University of Mississippi University of Mississippi
eGrove eGrove
Honors Theses Honors College (Sally McDonnell Barksdale Honors College)
2016
Delta Air Lines: A Financial Analysis and Corresponding Delta Air Lines: A Financial Analysis and Corresponding
Recommendations for Delta Air Lines, Inc. Recommendations for Delta Air Lines, Inc.
Emily Bush University of Mississippi. Sally McDonnell Barksdale Honors College
Follow this and additional works at: https://egrove.olemiss.edu/hon_thesis
Part of the Accounting Commons
Recommended Citation Recommended Citation Bush, Emily, "Delta Air Lines: A Financial Analysis and Corresponding Recommendations for Delta Air Lines, Inc." (2016). Honors Theses. 300. https://egrove.olemiss.edu/hon_thesis/300
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DeltaAirLines:AFinancialAnalysisandCorrespondingRecommendationsfor
DeltaAirLines,Inc.
by
EmilyMarieBush
AthesissubmittedtothefacultyofTheUniversityofMississippiinpartialfulfillmentof
therequirementsoftheSallyMcDonnellBarksdaleHonorsCollege.
Oxford
May2016
Approvedby:
___________________________________Advisor:ProfessorVictoriaDickinson
iii
ABSTRACT
DeltaAirLines:AFinancialAnalysisandCorrespondingRecommendationsfor
DeltaAirLines,Inc.
ThisalternativethesisprojectisafinancialanalysisofDeltaAirLines,Inc.
Utilizingthe10-KFinancialStatementsfrom2009to2013,alongwithsomecorrelating
outsideresources,afullbusinessandfinancialanalysiswascompleted.Startingwiththe
businessbackgroundandoperations,andthenworkingintoanalysisoftheFinancial
Statements,correspondingrecommendationswerecreatedfortax,auditandadvisory
planningstrategies..Thebulkoftheanalysisutilizedthe10-KdataprovidedbytheSEC,
onlyusingminimalotherresourcesforbackgroundresearch.
TheresearchfoundthatsincefilingChapter11bankruptcyDeltaAirLineshas
improvedsubstantially.Delta’slargestissuestoovercomeinthecomingyearsare
findingwaystocontinuegrowingwhilekeepingcostslow.Thecompanyhasalreadyhad
tofileforbankruptcyonceinthelastdecade;theydonotneedarepeat.Lookingatthe
currentfinancials,Deltaisontherighttrackforsuccessbutneedstoconsider
implementingstrongcontrolsforproperty,plant,equipment,andinventory.The
companyalsoneedstoensurethattaxesremainlow,seeingthatrightnowtheyhavea
largetaxbenefitduetocarryforwardlossesandothertaxcredits.Futuretaxexpenses
couldcauseanegativeimpactonnetincome,sothecompanyshouldseektax-planning
strategiestoensurefuturedeductions.Finallythecompanymaywanttoconsider
utilizingbettermethodsforflighttimesandonlinepayments,andincreasingthe
capacityoftheirfuelsegment.Theserecommendationsandcorrespondingfinancial
analysisisoutlinedthroughoutthecontentsofthepaper.
DeltaAirLines:AFinancialAnalysisand
CorrespondingRecommendationsfor
DeltaAirLines,Inc.
EmilyBush
Spring2015
DeltaAirLines
1
PREFACE
The Accountancy Alternative Thesis Course, ACCY 420, has allowedme to not
onlycompletemythesis,butalsolearnmoreaboutaccountingthaneverachievableina
classicalclassroomsetting.Firstsemester,thecoursegavestudentstheabilitytomeet
withvariousfirms,corporationsandpersonnelintheaccountingbusinessworldtogain
adeeperunderstandingofthethreemainservicelines,therecruitingprocess,andlife
asanaccountant.Thefirstsemesterpreppedmyclassmatesandmyselfforthemonths
andyearstocomeinpublicorevenprivateaccounting,andImostdefinitelyfeelIhave
the“insidescoop”comparedtosomeofmypeersnotinthecourse.
Secondsemestertookadifferentroutewiththefocuslyinginthecompletionof
thethesis.Theassignmentwastoselectanypubliclytraded,USdomiciledcompanyand
completeanindepthanalysisofitsbusinessfunctions,financialstatementsandthento
suggestcorrespondingrecommendationsbasedofftheanalysis.FormythesisIchose
Delta Air Lines because recreational companies are heavily concentrated in my
internship city of Phoenix, Arizona. Companies such asMesaAir Lines, Starwood and
professional sports teams are all key clients in that region. Choosing a company that
providessimilartravelandrecreationalservicesheavilyparalleledandpreparedmefor
theinternshipIwouldcompletethefollowingyear.
DeltaAirLines
2
Overall, the skills learned while completing this paper will translate into my
professional career. Before this course, I had no clue how to read actual financial
statements and only knew the premises of financial accounting. By completing this
course,Ihavegainedanindepthknowledgehowtoutilizecompany’s10-Ks,andhowto
completefinancial,auditandtaxworkforareallifecorporationratherthanjustabook
example.Thevalueofthecourseisbeyondwhatcanbedescribed,butthebenefitsare
suretopresentthemselvesinthecomingyears.
DeltaAirLines
3
**AnysectionsnotcitedcanbeassumedtohaveusedtheDeltaAirLines’10-KFinancial
StatementsandFootnotesfortheyears2009-2013locatedonSecuritiesandExchanges
Commission’sWebsite
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TABLEOFCONTENTS
Chapter1
CompanyHistory..…………………….……………………………………………………………………….….Page8
CompanyOperations..…………………………………………….……………………………..……..…….Page25
ValueChain..………………………………………………………………………………………………………..Page27
BusinessProcessesDiagram..………………..………………………………………………..…….…….Page28
BoardofDirectors..………………………………………..……………………………………..…………….Page29
Chapter2
MissionStatement..……………………………………………………………….……………………….….Page33
Goals..…………………………………………………………………………………..…………………………….Page34
BusinessStrategy..……………………………………………………………………………………………….Page37
AssessingDemandforProducts..…………………………………………………………………..…….Page38
AssessingSupplyofInputs..……………………………………………………………………………..….Page39
Competitors…………………………………………………………………………………………………..…….Page42
GeopoliticalRisks..…..………………………………………………………………..………………….…….Page44
Porter’sCompetitiveForces..……………….…………………………………………….…………...….Page46
SWOTAnalysis..……………………………………………………………………………………………….….Page47
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5
Chapter3
AssetComposition..………………………………………………………………………………………….….Page48
CompanyFinancing..……………………………………………………………..………………….……..….Page51
CashFlows..…………………………………………………………………………………………………….….Page57
Liquidity,SolvencyandEarningsperShare..…………………………………………………….….Page58
Chapter4
AccountsReceivable..…………………………………………………………………………..………….….Page61
Inventory..……………………………………………………………………………………………………………Page64
Property,PlantandEquipment..………………………………….…..…………………..………….….Page69
Chapter5
IntercorporateInvestments..…………………………….…………………………….……………...….Page73
Restructuring..……………………………………….……………………………………………….……….….Page79
ForeignCurrency..……………………………………………………….……………………………….….….Page82
ReturningWealthtoShareholders..……………………….………………………….…………….….Page86
Pensions..…………………………………………………………………………………………….…………..….Page87
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6
Chapter6
OperatingvNon-Operating..…………………………………………………………………………….….Page89
FinancialStatementAnalysis..……………………………..….……………………………………….….Page92
RNOADisaggregationAnalysis..……………………………………………………………………….….Page98
DecompositionofNon-OperatingReturn..……………………………..………….………….….Page102
Chapter7
LaggingMacroeconomicIndicators..…………………………………..……….…………………….Page106
LeadingMacroeconomicIndicators..……………………………….…………………………….….Page111
RevenueRecognitionPrinciples..………………………………………………….………….…….….Page115
Analysts’Forecasts..……………………………………………………..……………….……………….….Page117
EarningsManagement..……….……………………………………………………….……………….….Page119
Chapter8
CapitalizationofOperatingLeases..……………………………………………………………….….Page121
Weighted-AverageCostofCapital..…………………………….………………………………….….Page124
SalesForecasting..…………………..………………………………….………………………………….….Page126
StockValueperShare..…………………………………………………………….…………………….….Page127
DeltaAirLines
7
Chapter9
ManagementAssertions..……………………………………………………………..……………….….Page131
AuditRisks..…………………………………………………………………………….…………………….….Page137
ForeignTaxRates..…………………………………………………….………………………………….….Page141
TaxCredits..…………………………..………………….…………………………………….…………….….Page142
TaxRecommendation..…………………………………..……………………………….…………….….Page143
Chapter10
TheBalancedScoreCard..……….…………………………………….……………………………….….Page145
RecommendationOne..……….…………………….………………………………………………….….Page148
RecommendationTwo..……….…………………………….………………………………………….….Page149
RecommendationThree..……….……………………..…………………..………………………….….Page150
EffectofRecommendations..……….…………………………………………………………….….….Page152
WorksCited..……….…………..……………………………….……………………………………….….….Page154
DeltaAirLines
8
CHAPTERONECOMPANYHISTORYSources:DeltaAirlines.com,DeltaMuseum.org,Fairweather,Malcom.“TheHistoricalDevelopmentofDeltaAirLines.”ReferenceforBusiness.com
TheBeginnings
Huff Daland Dusters, later to become Delta Air Lines, originated on May 30,
1934,inMacon,Georgia.Ownedbyamilitaryaircraftcompany,HuffDaland,hopedto
aidfarmerswithkeepingtheiragriculturalproductsinsect-freebydustingthefieldswith
pesticides via plane. Collett Everman “C.E.”Woolman advisedHuffDaland during the
serviceline’screationandwasessentialtothecompany’sformation.Between1925and
1924• EstablishmentofHuffDalandDustersinMacon,GA
1920's
• 1925-1928:HeadquartersmovetoMonroe,LAandExpansionofcompany
• 1928:Renamedto"DeltaAirService"
• 1929:Deltabeginspassengerflights
1930
• "SpoilsConference"• Closepassengerserviceline• Companyrenamed"DeltaAirCorporajon"
1934
• AirMailActof1934
• ReceiveairmailcontractRoute24
• Reopenpassengerserviceline
1938
• CivilAeronaujcsAct• DeltaAirCorporajonfirsttorecievepermanentcerjficajoninUnitedStates
DeltaAirLines
9
1928,thecompanymovedheadquarterstoMonroe,LAandamassiveexpansionwasin
the works. The dusting service line became available in much of the southern and
westernUnitedStates,andabroadinmultipleSouthAmericancountries.Wolmanlater
went topurchase the companywithD.Y. Smith and renamed it “DeltaAir Service” in
1928.ThenameDeltaoriginatesfromthe
Mississippi River Delta regionwhere the
company mainly conducted operations.
ThenamechangewasduetoWoolman’s
intent toexpand the company’s services
fromcropdustingtomailandpassenger
services.Finally, in1929DeltaAirServicebegan toofferpassenger flights.The routes
ranged from Jackson, Mississippi, Dallas, Texas, and Monroe, Louisiana. Delta later
addedstopsinCharleston,SouthCarolina,Birmingham,Alabama,andAtlanta,Georgia.
Moving into the 1930s,
Delta realized a need to secure
an airmail contract to keep
revenuesupduetothehighcost
and little profit produced by
passenger services. In 1930, the
DeltaAirLines
10
United States Government decided to delegate airmail contracts to domestic air
carriers. Unfortunately, Delta lost the bid to American Airlines during this “Spoilers
Conference.”Due to the lackof income,Deltawas forced to shutdown itspassenger
servicestemporarilyonOctober1,1930.DuringthisperiodDeltaAirServicesalsowas
renamedtoDeltaAirCorporation.TheUnitedStatesGovernmentdeterminedthatthe
contractswereassignedunfairly and therefore they created theAirMailActof1934.
TheAirMailActof1934leftDeltaAirCorporationwithairmailRoute24,whichhandled
United States Postal Service Mail in the southeast region. The company began mail
service on July 4, 1934, and shortly after on August 5, 1934, Delta was able to
recommencetheirpassengerserviceline.Deltaalsoaddedin-flightmealsforpassenger
flights in1936.Finally,near theendof thedecadeairlinepassenger serviceswereon
the rise, and the government realized that it needed a regulatory power on air
transportationmuchlikefederalhighways.Soin1938,thegovernmentpassedtheCivil
Aeronautics Act that required airline companies to apply for “Certificates of
Conveniences and Necessity” for their routes. Delta Air Corporation became the first
airlineindustrytogainpermanentcertification.
DeltaAirLines
11
BecomingDeltaAirLinesInc.
Early1940s
• 1940:AddstewardessestoflightcrewsandbeginservingbomledCoca-Colainflight
• 1941:MoveheadquarterstoAtlanta,GA
• 1942:DeltaaidsinWWII.
Mid1940s
• 1945:ChangednametoDeltaAirLines,Inc.
• 1945:NajonallyrecognizedbyNajonalSafetyCouncil• 1946:Beginscargoserviceline
Late1940s
• 1948:PartnerwithTWAforexpandedroutes
• 1949:Begincoachservices
Early1950s
• 1950:Souvenirsforchildren• 1953:MergewithChicagoandSouthernAirLines;internajonalflights
Late1950s
• 1955:Ujlizehubandspokesystem;secureAtlantatoNewYorkroute
• 1956:Weatheravoidanceradartechnology
• 1958:Ultraluxuriousupgradedfirstclass
1930:LogoforDeltaCrop-
DustingServiceLine;
utilizedThortorepresent
warbetweeninsectsand
thecrops
1929:DeltaAirService
Logo;Triangleshape
representsforGreek
letter“D”
1934-1951:GreekLetter
“D”stillutilizedsometimes
withAM24inthetriangle
referringtotheirairmail
serviceline
DeltaAirLines
12
The 1940s to 1950s era of
Delta Air Lines is marked by
the massive growth and
technology advancements
withinthecompany.The1940s
began with an essential
additiontotheDeltastaff,stewardesses.Theadditionofthestewardesseswasjustthe
beginningof services that illuminatedDelta’s extreme focuson customer satisfaction,
withbottledCoca-Colabeingofferedduringinflightbeverageservicethatyearaswell.
Justayearlater,DeltaAirCorporationHeadquartersrelocatedfromMonroe,Louisiana,
toAtlanta,Georgia,duetomassivegrowthinroutes.Whatoncebeganasflightshighly
saturatedinthe“deepsouth”hadmovedintoeasternstatesandthereforecausedthe
movetoAtlanta,acitythatcouldholdthecapacityoftheexpandingbusiness.AsWorld
War II began, Delta Air Corporation gave aid to the war effort and temporarily
terminatedcivilianservices.Thecompanymodifiedplanesformilitaryuse,trainedArmy
pilotsandmechanics,andrancargosupplyroutesthroughoutthewar.Throughoutthe
1940’sand1950’sDeltawasrecognizedforitssuperiorserviceandsafetystandardson
anationalplatform.WithWorldWarIIover,in1945DeltaAirCorporationreturnedto
its passenger services, but changed its name towhat it is known as today, Delta Air
DeltaAirLines
13
Lines, Inc. That year they received recognition from the National Safety Council for
achieving 300 million passenger miles and 10 years without any fatalities. By 1946,
Delta’sservicelinesevenfurtherexpandedwiththeadditionofcargoservices.Moving
intothelater1940sgrowthcontinuedwithpartnershipswithTWAthatallowedDeltato
expand its routes. The deal allowed Delta planes to be flown by TWA crews from
CincinnatitoDetroit,Columbus,DaytonorToledo.Inreturn,DeltaemployeesflewTWA
planes from Cincinnati to Atlanta, Miami and Dallas. This further allowed Delta to
increase its presence in the northernmarkets. Also during this time, Delta increased
plane cabin luxury by upgrading to in cabin pressurization and air conditioning, and
including seat trays. As the 1940’s came to an end expansion continued with the
commencementofCoachClassservicesonDeltaflights.
