Equity Research Presentation – Delta Airlines, Inc. - PowerPoint Presentation

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Equity Research Presentation – Delta Airlines, Inc.

Daniel Brenner

Senior Analyst

daniel.brenner@orangevaluefund.com

Anisa KhaloufJunior Analystanisa.khalouf@orangevaluefund.com

Price as of 10/30/2015:Target Price: $73.00

Potential Return: 42.8%Slide2

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix1

Table of ContentsSlide3

Trading at a 30% discount based on simplified discounted cash flowDiscounted cash flow model implies a conservative 5% growth in EBITDA

PEG ratio of .45x, industry average PEG is 1.06xTrading at a 8.97x 2 year Price to Earnings, industry average is 18.93x or a 47% discount

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Trading at Discount Investment Thesis

DAL is differentiating itself in a commoditized industry through strategic alliances and investments, has a strong balance sheet , and is trading at a steep discount on various multiples.Strategic Alliances and Equity Investments

Safety In-House Refinery Investment grade balance sheetNet debt/EBITDAR of 0.7xDebt/Assets ratio of .15xShareholder friendly management gives stock supportStock repurchase of $5 billion through 2017Plans to return 50% of cash flows in next 3 yearsIncreasing dividends In 2013 DAL acquired wholly owned subsidiary Monroe, LLCDAL is the only airline that owns its own refineryEnables DAL to have the lowest fuel price/gallon within the industry The refinery has generated significant profit for the first time since purchasing it DAL has joint ventures with 6 airlines and equity investments in 4 international airlines DAL is the only airline to have equity investments and strategic alliances with international airlines

This will allow DAL to be more efficient than its competitors in expanding to international marketsSlide4

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix3

Table of ContentsSlide5

Founded in 1928 in Monroe, Louisiana and headquartered in Atlanta, GA. DAL operates in two segments: Airlines and Refinery

Mainline fleet: more than 700 aircraft Serves more than 170 million customers each yearDAL Global Network:Offers 334 destinationsService to 64 countries on 6 continents

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OverviewBusiness Overview

Delta Airlines provides air transportation for passengers and cargo worldwide operating on its global route network.

Revenue by GeographyMarket Share Financial SnapshotDomestic Market Share: 17%Airport Market Share in Top 5 Trafficked Airports:ATL  74.11% DTW 48.33%LAX 14.89%JFK 26.48%LGA 21.78% Slide6

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix5

Table of ContentsSlide7

DAL has 4.24% equity stake in AeroMexico, largest airline in MEX, and an enhanced operating agreementPotential to own up to 8.27% from derivatives

DAL, has received a seat on the board of AeroMexicoExpected within a few months to receive antitrust immunity and establish a joint venture (“JV”)After “JV:”

DAL will have largest market share in Mexico

6AeroMexicoGrowth Catalyst

International Equity InvestmentsGOL

China Eastern AirlinesVirgin Atlantic China Eastern is 2nd largest airline in ChinaOwns 3.5% of outstanding common stock and has a exclusive partnership Interest are aligned to expand into international market by feeding passengers to each other Plans to build Shanghai hub DAL owns a 49% stake in parent company Virgin Atlantic Limited and JV agreement Codeshare agreement across 108 routes; 66 destinations$13M in profit from MTM adjustments in Q315Enhances DAL’s access to London-Heathrow

Makes DAL a competitor across the AtlanticDAL has 9.5% stake in GOL by owning conditional voting preferred sharesSecond largest airline in Brazil with 40% market share Plans to file antitrust immunity and establish a JV by end of next year Once JV is secured, DAL will have profit sharing agreements with two leading airlines within Latin AmericaSlide8

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Growth Catalyst

Operational

Efficiency Leading the industry in:Load FactorPrice per gallon of jet fuelFar above the industry average in:ASMYield Per RPMWeak performance in

CASMPlans For ImprovementsExpected increase in Yield Per RPM because of “Branded Fares Program”Expected decrease in CASM due to purchasing new and more efficient aircraftPrice/Gallon expected to decrease to 1.75 for Q4 due to refinery increasing operational efficiency

ASM to increase from 0% to 2% Relatively flat change in ASM due to international restructuring Peer AnalysisSlide9

Operates in Pennsylvania as wholly-owned subsidiary of DeltaProduces 200,000 barrels a day

Produces 40,000 barrels of jet fuelMonroe Energy will either exchange other products for jet fuel or sell it to the market

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Production Details Growth Catalyst

Refinery- Monroe Energy, LCC Effect on Fuel Price

Natural HedgeImpact on Cash FlowsThis refinery differentiates DAL from every other airline in terms of safetyIncrease in jet fuel prices would allow refinery to become more profitable Ensures the lowest in the industry jet fuel pricesPurchased in 2013 for $180 million By end of 2015 will generate $350 dollars in profit For year 2014, fuel expense was 42% of revenueLower fuel expense will significantly increase margins DAL has lowest cost per barrel of jet fuel at 1.8Projected to be at 1.75 per barrel in Q4Produces roughly 30% of the daily jet fuel for New York HubsDAL used to have highest jet fuel prices per barrel in the industry before refinerySlide10

