flows Provided By or Used In Capital Expenditures Investments Other Cash flows from Investing Activities Total Cash Flows From Investing Activities Financing Activities, Cash Flows Provided By or Used In Net Borrowings Other Cash Flows from Financing Activities Total Cash Flows From Financing Activities Change In Cash and Cash Equivalents 593,000 854,000 1,009,000 1,727,000 234,000 (141,000) 403,000 (36,000) 52,000 2,832,000 1,716,000 107,000 (76,000) 559,000 (8,000) (318,000) 2,834,000 1,758,000 (439,000) (116,000) 1,000,000 (451,000) (285,000) 2,476,000 (1,342,000) (666,000) (18,000) (2,026,000) (1,254,000) (234,000) (10,000) (1,498,000) (1,968,000) 61,000 (55,000) (1,962,000) (2,592,000) 90,000 (2,521,000) (1,777,000) 269,000 (1,571,000) (899,000) 185,000 (755,000) (1,715,000) (235,000) (241,000)
  • 27. Financial Analysis • Around $2.5M come from operating activities each year. • Around $2M have been used in investing activities every fiscal year. • Each year around $1.75M have been used to pay borrowings which leaves $(241,000) in net cash account last year.
  • 28. Financial Analysis Short-term liquidity ratios 2010 2011 2012 Current ratio 0.64 0.61 0.62 Quick ratio 0.61 0.58 0.59 Accounts receivable turnover 22.6 23.3 22.5 16 15 16 53.82 61.04 56.2 Average collection period (in days) Inventory turnover • Delta Airlines may have problems meeting its short-term obligations if creditors will claim for payments within the next 12 months. • However Delta collects its accounts receivable efficiently. • Approximately it takes 16 days for Delta Airlines to receive payments owed, in terms of receivables, from its customers and clients. • High inventory turnover measures that Delta has strong sales, and renews its inventory very quickly.
  • 29. Financial Analysis Long-term solvency ratios 2010 2011 2012 Total debt to total assets 97.9% 96.8% 95.2% Total debt to total equity 4715% -3016% -19901% EBIT 608,000 769,000 1,025,000 11,322,000 13,228,000 13,890,000 -63% -85% -126% EBITDA Interest coverage • High total debt to total assets ratio shows that 95.2% of company’s assets has been financed by debt (i.e. bank loans). • High negative total debt to total equity ratio indicates that Delta Airlines cannot cover its equity by assets in case if investors will claim for payments. • Negative interest coverage ratio shows that the company is not able to pay its debt interest expenses.
  • 30. Financial Analysis Profitability ratios 2010 Return on stockholders' equity (ROE) 2011 181.9% -342.3% 2012 -274.6% Gross profit rate 7.0% 5.6% 5.9% Return on sales 1.9% 2.4% 2.8% 73.0% 81.0% 83.3% EBIT to sales 1.9% 2.2% 2.8% Return on assets (ROA) 1.4% 1.8% 2.3% Earnings per share, basic (EPS) 0.73 1.00 1.17 Total assets turnover
  • 31. Financial Analysis • Negative ROE shows that Delta is making loss of $275 for every $100 invested in it. • However, for every USD, Delta earns almost $6. • For every dollar earned, Delta Airlines has almost $3. • The amount of sales generated for every dollar's worth of assets by Delta is 83%. So the company growing its revenues in proportion to its assets. • EBIT/Sales is high (2.8%), that indicates a high company’s profitability. • ROA shows that only 2.33% was generated from invested capital, however previously Delta had lower ROA (1.4%), that shows that company’s management has improved its returns to invested capital. • Moreover, Delta showed good improvement in EPS over the 3 years.
  • 32. Financial Analysis Market price and dividend ratios 2010 2011 2012 $ 39.4 $ 28.6 $ 24.51 Book value per common share 1.06 (1.62) (2.46) Market to book 27.0 (17.7) (11.7) Dividend-yield - - - Dividend-payout - - - Price earnings (P-E) “We have not paid dividends in the last three fiscal years in order to fund our operations and meet our cash and liquidity needs. Our ability to pay dividends or repurchase common stock is subject to compliance with covenants in several of our credit facilities. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.” - Delta Airlines, Inc
  • 33. Financial Analysis • P-E ratio shows that Delta’s earnings market value has fallen over the 3 years. • However, negative Book value per common share is associated with high risk, that investors will lose money if Delta Airlines, Inc. will pay off all its debts. • Market to Book Ratio below 1 indicates that Delta’s stocks are highly overvalued by market. • Dividend-yield & Dividend-payout ratios are not feasible to calculate, since Delta Airlines did not pay any dividends over the last 3 years.
  • 34. Financial Analysis Key performance metrics and drivers 2010 2011 2012 Sales growth 13.2% 10.6% 4.4% COGS to sales 54.7% 59.5% 59.1% SG&A to sales 32.2% 29.8% 29.5% 4.8% 4.3% 4.3% Depreciation and amortization to sales • Delta’s showed sales growth over the last 3 years; however this indicator has been falling. • Company’s sales profits cover almost 60% of its COGS. • Delta spends 30% of its revenue on selling, general and administrative expenses. • Almost 5% of revenue, Delta is spending on non-cash expenses.