DeltaAirLinesgrowthandextensiveconcentrationonamenitiesandtechnology
continuedintothe1950’sera.Anewtarget-marketDeltabegantofocusonduringthis
period was children passengers. With the 1950 children’s souvenir of a Junior Pilot
Certificate foryoungboyandgirlpassengersand the1958souvenirof “kiddiewings”
pins,Deltaonceagainstrivedtomakeallpassengers’tripsenjoyable.In1953,amerger
between Delta Air Lines and Chicago and Southern Air Lines allowed the company’s
flightroutestoexpandexponentially.Themergercreatedanamechangefortwoyears
of“Delta-C&S,”butallowedDeltatoobtainitsfirstinternationalflightstotheCaribbean
DeltaAirLines
14
andCaracas.Themergercreatedthefifth largestairlinecompanyintheUnitedStates
and added 5,000 miles of new routes to Delta’s service lines. Throughout the mid
1950’s, Delta continued its development with the utilization of the hub and spoke
system beginning in 1955. The hub and spoke system is a technique that involves
droppingpassengersoffatairportterminalsor“hubs”andallowingthemtogetontoa
connecting flightora“spoke.”Thisallowedmorepassengers toutilize flightsand less
flights go under seated. By 1956, weather avoidance technology added to aircrafts
createdsafertripsforpassengersandcrews.Theupgradescontinuedin1958,withfirst
classflightsutilizingthreeinsteadoftwoflightattendants,playingboardingmusicand
offeringfreechampagneandsteaksin-flight.
1945-1953:FlyingDLogo1953-1955:Delta-C&SLogo;Logousedwhen
DeltamergedwithChicagoandSouthern
Airlinesthatcausedbriefnamechange
1955-1959:FlyingDLogousedbefore
themergerreturns
DeltaAirLines
15
TheJetEra
Asthe1950’scametoacloseDeltamoved intotheJetEra,becomingthefirst
airline to start a jet service in
1959.Thechangeleadstoanew
“widget” logo representing the
swept-wing look of jets. Of
course, Delta continuedwith its
customer satisfaction
innovationsby introducing in-flightmeals to coachpassengers. The1960sbeganwith
evenmoreexpansion,whenDeltafliesthefirstnon-stopflightfromAtlanta,Georgia,to
1959
• PurchaseofDouglasDC-8Jet• Firsttoofferjetservice• WidgetLogo
Early1960s
• 1961:AddsAtlantatoLosAngelesroute• 1962:SABRESystem
Late1960s
• 1966:C.E.Woolmandies;Terminatecropdusjngserviceline• 1967:MergeofDeltaandDelwareAirlinesInc.
Early1970s
• 1971:DeltaDashCargoService• 1972:NortheastAirlinesmergeswithDelta
• 1975:DeltaAirExpress
Late1970s
• 1976:PurchasedStonerLeasing• 1978:AirlineDeregulajonAct• 1979:EnergyCrisis;50YearAnniversary
DeltaAirLines
16
LosAngeles,California, in1961.In1961theyalsowerethefirstairservicewithflights
from California to Montego Bay and Caracas, and were recognized again with the
National Safety Award for 11 billion passengers without any fatalities. Technological
advancementfollowedin1962withthe initiationoftheSABREsystem,whichallowed
“instant” reservations through their “Deltamatic” system. Sadly, in 1966, original
founderofDeltaandcurrentCEOC.EWoolmanpassedaway.Withhispassing,thecrop-
dustingservicelineended.Unlikeotherairlinebusinesses,Delta’sCEO’spassingdidnot
hurt the company’s growth and income. Delta had a smooth transition from C.E.
Woolman to modern, collective management style, which aided in decreasing the
difficultiessomecompaniesfacewithmanagementchanges.
AseriesofmergersandpurchasesoccurredintheproceedingyearsforDeltaAir
Lines.DeltamergedwithDelawareAirlines (1967)andwithNortheastAirlines (1972),
and purchased Stoner
Leasing (1976). Delta
merger with Northeast
Airlines was especially
important because it
permitted more routes for
Delta in theNorthernUnited States regionswith direct flights toNew York andNew
DeltaAirLines
17
EnglandtoFlorida,Bermuda,Bahamas,andCanada.TheNortheastAirlinesmergeralso
broughtachangeincompanyroutepolicy.DeltadecreasedthenumberofsmallerNew
Englandroutesbygivingthoseroutestoanorthernregionalcompany,AirNewEngland.
Doing this allowed Delta to focus on the more profitable routes and longer haul
destinationflights.Duringthesameperiod,expansionwasalsohappeninginthecargo
service line. In 1971, Delta created Delta Dash Cargo, a service for small package
delivery.By1975,thecompanydecidedtocreateDeltaAirExpress,aguaranteedcargo
service.Deltaonceagainwasaleadinginnovatorbecomingthefirstairlinetoownanair
express service.Customeramenities continued to improveduring the1970’swith the
upgradesprovidingthefirstin-flightaudioentertainmentforpassengers.
In1978,theUnitedStatesGovernmentPassedtheAirlineDeregulationAct.The
act removed government control of airline routes, prices and entry into themarket.
Manyairlinecompaniesscurriedtograbasmanynewroutesaspossible,butDeltawas
more conservative. Delta
was cautious about the
change because they were
concernedthat itwould ruin
profitabilityof theirhuband
spoke systems, and also
DeltaAirLines
18
concerned that it would diminish flight services to small airport destinations. This
cautiousbehaviorwasvery typicalmanagement styleofDeltaduring the JetEra. The
company was technologically advanced and focused heavily on improving customer
satisfaction,but itwascarefulwith theirpurchasesbyonlybuyingaircrafts thatwere
proven to be durable and safe. This management policy, known as a “wait-and-see”
policy, savedDelta large amounts ofmoney in the 1970’s because they did not have
frivolousexpenses.AsDeltaChairmanduringthetimeperiod,W.T.Beebestated,“We
don’tsquanderoutmoneyongoofythingslikeadvertising.”Thisfurtherhighlightsthe
company’s culture of conservative spending on items that they could ensure were
value-added profitable activities. As the 1970’s drew to an end, Delta Air Lines
celebrated its 50thAnniversaryofpassenger services, andalso received recognition in
1979 for the first airline to board onemillion passengers in one city (Atlanta) in one
month and a Public Interest Award for their efforts in reducing jet noise. 1979 also
markedthebeginningofflightservicestoFrankfurt,WestGermany.Although1979was
ayearofsuccesses,itbeganasayearofturmoil.The1979EnergyCrisisoccurreddueto
the Iranian Revolution that caused an oil shortage worldwide. Due to the decreased
supplywiththedemandremainingconstant,pricesgrewexponentiallyandaffectedthe
airlineindustryforthebriefperiod.Duringthebeginningmonthsof1979,Delta,along
withotherairline service companies,was forced tocutbackon thenumberof flights
DeltaAirLines
19
duetotheoilshortage.DeltaAirLinesdroppedanaverageof18flightsadayandtheir
firstquarterearningswere61%lowerthantheywereinthefirstquarterof1978.This
subsidedexpansionofroutesforDelta,butluckilytheIranianRevolutionconcludedby
theendofthe1979allowingexpansiontocommenceonceagaininthe1980s.
1959-1965:SidewaysWidget,symbolizesspeed
ofwidgets
1962-mid1960’s:OvalWidgetLogo
1960’s-1970’s:UprightWidgettoLeftofCompany
name
DeltaAirLines
20
ExpansiontoanInternationalCarrier
The 1980’s to 1990’s for Delta Air Lines was marked by the extreme growth
domesticallyandinternationallyduetothetransition in internalmanagementstyle. In
thedecadesbefore,DeltaAir Lineshadbeenknown for their conservativeand“wait-
and-see”policies forbusinesspurchasesandventures,butduringthecomingdecades
Deltabeganutilizingaggressiveandriskystrategiesinhopesofexpandingthecompany
even more (ReferenceforBusiness.com). Throughtout the period, Delta continued to
developandinnovateincustomeramenitiesandaircrafttechnology.In1980,Deltawas
workingonacomputerreservationsystem(CRS)toeasetheboardingpassreservation
Early1980s
• 1980:DevelopmentofCRS
• 1981:Lauchesfrequentflyermileprogram
• 1983:Improveboardingprocessandreduceflyovernoise
1987
• WesternAirlinesmergeswithDelta
• RonaldW.AllennamedCEO
Early1990s
• Early1990'sRecessionandDropinOilPrices• 1991:PurchasePamAmAssets
Mid1990s
• 1994:Leadership7.5ProgramandRapidRedempjonFlyerProgram
• 1995:NamedAirlineofOlympicGames
Late1990s
• 1997:US-LajnAmericarouteexpansionsandnewaircrass
• 1998:FirstInternajonalCargoAlliance• 1999:AcquireASAHoldingsInc.
DeltaAirLines
21
process for consumers. That year, in-flight videoswere added as a customer amenity
andDeltacontinuedtoberankedNumberOnebytheDepartmentofTransportation.By
1981,customersatisfactionprojectscontinuedwiththedevelopmentofafrequentflyer
mileprogramlatertocalled“SkyMiles”in1995.Deltawantedtoimprovetheboarding
pass process further, so in 1983 the company upgraded to computer generated
boarding passes and automated advance seat selection. That year Delta also became
the first US aircraft line to meet new federal flyover noise standards. Continued
improvements and innovationswere a large part of the beginning of the 1980’s for
DeltaAirLines.In1987DeltaacquiredWesternAirlinestoaidintheexpansionofwest
coast routes. The merger caused Delta Air Lines to become the fifth largest aircraft
carrierworldwide. (DeltaMuseum.org). RonaldW. Allenwas named CEO that year as
well,whichfurtherconstructedtheaggressivebusinessstructureDeltabegantoutilize
duringthistimeperiod(ReferenceforBusiness.com).
Thelate1980sandearly1990swasaperiodofrecessionduetotheconflict in
the Middle East which caused oil shortages and increased oil prices throughout the
world.TheincreasingoilpricesanddecreasingcustomertrafficaffectedDeltaAirLines
bydiminishingprofitsduringtheearly1990speriod.Althoughaperiodoflittleincome,
Delta’sassertivebusinesspoliciespushedforthepurchaseofPamAmAssets in1991.
Thepurchasewas$1.7billionworthofassetsand$668millionworthofliabilities,italso
DeltaAirLines
22
openednumeroushubroutesforDeltaabroadanddomestically.ThepurchaseofPam
AmAssetsputDeltaatalossduetothehighcostofthetransactionandpooreconomic
conditions,endingwith$506millioninlossesin1991.Inordertodealwiththemultiple
years of losses, Delta created the Leadership 7.5 Program to get back on track. The
Leadership7.5Programwasacostcuttingschemetoreducecostsby7.5centsforevery
mile,perseattoreducecostby2billiondollarsinthenextthreeyears.TheLeadership
7.5 Program along with the Rapid Redemption Flyer Program, a program created to
encourage passengers to fly often and instantly reedeem miles for free tickets, the
companyfinallyreturnedtoapositiveprofitinthefourthquarterof1994.
In1995,Delta receivedahugepromotionalboostbybeingnamedtheOfficial
Airlineof the1996Olympics.Moving into theendof the century,Delta continued its
expansionwith growth ofUS-LatinAmerican routes and a purchase of an entire new
aircraftfleetin1997.In1998and1999respectively,Deltacreatedthefirstinternational
cargoallianceandacquiredASAHoldingsInc.Asthe20thcenturycametoaclose,Delta
AirLineshadgrowntoaninternationalandprestigeousaircraftcarrier.
1985-1991:SignatureServiceLogovisibleon
customeritems
1993-1995:FullCorporateLogo
DeltaAirLines
23
The21stCentury
Deltaenteredthe21
stCenturyasaleadingcompetitorintheAirlineIndustry.In
the age of technology Delta launched their Delta.com website in 2000, allowing the
companytointeractwithcustomerseasier.OnSeptember11,2001,terroistsstruckthe
UnitedStatesviaaircrafthijacking. In response, thecompanyshutdown for twodays
and had its first reported loss in six years. ButDelta bounced back from the horrible
eventbycontinuingtoimproveitssystems.In2003,theybecamealeaderinupgraded
check-insystemswithasystemthathadkioskboardingpasscheck-ins,expandedgate
Early2000s
• 2000:Delta.comWebsite
• 2001:Shutdowndueto9/11• 2003:Upgradedcheck-insystem
• 2004:75YearAnniversary
Late2000s
• 2005:OperajonClockwork;FileforBankruptcy• 2006:Overcomebankruptcyandhosjletakeover
• 2008:NorthwestAirlinesmerger
• 2009:Internajonalrouteexpansion
2010s
• 2010:2MillionDollarUpgrade
• Fortune'sMostAdmiredAirline2011,2013
• 2014:85yearsofPassengerService
1995-2000:FullCorporateLogo
DeltaAirLines
24
informationsystems,lobbyredesigns,bettersignagetoreducecongestionandcheck-in
capabilities on Delta.com. These improvements set Delta apart from its competitors.
2004 marked the 75 Year Anniversary of passenger service, but turmoil was on the
horizon. In 2005, Delta implemented “Operation Clockwork” which was the largest
scheduleing redesign in airline history. On September 24, 2005 Delta filed for
bankruptcy,butinNovemberhadthelargestexpansionofroutesincompany’shistory.
By 2006, Delta Air Lines had overcome its bankruptcy issue and avoided a hostile
takeoverbyUSAirways.In2008,thecompanymergedwithNorthwestAirlinesfurther
expanding the company’s routes and size. They also addedwi-fi to select flights that
year.Bytheendofthe2000s,DeltaAirLineswasundergoingaenormousinternational
routeexpansion. TheybecametheonlyUSAirlinetoservesixcontinentsandhasthe
largestpassenger loyaltyprogram,SkyMiles,with74millionmembers.DeltaAirLines
startedoffthisdecadewithatwomilliondollarupgradeofaircrafts-makingthemultra
luxurious. In both 2011 and 2013 Delta Air Lines was name Fortune’sMost Admired
Airline,provingitscustomers’lovefortheamenitiesandservicestheyprovide.Finallyin
2014thecompanycelebrate85yearsofpassengerservices.
2000-2007:HeritageLogo 2007-now:3DwidgetLogo
DeltaAirLines
25
COMPANYOPERATIONS
Delta Air Lines has twomain business segments according to Delta Air Lines’
SegmentReportingFootnoteofthe201310-KFinancialStatement.Deltastatedintheir
10-KDocumentsthattheydeterminedthesetwosegmentsbythegroupsinwhichthe
executive leadership team regularly discusses and reviews. Using this basis, Delta Air
Linesthereforearrivedattwooperatingsegmentsof:AirlinesandRefinery.TheAirline
Segment covers the passenger and cargo services that Delta offers domestically and
internationally,plus themaintaneanceand repairof thirdpartyaircraftsDelta serves.
WheretheRefinerySegment,anewservice lineforDelta, focusesontherefiningand
productionof jet fuel.Deltapurchased the refinery fromPhillips66andhasacquired
deals, mostly with BP, to supply crude oil for Delta to refine. The main goal of the
Refinery Segment is to provide jet fuel to Delta Aircrafts for a cheaper amount than
outsourcing,butalsotoselljetfueltothirdpartiesforextraincome.Delta’s10-Kstated
thatbecausetheRefinerySegment’smaingoal is toprovidearesourcefortheAirline
Segment,thatmanyoperatinggainsandlossesarerealtedtoportionsinbothbusiness
segments.ThetablebelowhighlightsthesegmenteddatabybusinessprocessforDelta
AirLinesfortheyearendof2013.