DAL revamped product offerings and classes of service to target customers more effectively Includes customer upgrades in: Basic Economy, Main Cabin, Delta Comfort+, First Class, and Delta One

Each category permits specialized amenities Serves as a driver of value for DAL customers, offering more choices

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Terms of DAL Branded FaresGrowth Catalyst

Branded Fares ProgramRevenue Driver

Combatting Competition U.S. Airlines are moving in direction of branded faresAmerican Airlines and Frontier spearheaded program popularityDAL offers more options and specialized perks than co competitorsDAL classifies 5 service classes where as others only offer 3Proven success model for other airlines Drives revenue and overall passenger trafficProjected to generate an annual $1.5 billion annually in incremental revenue by 2018Implemented in 462 markets since launch in Q215Generated $75 million in high margin revenue in Q315Sales in Comfort+ class increased 42%Increased paid first class load factor to 56% on basis of 5% more first class seatsDAL plans to generate $350 million in “cost benefits” in 2015 – CFO JacobsonSlide11

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix10

Table of ContentsSlide12

Invest heavily in various hubs to consume as much market share as possiblePlanning a conservative 3% in domestic market

Recent investment in Seattle hub yielded a 24% increase in RASM from that hubJFK and LAX hubs saw a 3% increase in capacity

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Domestic Strategy Strategy

Domestic vs. International International Strategy

Domestic PartnershipsInternational PartnershipsDomestic alliances with Hawaiian Airlines and Alaska Airlines Code sharing and frequent flyer participation Delta Connection, DAL’s regional carrier programInvolves contractual agreements with 7 regional airlines“Capacity purchase agreements”18% of passenger revenue was from regional carriers for year end 2014 JV Agreements: transatlantic and transpacificAir France-KLM and Alitalia, Virgin Atlantic Airways, Virgin Australia AirlinesJVs allow commercial operations in respective geographic regions Complete sharing of bottom line amongst JVsGOL Enhanced Commercial Agreements gives elements of control DAL has seat on the Board of Directors

Reducing international capacity by 4.5% with cuts of 20% or more in places like Japan, Brazil, Russia, and Middle EastJV Model: most capital efficient method of accessing international market Possible airline consolidation in China will benefit DALSlide13

Own 76% of their aircraftBoth operating and capital leases make up 24% of DAL’s fleet

Above industry average age at 17.1 yearsAirbus aircraft make up 42% of Delta’s fleetBoeing aircraft make up 58% of Delta’s fleet

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Current FleetStrategy

Fleet Composition Pricing Competition

Changes to FleetDelta TechOpsDAL TechOps is a division of Delta which does aircraft maintenance, repair, and overhaul (“MRO”)DAL’s elite MRO division allows older aircraft to operate at higher efficiencies despite being oldDAL TechOps excellent overhaul program will refurbish the used aircraft to like-new conditions Industry average of Maintenance Expense/Sales is 9.88% and DAL is 4.53%CEO, Richard Anderson, is intent on competitive pricing for new aircraftStrategically pits Airbus and Boeing against each otherDAL used to be only Boeings but recently have been buying AirbusRichard Anderson believes there is an “Aircraft Bubble”Plans to buy used aircraft at a steep discountCommitment to purchase 178 aircraft within the next 5 years 43% are Boeing while 57% are AirbusRetiring older aircraft such as Boeing 747 Replacing with Boing 737 and Airbus 330-900neoDAL is not looking for huge growth in their fleet but rather better utilization of their current fleetSlide14

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Strategy

Fleet CompositionSlide15

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix14

Table of ContentsSlide16

Plans to return 50% of all cash flows back to the shareholdersAuthorized a stock repurchase program through 2017 of $5 billion

Estimated repurchase of 14% of shares outstandingIn 2015, it is expected to buy $2.5 billion of share repurchases8% of current shares outstanding

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Stock Repurchase ProgramSafety

Capital Returns to ShareholdersStock DividendLast quarter DAL increased their dividend to $.135 50% increase from their previous dividendSlide17

As of Q3, DAL has $8.9 billion of debt outstanding Plans to reduce net debt to $4 billion by 2017

Cash position of $2.4 billion Net Debt to EBITDAR is .7xDebt to Asset .15xDebt is evenly distributed over the upcoming yearsDebt Composition is: 44.48% bonds, 23.38% term loans outstanding, 17.75% revolver outstanding, and 8.70% municipal bonds

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Manageable DebtSafety

Debt CompositionSlide18

Investment Thesis

Business Overview

Growth

Catalysts Strategy Safety Appendix17

Table of ContentsSlide19

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Appendix

Income StatementSlide20

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Appendix

Balance SheetSlide21

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Appendix

Simplified Discounted Cash Flow