  • 35. Financial Analysis Working capital drivers 2010 Net working capital 2011 (4,078,000) (4,972,000) 2012 (4,998,000) Accounts receivable to sales 4.6% 4.5% 4.6% Accounts payable to COGS 9.9% 7.7% 10.6% Inventory to COGS 1.5% 1.7% 1.9% • Negative working capital measures that Delta does not have enough short-term assets to cover its short-term liabilities. • Low A/R to sales ratio indicates that Delta’s sales are growing with proportion to accounts receivable. • Over the last 3 years, Delta Airlines has been increasing the items it is using for leasing. • Increase in Inventory/COGS ratio suggests potential cash flow problems due to greater sums tied up in inventory.
  • 36. Financial Analysis Market Capitalization and Enterprise Value 2010 2011 2012 Market Cap. 24,244,698,278 24,638,892,392 24,820,982,043 EV 24,266,393,278 24,661,961,392 24,844,855,043 2,143 1,864 1,789 764 702 578 EV to EBITDA EV to Sales • Delta is undervalued by market; however the difference with real EV is not significant. • EV/EBITDA is more accurate measurement then EV/EBIT (that does not normalize for depreciation and amortization costs), so me may conclude that per each dollar of EBITDA company valued at $ 1,733 • Decrease in EV/Sales measures that future sales prospects of Delta Airlines are not very attractive.
  • 37. Financial Analysis (Nowadays) 2012 3Q13 Current Ratio 0.62 0.63 Quick Ratio 0.59 0.56 A/R Turnover 22.5 10.5 16 35 56.2 5.3 Debt/Assets 95.2% 99.7% Debt/Equity -1991% 33474% -126% -774% -274.6% -251.8% Sales Growth 4.4% 8.1% Net Working Capital -4.9 B -5.2 B A/R to Sales 4.6% 22.6% Aver. Collection Period Inventory Turnover Interest Coverage ROE
  • 38. Financial Analysis (Nowadays) 100% 99% Total Assets Financed by Delta's Capital 98% 97% 96% 95% 94% Total Assets Financed by Debt 93% 92% 2010 2011 2012 1Q13 2Q13 3Q13
  • 39. Financial Analysis (Delta vs. Industry) Delta Airlines, Inc. Industry Average Current Ratio 0.63 1.13 Quick Ratio 0.56 0.94 10.52 26.94 35 14 5.31 25.73 Total Debt/Total Assets 99.70% 76.80% Interest Coverage -774% 486% -251.77% 24.10% Gross Profit Rate 14.90% 51.25% Return on Assets 2.97% 2.77% 1.54 0.70 Price Earnings 18.59 15.60 Sales Growth 8.1 5.2 -5.1 B - 3.2 B A/R Turnover Average Collection Period Inventory Turnover Return on Stockholders’ Equity Earnings per Share Net Working Capital
  • 40. Financial Analysis (Delta Vs. Industry) DAL (Delta Airlines, Inc.) is a component of S&P 500 stock market index, where it is categorized as Industrials (GICS (Global Industry Classification Standard)) Sector , Airlines (GICS (Global Industry Classification Standard)) Sub Sector.
  • 41. Conclusion We have analyzed the financial statements of Delta Airlines, Inc. for the period of 2010-2013, which is comprised of the annual income statements, cash flow statements and balance sheets for the period of 31 December 2010 until the 31 December 2012, and quarterly financial statements as at 31 May 2013, 30 July 2013, and 30 September 2013. Moreover, we have evaluated the liquidity, debt paying ability, profitability, turnover, capital structure, and market based ratios as well as carried horizontal, and vertical analyses. Furthermore, we have compared the ratios and analysis that have been carried for Delta Airlines, Inc. with airline’s industry average ratios and data. Based upon the data we have assembled, the ratios and analysis we have obtained, we are hereby expressing our opinion of investing opportunity in Delta Airlines, Inc. as well as to advise in the best possible way, the respective company could improve its performance.
  • 42. Conclusion In our opinion, the financial statements of Delta Airlines, Inc. for the period of 2010-2013: (i) demonstrates financial instability (ii) demonstrates high risks associated with possible investments (iii) express company’s inability to meet short-term as well as long-term obligations (iv) demonstrates company’s possibility of going bankrupt For the reasons above, we have decided not to invest in Delta Airlines, Inc. In our opinion, based on the financial statements of Delta Airlines, Inc. for the period of 2010-2013, the company’s performance can be improved by: (i) merging with a company with greater assets (ii) reducing the Delta’s liability in long-term debt and pension (iii) increasing the Delta’s equity in paid-in capital
  • 43. Environmental Projects
  • 44. Environmental Projects Launched in 2007, Delta’s In-flight Recycling Program stemmed from voluntary efforts by flight attendants to collect recyclable passenger materials on domestic flights into certain airports. After learning of the strides that flight attendants were taking, Delta implemented a comprehensive nationwide program to collect aluminum cans, plastic beverage cups, plastic bottles, newspapers and magazines for recycling.
  • 45. Environmental Projects In 2012, Delta received verification of its 2005-2011 greenhouse gas emissions under The Climate Registry, becoming the first U.S. legacy carrier to do so. Delta intends to continue third-party verification of its greenhouse gases in order to produce quality and reliable data when tracking goals and progress in reducing its carbon footprint. Emissions from 2005 are used as the baseline for measuring improvement in greenhouse gas reductions in accordance with industry reporting standards.
  • 46. Thank you for your Attention!