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26
SegmentData:DeltaAirLines:foryearendedDecember31,2013(inmillions) Airline Refinery Intersegment
SalesConsolidated
OperatingRevenue $37,773 $7,003 $37,773
Salestoairlinesegment
($1,156)
Exchangedproducts ($5,235)
Salesofrefinedproductstothirdparties
($495)
Operatingincome(loss) $3,516 $116 $3,400
Interestexpense,net $698 -- $698
Depreciationandamoritization
$1,641 $17 $1,658
Totalassets,endofperiod $51,080 $1,172 $52,252
Capitalexpenditures $2,516 $52 $2,568
Thedatainthetableaboveisprovidedfromthe10-KonSEC.gov
Delta’sCorporateHeadquarters is locatedinAtlanta,Georgia,which isalsothe
headoftheAirlineSegment.TheAirlineSegmentalsohaskeyoperatingbusinesshubs
in Amsterdam, Atlanta, Cincinnati, Detroit,Minneapolis-St. Paul, New York-LaGuardia
Airport, New York-John F. Kennedy International Airport, Paris-Charles deGaulle, Salt
LakeCity,SeattleandTokyo-Narita(MergentOnline.com).TheRefinerySegmentmostly
residesinPhiladelphia,Pennsylvaniawheretherefineryanditsassetsarelocated.
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27
VALUECHAIN
PRIMARYACTIVITES
SECONDARYACTIVITIES
InboundLogicsXcs
• RouteSelecjon
• PassengerServiceSystem
• FlightSchedules
• CrewSchedules
• Airport/TerminalPlanning
OperaXons• TicketSales• Refinery• GateOperajons
• AicrasRepairandMaintanence
• BaggageandCargoHandling
OutboundLogisXcs• Fuel• Baggage• ConnecjngFlights
MarkeXngandSales
• FrequentFlyerPrograms
• ElectronicTickejng
• Logo/PromojonalMaterials
Service• LostBaggageClaim
• CustomerService
• TripPlanningServices
• In-FlightAmenjjes
Procurement• Aircrass• CrudeOil• RepairParts
HumanResources
Management• PilotandCrewTraining
• RecruitmentofNewHires
• TerminalEmployeeTraining
TechnologicalDevelopment• OnlineReservajonStystems
• In-FlightTechnologies
• PricingSytem
• FlightSchedulingSystmes
• AircrasandAmenjjesDevelopment
Infrastructure• DepartmentsofFinance,Accounjng,Management,Legal/Regulatory,andExternalAffairs,Manufacturing
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BUSINESSPROCESSESDIAGRAM
PointswheretheOperatingValueChainActivitiesTakePlaceinBPMNModel:
• Cargo/TicketRequestàdeliveringcargoorpassengertodesireddestination
• AircraftRepairRequestàfixingaircraftsforthirdparties
• RefinedOilOrderàprovidejetfuelforDeltaplanesandthirdparties
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BOARDOFDIRECTORS
Delta Board of Directors currently consists of sixteenmembers, although one
doesnothavevotingpower.TheBoardmeetsfourtimesayearregularly,butwillmeet
extra times for special situations. According to Delta Air Lines Website, “The Board
believes sound corporate governance practices provide an important framework in
assistingtheBoardtodischargeitsresponsibilities.Accordingly,theBoardhasadopted
corporate governance principles relating to its functions, structure, and operations”
(DeltaAirLines.com).
Name Position Age TotalPay Tenure BackgroundDanielA.Carp
Non-
Executive
Chairman
66 $412,854 8 CurrentDirectorofNorfolkSouthern
CompanyandTexasInstrumentsInc.;
FormerCEOofKodak
RoyJ.
Bostock
Non-
Executive
Vice-
Chairman
74 $276,394 7 CurrentDirectorofNortheastAirlines
CorporationandChairmanofthe
PartnershipforaDrug-FreeAmerica;
FormerCEOofMcManusGroup
(communicationservices)andDirector
ofB/Com3(advertising)
Richard
H.
Anderson
Director 60 $14,375,902 8 CurrentCEOofDeltaAirLinesInc.;
FormerCEOofNortheastAirlines
EdwardH.
Bastian
Director 57 $8,845,206 17 CurrentPresidentofDeltaAirLines
Inc.;FormerCFOofDeltaAirLinesInc.
andCEOofNortheastAirlines
JohnS.
Brinzo
Director 73 $234,956 8 CurrentDirectorofAKSteelHolding
CorporationandBoardofTrusteesfor
KentStateEndowmentFoundation;
FormerCEOofCliffsNatural
Resources
DavidG.
DeWalt
Director 51 $224,555 4 CurrentBoardofDirectorofFive9Inc.
andCEOofFIreEyeInc.(security
company);formerEMCsoftware
groupemployee,BoardofDirectorof
JiveSoftwareInc.andPolycomInc.
William
H.Easter
Director 65 $220,389 3 CurrentDirectorofConchoResources
Inc.andBoardofMemorialHermann
HospitalSystem;Hasa30yearcareer
innaturalgasmarketing,
transportationandrefiningfrom
ConocoPhillips,FormerCEOofDCP
Midstream
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30
MickeyP.
Foret
Director 69 $229,110 7 CurrentPresidentofAviation
ConsultantsLLC,DirectorofNash
FinchCompanyandSpartanStores
Inc.;FormerCFONortheastAirlines,
specializesincargotransport
Shirley
Clarke
Franklin
Director 70 $235,810 4 CurrentCEOofPurposeBuilt
Communities(nonprofit),Co-Chair
AtlantaRegionalCommissionof
HomelessnessandDirectorof
NationalCenterCivilandHuman
Rights,visitingProfessoratUniversity
ofTexas;FormerMayorofAtlanta
DavidR.
Goode
Director 74 $240,666 16 CurrentMemberoftheBusiness
Council;FormerCEONorfolkSouthern
Corporationspecializeinground
transportation,DirectorofCaterpillar
Inc.
GeorgeN.
Mattson
Director 49 $233,730 3 CurrentBoardMemberofBoys’Club
NewYorkandBoardMemberofPratt
SchoolofEngineeringatDuke
University;FormerPartnerat
GoldmanSachsCo.,specializedin
GoldmanSachsinvestmentbankingin
Delta
SergioRial
Director 54 $-- -- CurrentCEOoftheinternational
companyMarfrigGlobalGoods;
FormerCFOandVPofCargillInc.and
ManagingDirectorofInvestment
BankingatBearStearns&Co.
Kenneth
C.Rogers
Director 54 $-- 7 CurrentDeltaPilotandBoeingFirst
Officer;PilotinUSAirForce;
nonvotingassociatememberofDelta
Board
Kenneth
B,
Woodrow
Director 70 $239,038 11 FormerPresidentandVicePresident
ofTargetCorporation
Paula
Rosput
Reynolds
Director 58 $232,387 11 CurrentCEOandPresidentPreferWest
LLC;FormerChiefRestructuring
OfficerofAmericanInternational
Group,CEOofSafecoCorporation,
CEOAGLResources,
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31
FrancisS.Blake
Director 65 $-- 1 CurrentDirectoroftheGeorgia
Aquarium,CEOandFormerDirectorof
HomeDepot,specializesinreal
estate,construction,creditservices,
strategicbusinessdevelopment,
growth,internationalandcallcenters
atHomeDepot;Formerexecutiveat
GeneralElectrichandledinternational
acquisitions.
DATAFROMTHETABLEISFROMMERGENT.COM(POSITION,WAGESANDTENURES)ANDDELTAAIRLINES.COM(NAMES,AGEANDBACKGROUND)
LookingatthetableoftheBoardofDirectorsforDeltaAirLines, Ibelievethey
didagreatjobatdiversifyingtheexpertiseofpersonnelontheirBoardofDirectors.The
company represents the supplier side of the company through themultipleDirectors
whomhaveexperience in theoil refineryandaircraft industries.Thecustomerside is
represented through the Directors with Communications and Relations backgrounds
such as, Roy J. Bostock and international customer affairs being represented through
Sergio Rial and Francis S. Blake’s backgrounds. I do believe that international affairs
could be more widely represented because the only strong representation is Rial’s
connection with South America. Delta has numerous business processes ongoing in
Europe, so it would beneficial to have European representation. Financially speaking,
Delta Air Lines’ Board of Directors contains numerous officers who used to work in
financial services or as CFO’s such as, Rial or Mattson. The technical aspects of the
company such as the refining process (understood by Easter) and the automated
programmingusedtoschedule,bookandmanageflightsandthecompany(background
DeltaAirLines
32
fits DeWalt) are clearly covered onmultiple levels. The company‘swell-differentiated
board allows the company to have a better understanding of the outside forces that
couldpossiblehinderthecompany’sgrowth.But,theboard lacksclearpersonnelthat
have worked in United States Transportation Regulatory Offices, although a political
aspect is coveredwith the former AtlantaMayor, Shirley Franklin’s background. I did
enjoy that the company included a pilot on its Board of Directors. This allows the
company to stay up to date on pilot codes, what its employees really want, and
understandinghowtheaircraftswork.OverallIbelievethatDelta’sBoardofDirectorsis
well diversified but could improve through the additionormemberswithUSAirways
Regulatory/backgroundsandinternationalexperience.
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CHAPTERTWO
MISSIONSTATEMENT
"We—Delta'semployees,customers,andcommunitypartners—togetherformaforce
forpositivelocalandglobalchange,dedicatedtobetteringstandardsoflivingandthe
environmentwhereweandourcustomersliveandwork.WeareDelta'sForcefor
GlobalGood"(Farfan).
The mission statement highlights Delta Air Lines’ purpose of organization,
business statement and values of the organization. We see that the purpose of the
organizationisto“formaforceofpositiveandglobalchange”.Thebusinessstatement,
or how theorganizationwillmeet its purpose is seen in the statement of, “bettering
standards of living and the environment where and our customers live and work.”
Finallythebusinessvaluesinabitambiguousbutitisportrayedinthestatement,“We
areDelta’s Force forGlobalGood.” Themission statementwould be better if it gave
more specific values that arenecessary for creatinga force for global good.Although
DeltacoveritscorevalueslaterinitsCoreResponsibilityReport.Thereportstatesthe
CoreValuesofDelta:
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34
AndtheFivePillarstoGlobalGoodcontinuetohighlightDeltaAirLines’Valuesintheir
CoreResponsibilityReport:
GOALS
Delta’s2013CorporateResponsibilityReportstatesthecompany’sgoalsfor2013and
whethertheywerecompletedsuccessfullyornotandalsoindicatesfuturegoalsfor
2014:
Honesty• Alwaystellthetruth
Integrity• Alwayskeepyourdeals
Respect• Don'thurtanyone
Perseverance• Tryharderthanourcompejtors
• Nevergiveup
ServantLeadership• Careforourcustomers,communityandeachother
SupporXngGlobalDiversity
ExpandingGlobal
HealthandWelllness
PromoXngArtsandCulture
AdvancingEducaXon
Improvingthe
Environment
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35
ENVIRONMENTALGOALS
SUPPLYCHAINGOALS
2013Goals• NojcesofViolajons• Aciheved• Non-Compliance/PermitExceedences
• DidNotMeetGoal
• Spills• DidNotMeet
• Achieve1.5%fuelefficienctimprovement
• InProgress• ReduceGreenhouseGassEmissionsbelow2012
• MetwithuseofCarbonOffsets
2014Goals• Achieve1.5%FuelEfficencyImprovement
• ReduceElectricityConsumpjonatSelectedAtlantaFacilijesby10%
• SetandArchieveaWaterReducjonGoalforAtlantaTechOps
• MeetEnvironmentalGoalsforNojcesofVioltaions(2),Non-Compliance/PermitExceedences(4),andSpills(69)
• ReduceGreenhouseGasEmissionsbelow2013Levels
2013Goals• AchievesettargetsinpercentagespendthroughMBE,WBEandSBE
• Achieved
2014Goals• AchievesettargetsinpercentagespendthroughMBE,WBE,andSBE
• ConjnuetosupportallNMSDCandWBENClocalandregionalorganizajonsandefforts
• Focusonfurthermaturajonof2ndjersupplierdiversityreporjng,and2ndjergoalofincreasingMWBEby10%overall
• FocusonethicsandcomplianceforSCMstaff,suppliersandenjrecorporajon
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EMPLOYEEGOALS
CUSTOMERGOALS
2013Goals• Payprofitsharingatorabovetarget• Achieved• Earn21ormoreSharedRewardpayments
• Achieved• Conjnuebuildingagreatplacetoworkandachievea5percentoverallimprovementonthe2013EmployeeSurvey
• Achieved• PursetwoaddijonalVPPsites• Achieved• SubmitapplicajontoOSHAfortwosites
• Achieved• Conjnuetofocusonreducingseriousinjuriesfromdrivingontherampthroughincreasedobservajons;providethirdpartytoconductobservajonsandseveral
locajons
• Achieved• Provideasafeworkenvironmanefor
employees
• Achieved
2014Goals• Payprofitsharingatorabovetarget• Earn21ormoreSharedRewardpayments
• Invest$1.5billioninrejrementplans(pensionand401K)
• Provideasafeworkenvironmentforemployees
2013Goals• Improvecustomerpreferencemeasuredby"netpromoter"scoreforbothdomesjcandinternajonalservicesby10%
• Achieved• EarnJ.D.PowerAwardforCustomerServiceamoungcarriers
• InProgress• WinBusinessTravelNewssurvey
• Achieved
2014Goals• EarnJ.D.PowerAwardforCustomerServiceamoungnetworkcarriers
• WinBusinessTravelNewssurvey
• Increase"netpromoter"scoreinselectcategoriesby10%
• BeindustryleaderinDO(on-jmedeparture)andtaxijmes
DeltaAirLines
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FINANCIALGOALS
BUSINESSSTRATEGY
Source:DeltaAirLinesCorporateResponsibilityReport
Airline corporations tend to fall into two categories of cost leadersor product
differentiators.DeltaAirLines isclearlyaproductdifferentiatorduetotheirextensive
focusoncustomerrelationsandamenities.Deltahasbuiltitsbusinessutilizingthebelief
thatDeltaisa“family”andcustomersareapartofthataswell.Customersatisfaction
built through the utilization of the most innovative and efficient technology and
luxurious amenities haveputDelta at the forefront of highquality commercial airline
services. Delta attempts to offer its passengers the best amenities possible while
keeping prices low and comparable to other airline providers. As seen through their
goalsateachbusinessprocesslevel,Deltahasafocusonmakingtheircustomersmore
comfortable, theiremployeeshappierand theworldabetterplace. This same idea is
outlinedintheirmissionstatementandnotsurprisinglyeffectsthestrategicpositionof
2013Goals• Produceatleast$300MillionofvaluethroughtheMonroeTrainerRefinery
• InProgress• Deliverprojectedreturnfrom$1Billionancillaryandseatrelatedrevenue
• Achieved
2014Goals• Quarterlydividendsofapproximately$200Millionayear
• Produceatleast$300MilliionofvaluethroughtheMonroeTrainerRefinery
• Improveancillaryrevenueto$670Millionandimprovedigitalchannelcustomersajsfacjontoindustry-leadinglevels
DeltaAirLines
38
thecompany.Ratherthanbeingacostisthebottomlinecompany,Deltaputsthefocus
onqualityandsatisfaction,differentiatingthemselvesfrommanyoftheircompetitors.
ASSESSINGDEMANDFORPRODUCTS
SOURCE:FLIGHTFOX.COM,CHRISSCHLICK
Air travel services are normal goods because as demand rises the cost of the
goodalsorises.Whenlookingattheairline industry,thiscanbeseeninthepricingof
passengertickets.Ticketpricesintheairlineindustrychangeconstantlyduetodemand
andseatavailability.Dependingonfactorssuchasthetimeofdaytheflightis,theday
of the week, and when to flight is booked can affect the quoted ticket price for a
passenger’s seat.When demand rises, the airlines raise prices accordingly, but when
demand falls for certain flights the company will lower the cost of passenger seats
temporarily.Priceslevelsareonaflight-by-flightbasis.Inthesubclassofnormalgoods,
passengerairlineserviceswouldbeconsideredaluxurygood.Airlineservicesareleisure
goods and when the economy is doing poorly the average family’s income spent on
leisure activities decreases significantly. Because consumers can dowithout air travel
duringtougheconomictimes,theservicewouldmost likelyfall intheluxurycategory.
Overallairservicecompaniesprofitssoarduringgoodeconomictimesduetoincrease
leisure travel, the only exceptionwould be business travel,whichwould still become
more limited by employers during economic downturns. On the other hand, the
DeltaAirLines
39
refinery segment of the Delta would also be a normal good, but instead of being
classifiedasaluxuryitemitwouldfallunderthenecessitycategorybecauseoftheneed
forjetfueltoprovidetheservicetocustomers.
ASSESSINGSUPPLYOFINPUTS
SOURCES:DELTAAIRLINES.COM,BOEING.COM
The biggest input in the airline industry is gasoline and aircrafts. Since Delta
Airlineshas takenaway the supplierportionof thegasoline supply chaindue to their
refinerysegment,Delta’s inputsareheavilyfocusedontheiraircraftfleet.Theseinput
costs include airplanes, parts and innovative technology upgrades. According to
DeltaAirLines.comthecompanyspentmoneyinthefollowingthreemaincategorieslast
year:Aircraft,GroundSupportEquipmentandSimulators.
Aircrafts GroundSupportEquipment Simulators
Aircraft&Engine
Parts
Insurance(Corporate) Supplies
AirportServices Mail&Postage Technology-Hardware
Beverages Marketing Technology-Phones&
Pagers
Cargo Meetings&Events Technology-Software
Environmental
Services
MRO(Mtc.Repair&Overhaul) Tooling
Equipment Paper&PrintedProducts Transportation
Facilities
Maintenance
PassengerExpenses(IROPs) Travel&Expenses
Food ProfessionalServices Uniforms
Fuel Safety&Security
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40
Focusing on the biggest
investment of inputs in the Airline
Industry,theaircraftsareprovidedby
two companies: Boeing and Airbus.
Boeing and Airbus are for the most
parttheonlytwocommercialaircraft
manufacturers with substantial
market shares. The small amount of
competition in the aircraft
manufacturing allows manufacturers
to build long-term contracts with
airlines and leaves air service
corporations such as Delta with little choice in manufacturer. Delta currently has an
aircraft fleetof764planeswith583ofthoseownedand181 leased.Themajorityare
Boeing aircraftmodelswith a few Airbus planes aswell. Looking at Boeing’swebsite
mostofthe700lineplanesthatDeltapurchaseshaveastickerpricebetween$330and
$380 million, further highlighting the extensive investment airline service providers
mustplace in theircompanies. Thetablebelowshowstheaircrafts inDelta’scurrent
Aircraft Owned Leased TotalB717–200 - 45 45
B737–700 10 - 10
B737–800 73 - 73
B737–900ER 17 10 27
B747–400 4 9 13
B757–200 92 35 127
B757–300 16 - 16
B767–300 11 5 16
B767–300ER 51 7 58
B767–400ER 21 - 21
B777–200ER 8 - 8
B777–200LR 10 - 10
A319–100 55 2 57
A320–200 50 19 69
A330–200 11 - 11
A330–300 21 - 21
MD–88 76 41 117
MD–90 57 8 65
Total 583 181 764
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fleetwith“B”aircraftsstandingforBoeingproducedplanes,“A”forAirbus,and“MD”
forMcDonald-Douglass(nowownedbyBoeing)planes.
Althoughanaircraftfleetisalargeinitialinvestment,theplaneslastmanyyears
allowingairplanecompaniestoutilizetheassettoitsfulldepreciation.Theplaneitself
may stay structurally throughout its years of use but the consumer amenities are
updatedtoprovidemorecomfortableandenjoyableflights.Airlinepurchasesareoften
very volatile and will be postponed depending on the current state of economy and
demandfor flights. Ifcustomersarecurrentlyunwillingtospendonair transportation
companies, suchasDelta,willpostponeaircraftpurchases.Therefore the relationship
betweenaircraftinputsandconsumerdemandisdirectandhasahighcorrelation.
Delta’svaluescontinuetoshineevenwiththeirchoiceinsuppliers.Thecompany
createdaplantowardssupplierdiversitybyutilizingsuppliersthatareowned,operated
and controlled by one of the following minority groups:Women, African Americans,
AsianAmerican,HispanicAmerican,NativeAmericans,DisabledVeterans,Gay,Lesbian,
andBisexual&Transgender. Delta’sgoal is tobuild relationshipswithmorequalified
anddiverse suppliersand theyencourage theirother suppliers todo soaswell. They
alsohopethat theprogramwillaid in thegrowthof jobs, theUSEconomy,andDelta
stockholder’sreturn.
DeltaAirLines
42
COMPETITORSSOURCE:IBISWORLD.COM
DOMESTICMARKETSHAREBYCOMPANY
INTERNATIONALMARKETSHAREBYCOMPANY
Delta has competitors on both the domestic and international level. Although
thereamultiple competitive forces that rivalDeltaAir Lines the twomain companies
thatcompetedirectlywithDeltaAirLinesonboththedomesticandinternationalfield
areAmericanAirlinesGroupInc.andUnitedContinentalHoldingsInc.WhileDeltaisnot
the leader in thedomesticor internationalmarkets, itdoesholda substantialmarket
share with 18.0 percent and 21.1 percent of the domestic and international market
share,respectively.
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43
UnitedContinentalHoldingsInc.
DomesticMarketShare:16.9percent
InternationalMarketShare:26.2percent
United ContinentalHoldings Inc. is the parent company ofUnitedAirlines and
Continental Airlines. They are headquartered in Chicago, IL and the two subsidiaries
merged in2010.Thecompanyhasabout5,600 flightsadayandservesdomesticand
international locations. The company serves international locations through its Star
Alliancenetworkandemploys80,500staffearning$38.8billionworldwide.
AmericanAirlinesGroupInc.
DomesticMarketShare:19.9percent
InternationalMarketShare:23.1percent
AmericanAirlinesGroupInc.istheparentcompanyofAmericanAirlinesandUS
Airways.AmericanAirlinesisheadquarteredinFortWorth,TXandthetwosubsidiaries
merged in 2013. The merger was not easy with the Department of Justice forcing
Americantogiveup landingspotsatmultipleairports inorder for themerger to take
place. The companyhas about 6,700 flights a day to 339destinations in 54 countries
around theworld. In2011,AmericanAirlines filed forChapter11Bankruptcywhen it
had$29.6billionindebt.Themergerbetweenthetwocompaniesearned$41.2billion
DeltaAirLines
44
in 2014, making it the highest revenue airline service. The company employs over
100,000worldwide.
DIRECTCOMPETITORCOMPARISON
DatainTableProvidedbyYahoo!FinanceDAL:DETLAAIRLINES,AAL:AMERICANAIRLINES,UAL:UNITEDCONTINENTALHOLDINGS
GEOPOLITICALRISKSSource:IBISWorld.com
1. OilPrices
OilPricesarevolatileandthereforehaveamajor impactonthecostof
transportationincludingtheairlineindustry.Luckily,Deltahascreatedarefinery
segment decreasing some of the middleman costs of refining crude oil. Still,
crudeoilpriceschangedailyandthereforeaffectthecostofflyingtheirplanes.
Deltahasno control over thepriceof crudeoil and trendsonly foreshadowa
DAL AAL UAL IndustryMarkeyCap 39.90B 36.11B 26.01B 2.50B
Employees 79,655 111,852 80,500 59.71K
QtrlyRevGrowth .06 .63 0.00 .25
Revenue 40.36B 39.86B 39.90B 14.75B
GrossMargin .20 .27 .28 .21
EBITDA 4.70B 5.67B 4.48B 1.52B
OperatingMargin .07 .11 .07 .09
NetIncome 659M 284M 1.13B N/A
EPS .78 .51 2.93 .51
P/E 62.00 98.32 24.05 63.05
P/S 1.01 .95 .68 1.01
DeltaAirLines
45
continued rise in its average price in the future. The estimated barrel price is
2015was$56.70perbarrel,butinrealityitroseto$72.60perbarrelthatyear.
2. InternationalTravel
Since the recession it has become safer and cheaper for international
travel.ThelargestnumberofvisitorscamefromCanadaandMexicototheUSin
2014. The concern is the safety of US passengers flying internationally to
sometimesconflictingnations.Theotherconcernisforeignpassengerstraveling
totheUS.WithrecentoutbreakssuchasEbola, internationaltravelregulations
aretakingnewmeaningtogivethehealthandsecurityoftheUSincheck.
3. TerrorismandConflict
Increasedsecurityneedsduetoconflictabroadandterroristattacksand
attempts such as 9/11. 9/11 took a hard hit on the airline industry, causing a
complete restructuring of the security regulations and rules. Flying into
conflictingnationsbringsworriesofsafetyforpassengersandaircrafts.
DeltaAirLines
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PORTER’SCOMPETITIVEFORCES
ReferenceforModel:Investopedia.comandAirlineIndustryAnalysis
Porter'sFiveForcesModel
RivalryAmoungExisXngFirms
• Highlycompejtvebetweenbrands
• Thereforemustdifferenjateservicesto
amractamarketsegmentofconsumers
• HIGHTHREAT
DeterminantsofSupplierPower
• Aircrassonlyhavetwoprimarysuppliers:Boeing
andAirbus
• Standardizedproductwithlimledifferientajon
• Airlinecompaniescannoteasilyswitchsuppliersduetohighcostandlong-termcontracts
• Unionscontrollaborsupply
• MILDTHREAT
ThreatofNewEntrants
• Largeamountofinvestmenttoenterindustry
• Difficulttobuildcustomerloyaltyandtrustdueto
consumerswanjngtobuyjcketsfromairlineswithproven
safetyandreliability
• Lowswitchingcostsbetweenbrands
• Needforaviajonexperienceandlicesnsestoenter
• Governmentregulajonsonindustry
• LOWTHREAT
DeterminantsofBuyerPower
• Buyergroupsincludepassengersandtravelagents
• Passengers-focusonjmeandcostofflight
• Travelagents-middlemanbetweenpassengersandairlines
• Lowswitchingcostbetweenbrandswithsameservicebeingprovidedwithdifferenjajonlayinginthecostoramenijes
• LOWTHREAT
ThreatofSubsXtuteProducts
• Threatincludesothersourcesoftransportajonsuchascar,train,busor
boat
• Airlinesprovidedshortesttraveljme
• Othertransportajonsmaybeopjmalopjonsforshorttravelorlow
monetarycosts
• MILDTHREAT
DeltaAirLines
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SWOTANALYSIS
ReferenceforModel:Investopedia.com
Strengths• AirTravel=lesstraveljme
• Highsafetystandardsandrecords• Heavyfocusoncustomersajsfacjonandamenijes
• Lowpricerefinedfuelandprofitsfromrefinerysales
• Highlyinnovajveandefficentprocesses
Weaknesses• Perishabilityofseats• Largeinvestmentanddebtnecessarytopuchaseaircrass
• Higherpricesthansomecompejtors
OpportuniXes• Currentlowgasprices• Increasedadvancesintechnologyaidinimprovement
• Currentupturnoftheeconomy,increaseinleisurespending
Threats• Uncertainityofcrudeoilpricesinthefuture• Dependencyonweather• Increasedregulajonsbygovernmentagencies
• TerrorismandConflict
• DomesjcandInternajonalCompejjon
• Economicdepressions,decreaseleisurespending
SWOT
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CHAPTERTHREEASSETCOMPOSITION
Delta currently has assets totaling$54,252million, and its composition canbe
split intothreemaingroups:CurrentAssets,PPE(Plant,PropertyandEquipment),and
Other Assets. Current Assets includes the subgroups of cash, cash equivalents, short-
terminvestments,restrictedcash,accountreceivable,fuelinventory,expendableparts
and supplies inventories, deferred income taxes, and prepaid expenses. Totaling at
$9,651million,currentassetsonlycomposes18percentofDelta’stotalassets.ThePPE
category is compromised of the property and equipment Delta owns such as their
aircrafts, which results in 42 percent of Delta’s assets. Finally Other Assets includes
subgroups of goodwill, identifiable intangibles, deferred income taxes, and other
18%
42%
40%
DeltaAssetComposiXon(inmillions)TotalAssets=$52,252
CurrentAssetsPPE
OtherAssets
DeltaAirLines
49
noncurrentassets.Thesealsotakealargeportionoftheassetcompositionat40%.The
companydoeshavequiteabitof goodwill and intangibleassetswith$14,362million
creatingapproximately27percentofthetotalassetcomposition.
The company makes some valuations utilizing fair market value but must
estimate for others. According to the companies 10-K they do make estimations on
certainvaluesofassetsandotherentities,butcomplywithGAAPpolicies.Forgoodwill
andintangiblesthe10-KstatesthatDeltautilizesafairmarketvalueimpairmenttoset
the value of intangible assets. Items in PPE are recorded utilizing impairments,
depreciationandpredictorsforfuturecashflowstodeterminethecarryingvalueofthe
property, plant or equipment item. Fair market value assets included cash, cash
equivalents, long-term investments, restricted cash, and hedge derivatives The main
entitiesDeltaAirLinesestimatesthatmaynotbeprecisewithactualvalueaccordingto
their10-KistheFrequentFlyerProgram,PassengerTicketSalesEarningMileageCredits,
Sale of Mileage Credits, Breakage, Goodwill, Intangibles, Long-Lived Assets (PPE),
Income Tax Valuation Allowances, Defined Benefit Pension Plans, Weighted-Average
Discount Rate, Expected Long-Term Rate of Return, and Funding. Items that are
estimated that involve customer contact (Frequent Flyer Program, Passenger Ticket
SalesEarningMileageCredits,SaleofMileageCredits)aremorelikelytobesensitiveto
change because the external environment affects them, which is outside of Delta’s
DeltaAirLines
50
control. Plus customers tend to be more unstable and volatile than entities such as
taxation,depreciationoflong-termassetsandsetpensionplans.
DeltaAirLines(DAL)maindomesticandinternationalcompetitorsareAmerican
AirlinesGroup(AAL)andUnitedContinentalHoldings(UAL).Thethreeindustryleaders
allcontainprimarilythesamecompositionofassets,withvariancesbetweenthegroups
lyingintheamountofOtherAssets.OverallPPEisthehighestassetgroup,followedby
OtherAssetsandfinallyCurrentAssetsacrossall industrycompetitors. CurrentAssets
are usually low for airlines due to the large investment in PPE. PPE is essential to
functionof the companybecause theplanesandairport gatesneeded toprovide the
DAL AAL UAL
OtherAssets 20,747 8,696 10,063
PPE 21,854 19,259 18,047
CurrentAssets 9,651 14,323 8,702
0
10,000
20,000
30,000
40,000
50,000
60,000
Dollars(inm
illions)
IndustryComparisonsofAssetComposiXons(2013)
DeltaAirLines
51
serviceareclassifiedasPPE,wheremostretailcompaniesclassifywhattheyareselling
asinventory,acurrentasset.So,thisclassificationoftheserviceprovidedasalong-term
asset tends tohurtAirlineCompany’scurrentasset ratio,dueto itsexclusionof long-
termassetsinitscalculations.Thistrendofshort-termorcurrentassetsbeinglowand
long-termorPPEandotherassetsbeinghighcanbeseenthroughoutthepastfiveyears
atDeltaAirLinesandisdepicted inthegraphicbelow.Theairline industrymost likely
willnot seea change in this typeof compositionofassetsdue to the requirement to
place their product/service provided into the long-term category rather than a short-
termentity.
COMPANYFINANCING
2013 2012 2011 2010 2009
Long-TermAssets 42,601 36,278 35,770 35,881 35,798
Short-TermAssets 9,651 8,272 7,729 7,307 7,991
010,00020,00030,00040,00050,00060,000
Dollars(inmillions)
Short-TermandLong-TermAssetComparison
(INMILLIONSOF
DOLLARS)
2013 2012 2011 2010 2009
TOTALLIABILITIES 40,609 46,681 44,895 42,291 43,544
PIC 13,982 14,069 13,999 13,926 13,897
DeltaAirLines
52
Looking at Delta Air Lines financing, an adjustment was necessary when
comparing total liabilities with total equity to determinewhich primarily handles the
company’s financing.TotalStockholderEquitywouldnotbeappropriate touse in this
situationduetothedeficitinRetainedEarningsoccurringinmanyoftheyearsatDelta,
seemingly looking like therewasno income fromstock. Therefore, in this section the
comparisonof total liabilitieswaspairedwithPaid inCapital.Unsurprisingly,DeltaAir
Lines hadmuchhigher amounts of liabilities than stock income in the past five years
meaningthatthecompanyreliesheavilyonloansanddebttofinanceexpenditures.This
isriskybecauseitcanputthecompanyindebtandnegativelyaffectthesolvencyratios
duetothelargeamountsofliabilitiesandsmallamountsofequity.Largedebt-to-equity
ratiosmeanthecompanyismoreriskyduetotheincreasedloans.Onthenextpage,a
graphic showing the debt-to-equity ratios of Delta Air Lines over the past five years
comparedto itscompetitorsdepictstheenormousrangeofchange inDelta’sratio. In
2009,thecompanywasfacingextremelyhighriskdueto itshighdebt-to-equityratio.
Thislaterfellin2011and2012toanegativedebt-to-equityvalue.Anegativesolvency
ratiooften implies that the companyhasa largeportionof investment ingoodwill or
intangibles.Finallyin2013,Deltawasabletorestoreitsdebt-to-equityratiotoanormal
valueforairlineserviceindustryproviders.Furtherprovingthecompany’simprovement
inrecentyearsanddecreasedrisktoshareholders.
DeltaAirLines
53
2013 2012 2011 2010 2009
DAL 3.49 -21.91 -32.16 47.15 177.73
AAL -3.65 -2.76 -4.35 -7.36 -8.29
UAL 11.35 77.23 19.99 21.89 -7.65
-35-30-25-20-15-10-505
101520253035404550556065707580859095100105110115120125130135140145150155160165170175180
Deb
t-to-Equ
ityRa
Xon
Debt-to-Equity:5YearIndustryComparison
DeltaAirLines
54
ThefollowingisDeltaAirLines’compositionofbothcurrentandnoncurrentliabilities:
11%
29%
16%
14%
13%
5%4%
8%
CurrentLiabiliXesTotalCurrentLiabiliXes=$14,152
CurrentMaturijes
AirTrafficLiability
A/P
AccruedSalariesandBenefits
FrequentFlyerDeferredRevenue
TaxesPayable
FuelCardObligajon
OtherAccruedLiabilites
37%
47%
10%6%
NoncurrentLiabiliXesTotalNoncurrentLiabiliXes=$26,457
Long-termDebtandCapitalLeases
Pension
FrequentFlyerDeferredRevenue
DeferredIncomeTaxes
OtherNoncurrentLiabilijes
DeltaAirLines
55
AmajorityofDeltaAirLines’liabilityresidesinlong-termliabilities,whichhavea
largerandlongercommitmentthancurrentliabilities.Thismakessenseonceagaindue
to theequipmentneeded toprovide flight services tocustomers.Aircraftsareahuge
expense,meaning that they cannotbepaid inone yearor less. Thismere fact alone,
causeDelta’snoncurrentliabilitiestobemuchlargerthancurrent.Anotherlargepartof
Delta’snoncurrentliabilitiesistheirpensionplans.ThisisinlinewithDelta’scorevalue
of providing high levels of customer and employee satisfaction by offering superior
pensionplanstotheiremployees.Lookingatthetablebelow,thecomparisonofcurrent
tononcurrentliabilitiesisshownoverthelastfiveyears:
2013 2012 2011 2010 2009
NoncurrentLiabiliXes 26,457 33,411 32,194 30,906 33,747
CurrentLiabiliXes 14,152 13,270 12,701 11,385 9,797
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Dollars(inmillions)
LiabilityComposiXonOvera5YearPeriod
DeltaAirLines
56
Over the past five years Delta has been increasing its current liabilities and
normally decreasing its liabilities except for 2012 and 2011. This could mean a few
differentthings.First,Deltacouldbepayingofftheirnoncurrentliabilitiesmakingthem
currentliabilities.Thiswouldbeapositivechangeforthecompanyandfurtherhighlight
therecentfinancialimprovementsthecompanyhasbeenmakingsincethebeginningof
the new decade. Second, Delta could bemakingmore transactions or contracts on a
short-termloanbasisratherthanalong-termholding.Thiscouldbeapositivechangeif
it isduetothefact thatDeltacanaffordandhastheassetstopayfortheamountof
purchasesonashort-termbasisratherthanneedingtoextendtolong-termcontracts.
DeltaAirLines
57
CASHFLOWS
The trend over the last five years in Delta Air Lines cash flows highlights the
company’seconomiclifecyclestage.Withoperatingactivitiesbeingpositivevaluesover
thepast five years, and financing and investing activities beingnegative integers, this
2013 2012 2011 2010 2009
OperaXng 4,504 2,476 2,834 2,832 1,379
InvesXng (2,756) (1,962) (907) (1,005) (951)
Financing (1,320) (755) (1,571) (2,521) (19)
CashIncrease 428 (241) (235) (1,715) 352
(3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
Dollars(inmillions)
DeltaAirLinesCashFlows5YearComparison
DeltaAirLines
58
indicates that the company is at themature stage of its life cycle. Themature cycle
indicatesthattheprofitswillbegintofallandsaleswillpeak.Duringthematuritystage
ofacompanyitisessentialfortheorganizationtoinnovateanddifferentiateitselffrom
itscompetitorsduetothehighsaturationof themarket. Inorder toavoid falling into
thedecliningstagethecompanymustfindawaytoincreaseprofitabilityandcontinue
to update the services and products it provides to customers to stay relevant and
coveted.
LIQUIDITY,SOLVENCYANDEARNINGSPERSHARE
(INMILLIONSOFDOLLARS) 2013 2012 2011 2010 2009CURRENTRATIO 0.68
0.62
0.61
0.64
0.82
DEBT-TO-EQUITY 3.49
(21.91)
(32.16)
47.15
177.73
TIMESINTERESTEARNED 5.00
2.26
1.85
1.63
(0.79)
EARNINGSPERSHARE 12.41
1.20
1.02
0.71
(1.50)
Liquidity:CurrentRatio
Thecurrentratiohasbeenslightlyimprovingsinceissubstantialfallafter2009.
Asdiscussedearlier the likelycauseofsucha lowcurrent ratio is that themajorityof
assets needed to provide air passenger services to customers are long-term and
thereforenotincludedintheratio.Thiscausesthenumeratortobeextremelysmallin
DeltaAirLines
59
comparison to the large amount of liabilities needed to pay for the long-termassets,
makingthecurrentratioconsistentlylessthanoneforDeltaAirLines.
Solvency:Debt-to-EquityandTimesInterestEarned
Debt-to-Equity has substantially improvedwith it going from extreme highs in
2009and2010,tonegativevaluesin2011and2012andfinallyanormalamountforthe
industryin2013.ThistypeofchangedepictsthatDeltahasmovedfromextremedebt,
toextreme investment in intangibleassets, to finallyabalanced relationshipbetween
theamountsofdebttheyhaveandtheamountofequitytheyarereceivingfromtheir
investors.
Times Interest Earned clearly shows the improvements of Delta Air Lines over
thepastfiveyears.Thetimesinterestsearnedvalueshavegrowneachyearsince2009,
withasignificant jumpfrom2012to2013.This impliesthatcompanycanpayback its
interest costs more times with their income. This shows that the riskiness of the
companyisfallingandthatthecompanyisbecomingmoresolvent.
EarningsperShare
EarningsperSharehavealsosignificantlyincreasedinthepastfiveyears,witha
large growth between 2012 and 2013. This number has been achieved in the recent
DeltaAirLines
60
years due to the large income growth with relatively same numbers of outstanding
shares; meaning the numerator had a drastic increase with a constant denominator.
ThisisagoodsignforDeltaAirLinesbecauseitimpliesthatthecompanyhasincreased
itsprofitsandthereforecanpaymoredividendstoitsshareholders.
DeltaAirLines
61
CHAPTERFOURACCOUNTSRECEIVABLE
According to Delta Air Lines’ 10-K the Accounts Receivable account is mainly
composed of the amount due from credit card companies for passenger’s airfare,
maintenance and cargo transportation services payments and mileage credits from
SkyMilesProgram.MostofDeltaAir Lines’ accounts receivables are frompassengers,
whichmakethecreditworthinesshighlydifferentiated.
ACCOUNTSRECEIVABLEDATA
2013 2012 2011 2010 2009
AccountsReceivable(inbillions)
$1,609 $1,693 $1,563 $1,456 $1,353
AccountsReceivableTurnover
22.88times
22.52times
23.26times
22.61times
19.58times
AverageCollectionPeriod 15.55days
16.85days
16.24days
16.74days
17.60days
AllowanceforDoubtfulAccounts(inbillions)
$23 $36 $33 $40 $47
AllowanceforDoubtfulAccountsasaPercentofAccountsReceivable
1.43% 2.13% 2.11% 2.74% 3.47%
Overthepast fiveyearsDelta’saccountsreceivableturnoverhasfluctuatedup
and down, but had amajor increase after 2009. 2013’s accounts receivable turnover
was higher than 2012’smeaning the company is collectingmore of their receivables
throughouttheyear.Thecompanyoverallhasbeenfairlyconsistentsince2010inthe
DeltaAirLines
62
area of accounts receivable turnover. As for average collection period the value has
beenoveralladecreasingtrendoverthepastfiveyears.Thisdecreasingtrendispositive
because itmeansthecompany iscollectingcustomer’spaymentsmorequickly.Below
trend graphs depict the accounts receivable turnover and average collection period.
Mostofthecreditisfrompassengerssothevaluesrepresentthatmostoftheaccounts
receivable has a fairly short collection period due to the credit being spread out
betweenmanyconsumersratherthanjustafewbuyers.
22.8822.52
23.2622.61
19.58
17
18
19
20
21
22
23
24
2013 2012 2011 2010 2009
AccountsReceivableTurnover
15.55
16.85
16.24
16.74
17.6
14.5
15
15.5
16
16.5
17
17.5
18
2013 2012 2011 2010 2009
AverageCollecXonPeriod
DeltaAirLines
63
Thecompanyestimatestheirbaddebtsexpensebyusinghistoricalchargebacks,
write-offs, bankruptcies and other specific analyses, but the bad debts expense is
immaterial and therefore fairly irrelevant. But the bad debts expense data does
illuminate that the company is typically predicting less bad debts expense each year
over the past five years, meaning that the company is expecting to receivemore of
accountsreceivablepayments.Theeffectofalowbaddebtsexpensewouldbehigher
net incomebecause the companywouldhave less expense reportedon their income
statement.
AcompanysuchasDeltaAirLinesmaymanipulatetheiraccountsreceivable in
order to increasenet income.Theirbaddebtsexpense is immaterial,meaning itdoes
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
2013 2012 2011 2010 2009
BadDebtsExpenseasaPercentofA/R
DeltaAirLines
64
nothaveahugeeffectontheaccountsreceivable.However,thelowestimationcould
have been purposeful. By reporting less bad debts expense, Delta is decreasing the
amountofexpensesreportedontheincomestatementandconsequentlyincreasingnet
income.Thatbeingsaid,itmakessenseforDeltatohavefairlylowbaddebtsexpense
due to the large amount of accounts receivable being low amount consumer airfare
creditpurchases.Channel stuffingwouldbedifficult tomanipulatedue to the limit in
theamountofproduct(numberofseats)availabletoselltoconsumers.Inotherwords,
there is a limit in theamount the company can report as sales throughadistribution
channel.Meaning that channel stuffing ismost likely notwhereDeltaAir Lines could
manipulateaccountsreceivable. Finally,thereisapossibilityofthecompanyselling it
accountsreceivable.Thiswouldcauseartificiallyhighrevenueduetothe“collection”of
theaccountsreceivable,whichwouldcausenetincometoincrease.Thecompanycould
bemotivatedtomanipulateaccountsreceivablebecausestakeholderstendtoonlycare
about income.Havingabiggerbottomlinewouldmotivatecompaniestoperformthis
typeofmanipulation.
INVENTORY
According to the 10-K, Delta Airlines’ types of inventory fall in two main
categories: Spare Parts and Refinery Items. Spare parts inventory includes disposable
partsrelatedtoflightequipmentthatcannotbereusedandthenflightpartsthathave
DeltaAirLines
65
value after the aircraft is retired from service. The parts that are disposable have a
carryingvalueofaveragecostandarechargedtooperationswhentheyareused.The
companycreatesanallowanceforobsolescencebycomputingtheremainingusefullife
ofsparepartswhentheaircrafthasbeenretired.Therealso isanallowanceforparts
thatareinexcessorobsoletethatisusedtolowercarryingvaluetolowerofcostornet
realizablevalue.Sparepartsarepredictedtohavearesidualvalueof5%oforiginalcost.
Theothertypesofinventoryincluderefineryproducts,feedstockandblendstock.These
areall finishedgoods fromthe refineryprocessandhaveacarryingvalueof lowerof
costormarket.FIFOmethodisutilizedtodeterminecostallocationandthetotalcosts
include direct material, direct labor and manufacturing overhead. If the ending
inventorycostsofaproductarehigherthanmarketvaluetheyarewrittendownatnet
recoverablevaluesandplacedinoperatingexpenses.
INVENTORYDATA
2013 2012 2011 2010 2009
SparePartsInventory(inbillions)
$357 $404 $367 $318 $327
FuelInventory(inbillions)
$706 $619 $168 X X
TotalInventory(inbillions)
$1063 $1023 $535 $318 $327
GrossProfitMargin 21.18% 22.70% 19.39% 21.80% 15.59%InventoryTurnover 28.54
times36.39times
66.37times
77.00times
66.29times
AverageInventoryDaysOutstanding
13.03days
13.17days
6.90days 4.67days 5.04days
DeltaAirLines
66
Thegrossprofitmarginoverthepastfiveyearsincreasedgreatlyafter2009,but
since thenhas stayed fairly stablewith a slight drop in 2010. The gross profitmargin
depicts theamounta company receives for a saleof aproductonce costshavebeen
deducted.Aconstantgrossprofitmarginprovidesthatcostsperunitandsalespriceper
unitarestayingrelativelystableaswell.Whenlookingatbothinventoryturnoverand
average inventorydaysoutstanding,adramaticchangeoccurs in2010andthereafter.
This is due to the implementation of the refinery segment for Delta Airlines. Delta
refinescrudeoiltojetfuelthattheyutilizeontheirownaircraftsandselltheexcessto
otherairlinecarriers.BecauseDeltausessomeofitsinventoryforitsownservices,the
inventory turnover decreased significantly and average inventory days outstanding
increaseddrasticallydue toan increase in theamountof inventoryonhandbut little
change in the amount of sales. Although a low inventory turnover and high average
inventorydaysoutstanding is typically anegativeattribute, thedata is abit distorted
duetoDelta’srefinerysegmentimplementation.
DeltaAirLines
67
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2013 2012 2011 2010 2009
GrossProfitMargin
GrossProfitMargin
0
10
20
30
40
50
60
70
80
90
2013 2012 2011 2010 2009
InventoryTurnover
InventoryTurnover
DeltaAirLines
68
Possibleinventorymanipulationscouldhaveoccurredtoprovidehigherincome
forDeltaAirLines.Somecompaniesareabletomanipulatetheir inventory iftheyuse
LIFO valuationmethodby releasing LIFO reserve to earning by decreasing production
relativetosales.SinceDeltadoesnotutilizeLIFOvaluation,thecompanywouldnotbe
abletoimplementsuchamanipulation.Anotherpossibilityofmanipulationisdelaying
inventory write-downs to avoid a loss. This could happen when Delta is reporting
inventory at lower of cost ormarket. The company could delay this process until the
marketpricerisesagainthereforeavoidinga lossontheirproductsonhand.Avoiding
this losswill artificially raise incomes,which once again allows Delta to be perceived
0
2
4
6
8
10
12
14
2013 2012 2011 2010 2009
AverageInventoryDaysOustanding
DeltaAirLines
69
betterby stockholders. Finally,Delta couldmanipulate inventoryby lowmarketvalue
write-offs thatwould later showextremeprofitswhen sold at amuch highermarket
value. This kind of manipulation would show profits that did not actually exist and
consequently cause net income to increase. Inventory is yet another aspect that
companies can possibly manipulate to cause higher stated profits on their financial
statements.
PROPERTY,PLANTANDEQUIPMENT
DeltaAirLinescontainsalargeamountofproperty,plantandequipmentdueto
the fact that its service involves providing a long-term asset for consumer
transportation.ThecompanyhastwomaintypesofPPE:flightequipmentandground
and property equipment (owned and under capital leases). The company computes
depreciationby reportingpropertyandequipmentat costanddepreciating itutilizing
the straight-linemethodbasedonanestimated salvage valueandestimatedyearsof
usefullife.Salvagevalueofownedequipmentisfivetotenpercentofcost.
DeltaAirLines
70
PROPERTY,PLANT,ANDEQUIPMENT
From2012to2013,thecompanyacquirednewflightequipmentandgroundand
propertyequipment.Thiscanberecognizedduetheincreaseinamountsfrom2012to
2013ratherthanadecreasethatwouldoccurthroughnormalstraight-linedepreciation
from year-to-year. Also, we see an increase in advance payments for equipment,
(inmillionsexceptuseful
life)
EstimatedUsefulLife
2013 2012 2011 2010 2009
FlightEquipment
21-30years $23,373 $21,481 $21,001 $20,312 $19,513
GroundPropertyandEquipment
3-40years $4,569 $4,254 $3,256 $3,123 $2,963
FlightandGround
EquipmentunderCapital
Leases
Shorterof
leaseterm
orestimated
usefullife
$1,296 $1,381 $1,127 $988 $717
AssetsConstructedfor
Others
30years X X $234 X X
AdvancePaymentsforEquipment
$381 $253 $77 $48 $191
(AccumulatedDepreciation
andAmortization)
($7,792) ($6,656) ($5,472) ($4,164) ($2,924)
Totalpropertyandequipment
$21,854 $20,713 $20,223 $20,307 $20,433
FixedAssetTurnoverRate
1.73times
1.77times
1.74times
1.56times
1.37times
DeltaAirLines
71
meaningthecompanyhasplanstogetmoreequipmentorpropertyinthenearfuture.
Since2010,thefixedassetturnoverratiohasstayedfairlystable,butitincreasedfrom
2009 to 2011. An increase in fixed asset turnover is a positive changemeaning that
Delta’sfixedassetsweremoreproductiveingeneratingsalesinrecentyears.
Deltareportsimpairmentsonlong-termassetsformultiplereasonsincluding:1)
decision to remove flight equipment permanently, 2) large changes in useful life
estimate3) largechanges inprojectedcashflows,4)permanentandlargedecrease in
aircraft fleet fairvalues5)achange in regulation.Long-termassetsheld for salehave
discontinued depreciation and impairment losseswhen carrying value is greater than
fairvalueminuscostofgood.Theimpairmentonaircraftsisdonebygroupingaircrafts
bytype,estimating futurecash flowsbasedonnumerous factors (capacity,mileyield,
fuelcost,laborcost,etc.)andrecognizinganimpairmentlosswhenthecarryingvalueis
greaterthantheestimatedfairmarketvalue.Fairmarketvalueestimation isprovided
throughappraisals,bidsandthirdpartysources.Lookingatthe10-K,noimpairmentis
noted or recorded specifically for long-term assets, so it is assumed that none have
occurredinthepastfiveyears.
(Inyears) 2013 2012 2011 2010 2009
AverageAgeofAssets 4.98 4.05 3.59 2.69 1.83RemainingUsefulLife 18.93 16.68 16.84 15.78 14.64
DeltaAirLines
72
The average age of assets has increased significantly since 2009meaning the
company’sassetsaredeterioratingmorerapidlythaninearlieryears,butontheother
handtheremainingusefullifeisincreasingrapidlysince2009.Anincreasingremaining
useful life indicates thatassetshavemore timebefore theyneed tobe replaced.The
opposing viewpoints of the average age of assets and the remaining useful life is
concerningbecauseincreasingageandincreasingusefullifedonotcorrelate.Thiscould
meanmanipulation of long-term assets has taken place. By increasing the remaining
usefullifeofanassetthecompanyisabletoincreasethedenominatorofthestraight-
linedepreciation equation. Thedenominator increase causesdepreciation expense to
decrease, and as a result, fewer expenses reported on the income statement.
Consequently, higher net income is reported. Since depreciation is very volatile
dependingonchoicesmanagersmakeinitscalculation,property,plantandequipment
assetstendtobeeasiertomanipulate.
DeltaAirLines
73
CHAPTERFIVEINTERCORPORATEINVESTMENTS
DeltaAirLinesdoesa largepartofbusiness in intercorporate investmentsand
acquisitions.Lookingat long-terminvestmentsfootnotesinthefirm’s201310-K, long-
term investments areprimarily equity investments inGrupoAeromexico SABdeC.V.,
the parent company of Aeromexico located inMexico and Linhas Aereas Inteligentes
S.A., the parent company ofGOL located in Brazil. Delta basis its investments on the
quotedmarketpriceof thepublically traded firmsand they soldall theirauction rate
securities this year. The equity investments in the two companies are separate and
$109
$208$188
$144$129
$0
$50
$100
$150
$200
$250
2013 2012 2011 2010 2009
Long-TermInvestments(inmillionsofdollars)
DeltaAirLines
74
Deltahasanexclusivecommercialrelationshipwiththecompanies.Deltainvestsinthe
twoLatinAmericanAirlineCarriersbecausetheyoperateinthelargestLatinAmerican
markets.Theinvestmentallowsthecompaniestoshareentitiessuchasfrequentflyer
milesprogram,airportloungeaccess,passengerconnectionsandjointsales.Specifically
with Aeromexico, Delta has a joint venture that allows for shared repair and
maintenanceonaircraftsinQueretaro,Mexico.Thelong-terminvestmentsin2013and
2012wereprimarilyauctionrateequityinvestmentsinGOLandAeromexico,butprior
to2013and2012Deltahadinvestmentsinotherentities.From2009to2011,long-term
investments consisted of student loan back available-for-sale and trading securities.
Long-termInvestmentssignificantlydroppedin2013,butconsistentlygrewfrom2009
to2012.
2013 2012 2011 2010 2009
Goodwill $9,794 $9,794 $9,794 $9,794 $9,787
$9,782
$9,784
$9,786
$9,788
$9,790
$9,792
$9,794
$9,796
GoodwillOverthePastFiveYears(inmillionsofdollars)
DeltaAirLines
75
DeltaAirLinesgrowsthroughacquisitionandmergersratherthanorganically
throughnewmarketsandcustomers.Duringthe2013,thecompanymadea49%equity
investmentinVirginAtlanticfor$360million.AlsoitisnotedthatinMay2013Delta
acquiredEndeavorAir,Inc.aspartofareorganizationplan.From2009to2011,long-
terminvestmentsconsistedofstudentloanbackavailable-for-saleandtrading
securities.In2012thecompanyacquiredTrainerrefineryandarefineryfromPhillips66
inordertofurthergrowtheirbusinesssegmentincrudeoilrefinement,andin2011
Deltaacquiredmoreairtakeoffandlandingrights,otherwiseknownas“slotpairs”at
JFKandLaGuardiaAirportfromUSAirways.The2009to2011MergerandAcquisitions
Sectionofthe10-K’sareprimarilyassociatedwiththemergerwithNorthwestAirLines.
Surprisingly,evenwiththelargeamountofacquisitionsandmergersDeltaisinvolved
with,thecompany’sgoodwillremainsfairlyunaffectedwithitremainingatthesame
amountforthepastfouryears.
DeltaAirLines
76
There are no income effects related to interest revenue due to none being
reported inthe10-Korgoodwill impairments,duetotheir immaterialvalueaccording
toDeltaAirLines’10-K.Asforunrealizedholdinggainsand lossesandrelatedholding
gainsandlosses,thevaluesoverthepastfiveyearsaredepictedabove.Whilerealized
holdinggainsand losseshave stayed fairly steadyover thepast five years,unrealized
holdinggainsand losseshas seenadramatic jump starting in2011and continuing to
2013.This large jumpcouldmeanthathedge fundshad todealwithmoreunrealized
riskthatyearinthethreeareasoffuel,interestorforeigncurrencyexchange.
ThethreehedgesDeltaAirLineshasarethethreeareasthatthecompanyhas
significantriskyinvestmentsin.Thederivativehedgefundsandthepensionplanshave
2013 2012 2011 2010 2009
UnrealizedHoldingGainsandLosses $3,037 ($1,975) ($3,057) ($560) ($192)
RealizedHoldingGainsandLosses $410 $164 ($131) $1,398 $177
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000Dollars(inmillions)
IncomeEffectsofIntercorporateInvestments
DeltaAirLines
77
the greatest effect of the unrealized and realized holding gains for Delta and they
therefore are highly interlinked to intercorporate investments. The fuel derivatives
consistofcallandputoptions,swapcontractsandfuturecontracts.Thecontractsare
valuedusingmarketprices/tradingvalueoffuelforthecurrentaccountingperiod.The
volatilityofthesecontractsrangefrom9percentto25percentandthechangeinfuel
pricehighlyaffectsthecompany’scostofoperation.Theinterestderivativeshandlethe
riskofinterestratesforlong-termdebtobligationsofDeltaAirLines.Theinterestrate
derivative also handles entities such as interest effects on cash, cash equivalents and
benefit obligations such as pensions. To handle the change in interest rates the
companyutilizes interestswaps.Theriskthatthecompanyenduresforcashandcash
equivalentsisthedecreaseininterestincomefromfallinginterestrates.Asforbenefit
planobligationrisk,thecompany isconcernedinthe increase in liabilityduetofalling
interestratesinthefuture.Finally,thelasttypeofhedgederivativedealswithforeign
currencyexchange.Thishedgedealswiththeriskoflosingrevenuesorgainingexpenses
duetoexchangerates.Foreigncurrencyandbenefitplanswillbediscussed further in
latersectionsofthischapter.
Derivativesareclassified inthefinancialstatementsdependingon if thevalues
are realized or unrealized. All unrealized hedge derivative values are classified under
accumulatedothercomprehensiveincomenotmatterwhattypeofhedge.Realizedfuel
DeltaAirLines
78
hedge derivatives are lumped into aircraft fuel, interest rate hedges are paired with
interest expense, and foreign currency exchange rate hedges are placed in passenger
revenues.
UNREALIZEDHOLDINGGAINSANDLOSSBYHEDGECATEGORY
(inmillions) 2013 2012 2011 2010 2009
FuelHedge -- $15 $233 ($87) ($1,344)
InterestHedge -- ($5) -- ($5) --
ForeignCurrencyHedge $135 ($25) ($61) ($31) ($6)
REALIZEDHOLDINGGAINSANDLOSSBYHEDGECATEGORY
(inmillions) 2013 2012 2011 2010 2009FuelHedge -- ($15) ($166) $158 $1,268
InterestHedge $28 $14 ($8) ($28) $51
ForeignCurrencyHedge $133 $212 $7 ($73) $11
DeltaAirLines
79
RESTRUCTURING
DeltaAirLinesrestructuringexpensesofthepastfiveyearshavebeenconsistent
with the exception of 2011 when restructuring expenses dropped severely. Delta
categorizes restructuring expenses into four categories: facilities, fleet, and other,
severance and related costs, routes and slots, and merger-related items. The graph
belowdepictstheallocationofrestructuringexpensesofDeltaAirLinesineachofthe
fourcategories.Asdepictedbelow,2013restructuringexpensesall rested in facilities,
2013 2012 2011 2010 2009
RestructuringExpense $402 $452 $242 $450 $407
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
Dollars(inMillions)
RestructuringExpensesOverthePastFiveYears
DeltaAirLines
80
fleetandother.This isduetoDelta’s focusonremovingolderand inefficientaircrafts
from operation and replacing them with newer models. Delta hopes with the new
aircraft fleet they will be able to increase fuel efficiency and customer service, and
decreasemaintenancecosts.Severanceandrelatedcostswereutilizedinrestructuring
terminationbenefitsthatemployeescouldelecttotakein2012and2011.Thevoluntary
severance program had 2,000 employees elect to take the benefit package and also
1,700 Comair employees received severance packages when operations shutdown in
2012. The Comair employee phase out severance packages had been part of
restructuringcharges from2009until itsshutdown.Thevoluntaryseverancepackages
were put in place to align human capital capacity with future expected operations
capacity.Therouteandslotrestructuringexpensesin2012and2011wereduetodeals
withUSAirwaysthatwerespokenofearlierinthemergersandacquisitionssectionof
thischapter.Finallymerger-relateditemswereweightedheavily inthe2010and2009
restructuring expenses. This was due to the merger with Northwest Air Lines. The
restructuring costs helped Northwest operations integrate with Delta operations,
relocateemployees,trainemployeesandre-brandNorthwestaircraftsandfacilities.
DeltaAirLines
81
IntermsofrestructuringexpenseseffectonDelta’sfutureprobability,ananalyst
would most likely see Delta’s restructuring charges, especially in 2013 as a way to
reducefuturecostsandexpense.ByupgradingtheiraircraftfleetDeltawillbeableto
spend lessof their revenueson fueland repairs.Theyalsowillmost likelyhavemore
consistently running airplaneswith less breakdowns and therefore happier andmore
loyal customers.Deltaalsowasable toeliminateunutilizedhumancapitalbyoffering
severancepackages.Volunteerseverancepackagesallowforeasierlayoffsanddecrease
costs in the long run by the elimination of unneeded employees and therefore
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2012 2011 2010 2009
RestructuringbyType
Facilijes,FleetandOther SeveranceandRelatedCosts
RoutesandSlots Merger-RelatedItems
DeltaAirLines
82
unnecessarypayrolls.Soalthoughtherestructuringcostsarehigh, in the longrunthe
purchase of these assets will decrease costs and therefore increase profitability for
DeltaAirLines.
FOREIGNCURRENCY
The two largest currencies thatDeltaAir Linesprocesses transactionswithare
the Japanese Yen and the CanadianDollar. In order to decrease riskwith exchanges,
Delta attempts to do international transactions in the same foreign currency of the
transaction. Other options in dealing with foreign currency include foreign currency
optionsandcarryforwardcontracts(hedges).Thecompanythereforepredictspossible
depreciation/appreciation of the currency and its effect on cash settlement at the
beginningofeachaccountingperiod.
PREDICTEDRISKSOFFOREIGNCURRENCYEXCHANGES
2013 2012 2011 2010 2009
EstimatedDepreciation/AppreciationofCurrency
10% 10% 10% -- --
PredictedCashSettlementGain,
(Loss)
$80million,
($100
million)
$90
million,
($110
million)
$90
million,
($110
million)
Immaterial Immaterial
DeltaAirLines
83
AforeigncurrencyhedgeexistsatDeltaAirlines.Thepurposeofthehedgeisto
handle the riskof theexchangerate.The realizedvaluesofgainsand losses fromthe
hedge are placed in passenger revenue on the income statement. Because realized
currency exchanges are placed on the income statement the company is transaction-
basedratherthantranslation-based.Ifthegainsandlossesareunrealizedthevaluesare
place in the calculation of accumulated other comprehensive income in either the
StatementofStockholder’sEquityorComprehensiveIncomeStatement.
FOREIGNCURRENCYHEDGEDATA
$257
$123
($89) ($96)
($23)
($150)
($100)
($50)
$0
$50
$100
$150
$200
$250
$300
2013 2012 2011 2010 2009
DeltaAirLines
84
(inmillions)
2013 2012 2011 2010 2009
NotionalBalance
120,915yen
438
Canadian
Dollars
119,277yen
430
Canadian
Dollars
126,993yen
313
Canadian
Dollars
141,100yen
233
Canadian
Dollars
55,800yen
295
Canadian
Dollars
FinalMaturityDate
August2016 December
2015April2014 November
2013September
2012
ForeignCurrencyDerivative
$257 $123 ($89) ($96) ($23)
Exchange rates are by far the biggest risk of performing international
transactions; the depreciation or appreciation of foreign currency can have effects of
gains/losses from export sales or import purchases. Overall, most of Delta’s
international transactionsareexportssales, inotherwords, foreignairfareticketsales
sothetableonlyanalyzestheeffectofthese.
2013 2012 2011 2010 2009
JapaneseYen 97.63 79.83 79.71 87.78 93.62
0
20
40
60
80
100
120
Yenpe
rUSDollar
JapaneseYenperUSDollar
DeltaAirLines
85
The JapaneseYenperUSDollar sawanappreciation trend from2009 to2011
butthenbegantoriseanddepreciatefrom2011to2013.Anappreciationinyenwould
cause the saleofpassengerairfare to create largergainswhereadepreciationof the
yenwouldcausealossofsalesduethecurrencybeingworthless.Theyenseemstobe
veryvolatileinitsappreciationanddepreciationmakingitamoreriskyforeigncurrency
toexchange.
TheCanadianDollarhastypicallyappreciatedforthepastfiveyearswithsome
minor depreciation taking place, but not very significantly. The appreciation of the
CanadianDollarimpliesthatcurrenciesworthisgrowingstrongerandthereforesalesof
airfare passengers will result in asset gains. The consistency of the Canadian Dollar
2013 2012 2011 2010 2009
CanadianDollar 1.03 1.001 0.989 1.031 1.141
0.9
0.95
1
1.05
1.1
1.15
1.2
Cana
dian
Dollarpe
rUSDollar
CanadianDollarsperUSDollar
DeltaAirLines
86
appreciationmakes itmorepredictable and lessof anexchange risk than the yen for
foreigntransactions.
RETURNINGWEALTHTOSHAREHOLDERSThegraphbelow illustratesDeltaAir Lines’ returnof capital. InMay2013, the
companyshareditsplanstoreturnoveronebilliondollarstoshareholdersoverthenext
threeyears.Thisreturningwealthtoshareholdersplanincludedtheimplementationof
dividends and a
repurchasing
plan as well.
Delta declared a
dividend for the
firsttimein2013
at $0.06 per
share.Thedividendhasaquarterlypayout.Thedividendpayoutratiofor2013is0.97
percent with Delta only paying $102million in dividends with $10,540million in net
income. The Delta Air Lines Repurchase Program intends to repurchase $500million
worth of equity shares by June 2016. The table below depicts the progress of the
RepurchaseProgram.
DeltaAirLines
87
Period NumberofSharesRepurchased
AveragePriceperShare
DollarValueYettobePurchaseUnderPlan(in
millions)October2013
1,138,700 $25.54 $378
November2013
4,627,552 $27.56 $252
December2013
95,000 $29.01 $250
TOTAL 5,861,252
PENSIONS
DeltaAirLinesprovidesapensionplanandotherbenefitsforitsemployeessuch
as: contributionpensionplans,postretirementhealthcareplans, andpostemployment
plans.Thepensionisavailableforeligibleemployeesandretirees,butdoesnotopento
newentrantsandthepensionsarefrozenforfuturebenefitaccruals.Deltacontributed
$914million in 2013, $697million in 2012, $598million in 2011, and $728million in
2010. Under government regulation, Delta elected to utilize the Alternative Funding
Rulesforpensions,inwhichafrozenpensioncanbeamortizedover17yearsatan8.85
percentdiscountrate.OptingfortheAlternativeFundingRulesallowsDeltatobeable
to more easily predict the amount of funding required each year. Delta’s plan for
investingdefinedbenefitpensionplanassetsistouseadiverseportfoliothatincludes
public and private equity, fixed income, real estate, and natural resource entities for
investment.Therateofreturninthepastfiveyearsonthedefinedbenefitpensionswas
12percent.In2013,thereturnontheplanwas9percent.
DeltaAirLines
88
Theplantassetshavebeenconsistentlylowerthattheprojectbenefitobligation
overthepastfiveyearsforDeltaAirlines.Thismeansthecompanyhasanunderfunded
plan.Thisisaredflagbecausethebenefitseemstobeoverlyoptimisticandexpenses
seemtobeunrealisticallylowfortheexpectationsofthepensionplan.Thiscouldmean
thatmanagershavemanipulatedpensionvaluestoseemmorebeneficialthanreality.
($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
2013 2012 2011 2010 2009
PlanAssetsv.ProjectedBenefitObligaXon(inmillions)
PlanAssets ProjectedBenefitObligajon PensionExpenses
DeltaAirLines
89
CHAPTERSIXOPERATINGV.NON-OPERATING
The itemshighlighted inblueareoperating items.Thenon-operating itemsare
indicatedinredonthefollowingstatements.
INCOMESTATEMENT(inmillions,exceptpersharedata) 2013 2012 2011 2010 2009
OperatingRevenue
Passenger:
Mainline 26,534 25,173 23,843 21,408 18,522
RegionalCarriers 6,408 6,518 6,414 5,850 5,285
TotalPassengerRevenue 32,942 31,754 30,257 27,258 23,807
Cargo 37 990 1,027 850 788
Other 3,894 3,926 3,831 3,647 3,468
TotalOperatingRevenue 37,773 36,670 35,115 31,755 28,063
OperatingExpense
Aircraftfuelandrelatedtaxes 10,150 9,730 9,730 7,594 7,384
Salariesandrelatedcosts 7,266 6,894 6,894 6,751 6,838
Regionalcarrierexpense 5,647 5,470 5,470 4,305 3,823
Aircraftmaintenancematerialsand
outsiderepairs
1,955 1,765 1,765 1,569 1,434
Contractedservices 1,590 1,682 1,642 1,509 1,405
Depreciationandamortization 1,566 1,642 1,523 1,549 1,595
Passengercommissionsandotherselling
expenses
1,565 1,523 1,682 1,511 1,536
Landingfeesandotherrents 1,336 1,281 1,281 1,281 1,289
Passengerservice 732 721 721 673 638
Profitsharing 372 264 264 387 480
AircraftRent 272 298 298 313 0
Restructuringandotheritems 402 452 242 450 407
Other 1,592 1,628 1,628 1,646 1,558
DeltaAirLines
90
TotalOperatingExpense (34,373)
(34,495)
(33,140)
(29,538)
(28,387)
OperatingIncome 3,400 2,175 1,975 2,217 (324) OtherExpense
Interestexpense,net (698) (812) (901) (969) (881)
Amortizationofdebtdiscount,net (154) (193) (193) (216) (370)
Lossofextinguishmentofdebt (118) (68) (391) (83)
Miscellaneous,net (21) (27) (44) (33) 77
Totalotherexpense,net (873) (1,150)
(1,206)
(1,609)
(1,257)
IncomebeforeIncomeTaxes 2,527 1,025 769 608 (1,581
)
IncomeTaxBenefit(Provision) 8,013 16 85 (15) 344
NetIncome 10,540 1,009 854 593 (1,237)
BasicEarningsperShare 12.41 1.20 1.02 0.71 (1.50)
DilutedEarningsperShare 12.29 1.19 1.01 0.70 (1.50)
CashDividendsDeclaredperShare 0.12
BALANCESHEET
(inmillions,exceptsharedata) 2013 2012 2011 2010 2009CurrentAssets
Cashandcashequivalents 2,844 2,416 2,657 2,892 4,607
Short-terminvestments 959 958 958 718 71
RestrictedCash,CashEquivalentsandShort-
TermInvestments
122 375 305 409 423
AccountsReceivable,netofanallowanceof
uncollectableaccounts
1,609 1,693 1,563 1,456 1,353
FuelInventory 706 619 168 x x
Expendablepartsandsuppliesinventories,net
ofallowanceforobsolescence
357 404 367 318 327
DeltaAirLines
91
DeferredIncomeTaxes,net 1,736 463 461 355 357
Prepaidexpensesandother 1,318 1,344 1,250 1,159 853
TotalCurrentAssets 9,651 8,272 7,729 7,307 7,991
PropertyandEquipment,net
PropertyandEquipment,netofacc.
Depreciationandamortization
21,85
4
20,71
3
20,22
3
20,30
7
20,43
3
OtherAssets
Goodwill 9,794 9,794 9,794 9,794 9,787
Identifiableintangibles,netofaccumulated
amortization
4,658 4,679 4,751 4,749 4,829
Deferredincometaxes,net 4,992 0 x x x
Othernoncurrentassets 1,303 1,092 1,002 1,031 749
Totalotherassets 20,74
7
15,56
5
15,54
7
15,57
4
15,36
5
TotalAssets 52,252
44,550
43,499
43,188
43,789
CurrentLiabilities
Currentmaturitiesoflongtermdebtand
capitalleases
1,547 1,627 1,944 2,073 1,533
Airtrafficliability 4,122 3,696 3,480 3,306 3,074
Accountspayable 2,300 2,293 1,600 1,713 1,249
Accruedsalariesandrelatedbenefits 1,926 1,680 1,367 1,370 1,037
Frequentflyerdeferredrevenue 1,861 1,806 1,849 1,690 1,614
Taxespayable 673 585 594 579 525
Fuelcardobligation 602 455 x x x
Otheraccruedliabilities 1,121 1,128 1,867 654 765
Totalcurrentliabilities 14,15
2
13,27
0
12,70
1
11,38
5
9,797
NoncurrentLiabilities
Long-termdebtandcapitalleases 9,795 11,08
2
11,84
7
13,17
9
15,66
5
Pension,postretirementandrelatedbenefits 12,39
2
16,00
5
14,20
0
11,49
3
11,74
5
Frequentflyerdeferredrevenue 2,559 2,628 2,700 2,777 3,198
Deferredincometaxes,net 0 2,047 2,028 1,924 1,917
Othernoncurrentliabilities 1,711 1,649 1,419 1,533 1,222
DeltaAirLines
92
Totalnoncurrentliabilities 26,45
7
33,41
1
32,19
4
30,90
6
33,74
7
CommitmentsandContingencies
Stakeholders'Equity(Deficit)
Commonstockat.00001parvalue,
1,500,000,000sharesauthorized
0 0 0 0 0
AdditionalPaid-InCapital 13,98
2
14,06
9
13,99
9
13,92
6
13,82
7
Retainedearnings(accumulateddeficit) 3,094 (7,38
9)
(8,39
8)
(9,25
2)
(9,84
5)
Accumulatedothercomprehensiveloss (5,13
0)
(8,57
7)
(6,76
6)
(3,57
8)
(3,56
3)
Treasurestock (258) (234) (231) (199) (174)
TotalStockholders'Equity(deficit) 11,64
3
(2,13
1)
(1,39
6)
897 245
TotalliabilitiesandStockholder'sEquity 52,252
44,550
43,499
43,188
43,789
FINANCIALSTATEMENTANALYSIS
STATUTORYV.EFFECTIVETAXRATES
INCOMETAXRATES
2013 2012 2011 2010 2009
FederalStatutoryTaxRate
35.0% 35.0% 35.0% 35.0% 35.0%
StateStatutoryTaxRate
3.0% 3.3% 3.4% 2.3% 1.8%
EffectiveTaxRate
(317.2%) 1.5% (11.0%) 2.6% (21.7%)
DeltaAirLines
93
TheFederalStatutoryTaxRatehasbeenfairlystableoverthepastfiveyearsat
35percent,which is typicalof largecorporations.Thestatetaxstatutorytaxratealso
stayedrelativelyconstantwith theamountsnear the threepercent region in thepast
fiveyears.Lookingattheeffectivetaxratewecanseethatthetaxeffecthasbeenfairly
volatile.Withnegativevaluesrepresentingataxbenefit ratherthanaprovision.Delta
seemstohaveatrendoflargertaxbenefitsoneyear,followedwithsmalltaxprovision
thenextandcontinueswiththatsamepatteroverthelastfiveyearsasseeninthechart
below.
2013 2012 2011 2010 2009
EffecXveTaxRate -317.20% 1.50% -11.00% 2.60% -21.70%
-350.00%
-300.00%
-250.00%
-200.00%
-150.00%
-100.00%
-50.00%
0.00%
50.00%
Percen
t%
EffecXveTaxRate
DeltaAirLines
94
NOPBT,NOPAT,ANDNOA
Net Operating Profit Before Tax (NOPBT), Net Operating Profit After Tax
(NOPAT),andNetOperatingAssets (NOA)overthepast fiveyearsaredepicted in the
chart above. The NOPBT aligns almost exactly with the NOPAT except in 2013. The
reasonforthelargedifferencebetweenNOPBTandNOPATisthelarge,317.2percent;
effective tax rate benefit that causes profits to growmuch larger after the benefit is
applied. The years besides 2013 have tax benefits or provisions that do not range
outside of -20 percent to 20 percent causing the before tax and after tax values to
2013 2012 2011 2010 2009
NOPBT $3,400 $2,175 $1,975 $2,217 ($324)
NOPAT $14,182 $2,173 $2,193 $2,160 $293
NOA $19,060 $6,829 $8,475 $12,130 $12,342
($1,000)
$1,000
$3,000
$5,000
$7,000
$9,000
$11,000
$13,000
$15,000
$17,000
$19,000
Dollars(inmillions)
FinancialAnalysis:NOPBT,NOPAT,NOA
DeltaAirLines
95
remainsimilar.Delta’sNOAhasbeendecreasingsteadilyfrom2009to2012,butmadea
drasticincreasein2013.TheincreaseinNOAthatyearwasduetothemassiveincrease
in operating assets paired with the fall in operating liabilities. This indicates positive
change for Delta. In other words, a growing NOAmeans what the company owns is
muchhigher thanwhat thecompanyowes.Thegrowth innetassets in2013wasnot
duetoonespecificasset,butinsteadwasspreadacrossmarginalgrowthinmanyasset
fields.Asforthedecreasingoperatingliabilities,thisdroptookplaceinthenoncurrent
operating liability accounts that offset the minimal growth in the current operating
liabilities.
OPERATINGRETURN
109.56%
28.40%21.29% 17.65%
1.63%2013 2012 2011 2010 2009
RNOAOverthePastFiveYears
RNOA
DeltaAirLines
96
Operating Return (RNOA) has increased over the past five years with a large
growth in 2013. RNOA growthwas due to the large increase in NOPAT, especially in
2013,where it jumped from $2,173million in 2012 to $14,182million by the end of
2013.TheNOAalsoincreasedgreatlyin2013butthiswasoffsetduetosmallerNOAin
2012 that was averaged into the denominator. A growing RNOA means that Delta
Airlines is receivingmore operating income per operating asset held. The increase in
RNOA was mainly caused by the growth in operating income that was aided by the
increaseinsalesandtaxbenefits,withoperatingexpensesremainingfairlyunchanged
overthepastfiveyears.
RETURNONEQUITY
ReturnonEquity(ROE)wassomewhatvolatileoverthelastyearfiveyears,but
hasasteadygrowthsince2011.AgrowthinROEindicatesthatthecompanyisearning
221.61%
-57.22%
-342.28%
103.85%
-221.09%
2013 2012 2011 2010 2009
ROEOverthePastFiveYears
ROE
DeltaAirLines
97
morenet incomepercommonstockholder’sequity.Lookingatstockholder’sequity in
the financial statements, it is clear theROEwasnegative in2011and2012due toan
equitydeficit,althoughnetincomewasgrowingdramatically.ThenegativeROEin2009
wasduetoanetloss,whichcanbeseeninthe2009NetIncomeStatement.Finallyby
2013,theequityfinallymovedoutofadeficitduetoDeltareceivingapositiveRetained
Earnings. This pairedwith the extreme rise in net income allowed ROE to be a large
positiveamountin2013.
2013 2012 2011 2010 2009
Non-OperaXngReturn 112.05% -85.26% -363.57% 86.20% -222.72%
RNOA 109.56% 28.40% 21.29% 17.65% 1.63%
-375.00%-350.00%-325.00%-300.00%-275.00%-250.00%-225.00%-200.00%-175.00%-150.00%-125.00%-100.00%-75.00%-50.00%-25.00%0.00%25.00%50.00%75.00%100.00%125.00%150.00%175.00%200.00%225.00%250.00%
Percen
t%
ROEBREAKDOWN:RNOA+Non-OperaXngOverthePastFiveYears
DeltaAirLines
98
ROEcanbebrokendownintotwoparts:RNOAandNon-OperatingReturn.The
equation for ROE is equal to RNOA plus Non-Operating Return. RNOA’s and ROE’s
calculationsandeffectswerediscussedearlierinthissection.LookingatNon-Operating
Return in 2009, 2011, and 2012 this figurewas negative,meaning the companywas
takingonlessrisktooffsetthehighlynegativeROE.Butlookingat2013,itisclearthat
there is a clearly positive Non-Operating Return, this possibly implies that Delta
increasedtheirROEbytakingonmoreriskyinvestments.Investigatingthisfurtherinthe
10-K,thereseemstonoinvestmentaccountsthathavegrownsignificantlyimplyingthat
Delta’s ROE growthmost likelywas due to the growth in company income, not risky
investments. Delta’s ROE is the same as its ROCE because there are no preferred
dividendsorstock.
RNOADISAGGREGATIONANALYSIS
RNOAcanbedisaggregatedorbrokendownfurtherintotwomaincomponents
ofNetOperatingProfitMargin(NOPM)timesNetOperatingAssetTurnover(NOAT).
NOPMtimesNOATisgoingtoequalRNOA.Thetablebelowdepictsthisdisaggregation
overthepastfiveyears.
2013 2012 2011 2010 2009
NOPM 37.55% 5.93% 6.25% 6.80% 1.04%
XNOAT 2.92 4.79 3.41 2.60 1.56
=RNOA 109.56% 28.40% 21.29% 17.65% 1.63%
DeltaAirLines
99
NOPM for themost part steadily grew over the past five years, with a larger
growthoccurringin2013.OntheotherhandtheNOATstayedfairlyconstantoverthe
pastfiveyears. AgrowthinNOPMimpliesthattheoperatingprofitpersalesdollar is
increasing,which isapositivechange forDeltaAir Lines.Aspects suchasgrossprofit,
operatingexpenses,andlevelofcompetitionandcompany’sabilitytocontrollossaffect
NOPM.LookingatDeltaAirLines’financialstatementsitisclearthechangeisNOPMis
mostlikelyduetotheincreaseingrossprofitpairedwiththefallingoperatingexpense.
NOPMBREAKDOWN
NOPM can be further broken down into Gross Profit Margin (GPM) and
OperatingExpenseMargin(OEM).GPMstayedconstantinthelasttwoyearswithOEM
falling.ThisfurtherillustratesthereasonsforDeltaAirLinesincreasingNOPM.
21.31% 22.12% 19.39% 21.80%15.55%
91.00% 94.07% 94.38% 93.02%101.15%
37.55%
5.93% 6.25% 6.80% 1.04%
2013 2012 2011 2010 2009
DisaggregaXonofNOPM
GPM OEM NOPM
DeltaAirLines
100
NOATBREAKDOWN
2013 2012 2011 2010 2009
ART 22.88 22.52 23.26 11.3 20.07
INVT 28.6 36.66 66.37 77 70.22
LTOAT 0.95 1.01 0.98 0.89 0.78
APT 12.49 14.67 17.09 16.77 14.73
NOWCT -8.39 -7.34 -7.06 -7.79 -15.54
NOAT 2.92 4.79 3.41 2.6 1.56
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
DisaggregaXonofNOAT
DeltaAirLines
101
NOATstayedfairlyconstantoverthepastfiveyears.NOATcanbebrokendown
into five components of: Accounts Receivable Turnover (ART), Inventory Turnover
(INVT),Long-TermOperatingAssetTurnover(LTOAT),AccountsPayableTurnover(APT)
and Net OperatingWorking Capital Turnover (NOWCT). ART, LTOAT and APT stayed
similaroverthepastfiveyears.InventoryTurnoverhasfalleninthepastfiveyearsdue
tothedecrease inCostofGoodsSold,which isa furtherpositivechangeforDeltaAir
Lines. Thiswasoffsetby the slight increase inNOWCover thepast fiveyears,which
allowedDeltatoremainataconstantNOAT.
Although Delta Air Lines tries to keep competitive prices with other airline
carriers, they were classified as a product differentiator due to their high levels of
customer service compared to other airline companies. The RNOA disaggregation
provedotherwise.TheconstantNOATpairedwiththerisingNOPMmeansthecompany
was more concerned with selling more tickets and making more money rather than
havingbetteraircrafts,customerservice,etc.
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102
DECOMPOSITIONOFNON-OPERATINGRETURN
AsdiscussedearlierROEcanbedecomposedintooperatingplusnon-operating
returns. The operating returns are only composed of RNOA, which was thoroughly
disaggregatedinanearliersection.Thenon-operatingportionoftheequationisamix
of FLEV and SPREAD. FLEV and Spread are broken down further below to see their
changeoverthepastfiveyears.
FLEVBREAKDOWN(in
millions)2013 2012 2011 2010 2009 2008
NNO $7,471 $8,960 $9,871 $11,233 $12,097 $11,675Avg.NNO $8,216 $9,416 $10,552 $11,665 $11,886 /Avg.
Equity
$4,576 ($1,764) ($250) $571 $560
FLEV 1.72 (5.34) (42.29) 20.43 21.24
ROE
Operajng
RNOA
Non-Operajng
FLEV SPREAD+
x
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103
FLEV was constant from 2009 to 2010, dropped in 2011, rose again and
remainedconstant in2012to2013.FLEVmainlyhadamassivefall in2011duetothe
small deficit in common stockholders average equity, leaving the FLEV denominator
negativeandverysmallcomparedtothenumerator.NNO,thenumeratorofFLEV,has
droppedconsistentlyoverthelastfiveyears.AfallingNNOmeanstherewaslessnon-
operatingliabilitiescomparedtonon-operatingassets.Thisisapositivesignbecauseit
meansthatDeltahaslesslong-termdebtandmoreinvestments.
($50.00)
($40.00)
($30.00)
($20.00)
($10.00)
$0.00
$10.00
$20.00
$30.00
2013 2012 2011 2010 2009
FLEVOverthePastFiveYears
FLEV
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104
SPREADBREAKDOWN(inmillions) 2013 2012 2011 2010 2009
NNE $3,642 $1,164 $1,339 $1,567 $1,530/Avg.NNO $8,216 $9,416 $10,552 $11,665 $11,886NNEP 44.48% 13.36% 12.69% 13.43% 12.87%
RNOA 109.56% 28.40% 21.29% 17.65% 1.63%(NNEP) (44.48%) (13.36%) (12.69%) (13.43%) (12.87%)SPREAD 65.08% 16.04% 8.60% 4.22% -11.24%
SpreadforDeltaAirLineshadalargeincreaseafter2009andthencontinuedon
a low marginal rise from 2010 to 2013. This implies that the company had larger
operating returnsand lessnon-operatingexpensesover the last fiveyears.Decreased
-1200.00%
-1000.00%
-800.00%
-600.00%
-400.00%
-200.00%
0.00%
200.00%
2013 2012 2011 2010 2009
SPREADOverthePastFiveYears
SPREAD
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105
expenses and increasing returns highlight even further Delta’s improvements and
growth,especiallyinthelastyear.
Finally,thetablebelowpiecedtogetherallthepartsoftheROEequationthatwe
calculated.TheslightdifferencesinthetwocalculationsofROEareduetorounding.
2013 2012 2011 2010 2009
FLEV 1.72 (5.34) (42.29) 20.43 21.24XSPREAD 65.08% 16.04% 8.60% 4.22% -11.24%+RNOA 109.56% 28.40% 21.29% 17.65% 1.63%=ROE 221.50% -57.61% -342.40% 103.86% -237.11%
ROE:DECOMPOSED
221.50% -57.61% -342.40% 103.86% -237.11%
ROE:SECTION1
221.91% -57.22% -342.48% 103.85% -221.09%
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106
CHAPTERSEVENLAGGINGMACROECONOMICINDICATORSGrossDomesticProductSource:Amadeo,Kimberly."U.S.GDPbyYear:ComparedtoDebtandMajorEvents."
Theoverall trend ingrossdomesticproductover thepast13yearshasbeena
steady increase. The only exception to this trend is the slight fall in gross domestic
product in2009.Thiscanbeattributed to the recession thatoccurrednotonly in the
United States but also internationally due to the crash of the United States housing
market.Agrowinggrossdomesticproductcorrelatestoastrongeconomyandtherefore
has positive outcomes for companies such as Delta Airlines. When the economy is
strong,Delta ismore likely topurchaseaircrafts,hiremoreemployeesandpaybetter
salaries.Deltahastakenadvantageofaircraftpurchasesthroughitsrestructuringplan
16,76816,163
15,51714,96414,41914,71914,47813,85613,094
12,27511,51110,97810,62210,285
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
GDP(inbillions)
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107
thatwascoveredinanearliersection.LookingatDelta’sfinancialstatements,thereisa
cleargrowthininventory,payrollandinvestmentexpendituresthatcorrelateswiththe
risinggrossdomesticproduct.
(inmillions) 2013 2012 2011 2010 2009Inventory 1,063 1,023 535 318 327
PropertyandEquipment 21,854 20,713 20,223 20,307 20,433
PayrollExpense 7,266 6,894 6,894 6,751 6,838
IncomeandWagesSource:SSA.gov
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
39,000
40,000
41,000
42,000
43,000
44,000
45,000
46,000
20132012201120102009200820072006200520042003200220012000
Wage(USDollars)
AverageWageIndex
AverageWageIndex
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108
Averagewage index in theUnitedStateshas increasedconsistentlyeveryyear
except for 2009, which once again can be explained by the recession. Wages are
increasingregularlymeaningtheyarekeepingupwiththeaveragecostofliving.Thisis
correlatedtotherisingcostoflivingthatwillbeseenbelowintheConsumerPriceIndex
sectionofthechapter.LookingspecificallyatDeltaAirLinestotalpayrollexpensesover
thepastfiveyearsitiscleartherecessiondidnothavethedisastrouseffectonwages,
as some other industries experienced in 2009 and 2010. Delta’s wages only dropped
slightly in2010and remainedstable in2011and2012.Although theeffects fromthe
recessionwerenothorrific, theydohighlightDelta’suseof loweringwages and their
7,266
6,894 6,894
6,751
6,838
6,700
6,750
6,800
6,850
6,900
6,950
7,000
7,050
7,100
7,150
7,200
7,250
7,300
2013 2012 2011 2010 2009
WageExpe
nse(in
millions)
DeltaAirLinesWageExpense
DeltaAirLines
109
implementationofalayoffprogramtodealwiththelowerGDPandincomesfromthe
recession.
UnemploymentRateSource:Infoplease.com
TheunemploymentratewasextremelyhighforthesamereasonGDPandwages
were lowbetween2007and2009.TherecessionhittheUnitedStatesandtherestof
theworldhard,andDeltawasnodifferent.Afteracquiringairfarecompanies suchas
NorthwestAirlinesandComairthecompanyhadanexcesscapacityofhumancapital.As
seen in the restructuring section of this report, Delta was forced to offer severance
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
UnemploymentRate
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110
packages to decrease the number of employees. This was better than many other
companies during the period that did not offer their employees benefits to leave
voluntarily.LayoffshelpedDeltakeepexpensesstableduringtherecessioneventhough
revenueswerenotashigh,andthereforewereabletokeepgrossmarginfairlystable
throughtheperiod.
ConsumerPriceIndexSource:"ConsumerPriceIndexDatafrom1913to2015."USInflationCalculator
160.0%
170.0%
180.0%
190.0%
200.0%
210.0%
220.0%
230.0%
240.0%
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
ConsumerPriceIndex
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111
AsexpectedConsumerPriceIndex,continuedtorisefrom2000to2013witha
slightdropduringtherecession in2009.Thisdrop inConsumerPrice Index isactually
good becausewages during the period also fell meaning that employees were being
paid less because the cost of living was lower as well. The CPI calculation was also
changed toexcludeenergyand foodprice. Therefore themodelobscurely represents
theeffectsof inflationsandthereforemeanswagegrowthis inadequatelygrowingfor
theactualcostoflivingexpenses.
LEADINGMACROECONOMICINDICATORSStockMarketSource:Damodaran,Aswath."AnnualReturnsonStock,T.BondsandT.Bills:1928-Current."
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
S&P500 32.15%15.89% 2.10% 14.82%25.94% -36.55%
5.48% 15.61% 4.83% 10.74%28.36% -21.97%
-11.85%
-9.03%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Return(%
)
AnnualReturnonStock
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112
Thestockmarketasexpectedfellduringtherecession.Therecessioncauseda
huge issue in terms of buyer confidence. This made it difficult for firms to increase
stockholder investment during the period and therefore stock prices began to fall.
Layoffsdidnothelpstockpricesandcausedadistainforpubliccorporationscausingthe
effects to be even worse. As seen in the chart, the 2008 data shows that return on
stockholderinvestmentswasheavilynegative.Fortunately,since2011thestockmarket
has recovered enormously andhas been rising consistently every year. The increased
stockmarketvaluehasaided in thegrowthanddevelopmentofDelta in recentyears
andinvestorconfidenceisbeginningtoberestored.
HousingMarketSource:Dataokfn.org
144.40
134.22139.06
145.00149.42
171.12
182.74180.84
160.14
140.71
127.65
116.44109.22
100.0080.00
90.00
100.00
110.00
120.00
130.00
140.00
150.00
160.00
170.00
180.00
190.00
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
PriceInde
x
USHousePriceIndex
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113
The2008to2009thehousingbubble“popped”andhousingpricebegantofall
dramatically. This can be seen through theUnited StatesHousing Price Index. People
could no longer afford theirmortgages andhad to foreclose their homes causing the
averagepriceofAmericanhomestofall. Ifpeoplecannotaffordbasic livingexpenses
such as home mortgages and with the unemployment rate dramatically high, luxury
good sales were put on the backburner. The airline industry is a luxury good that
personswill only spend theirmoneyon if theyhave theextra income todo so.With
businessestryingtokeepexpenseslowduetofallingrevenuesandfamiliestakingless
vacationsduringtheperiodduetolowerincomesandhighunemploymentthehousing
crisisdirectlyaffectedthesalesofDeltaAirLines.
LevelofNewBusinessStartupsSource:Kauffman.org
28.00%
30.00%
32.00%
34.00% 34.00%
32.00%
30.00%29.00%29.00%
30.00%30.00%29.00%
26.00%27.00%
25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
35.00%
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
IndexofNewEntrepreneurs
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114
Thenumberofbusinessstart-upsroseduringtherecession(2008-2010)dueto
thehighnumberoflayoffsintheUnitedStatesthatforcedworkingcitizenstofindother
meansofwork. Thisoftenmeantemployeesbecameentrepreneurs and started their
own company. The airline industry on the other hand, decreased the number of
competitive forces (companies) during the period. Due to the decrease in sales, the
need to reduce cost and the large number of airline services available the industry
began to consolidate. From the merger of Delta Air Lines and Northwest Airlines to
American Airlines buy-out of United Airways, the airline industry became a much
smaller service line in terms of number of competitors. This also coincides with the
largernumberoflayoffsduringtheperiod.
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115
REVENUERECOGNITIONPRINCIPLES
Sales Growth Index (SGI): Sales Growth Index fell drastically from 2009 to 2010, but
after2010madearapidincreasebacktolevelspre-2010.From2011andthereafter,the
indexleveledbackouttoaconsistentlevel.Theissuewiththerapidlyincreasingindex
from2010to2011isitreflectsapossiblemanipulationofrevenue.Accordingtothe10-
KtherevenueroseveryrapidlybecauseinvestmentprojectsofnewterminalsatJFKand
other airportswere completed and allowed formorepassenger flights. The10-K also
ruled out channel stuffing as the reason for the increased SGI. The company places
2013 2012 2011 2010 2009
SGI 1.03 1.04 1.11 0.13 1.24
GMI 0.99 1.19 0.98 1.59 -0.81
SGAI 1 0.87 1.01 0.87 1.21
-1
-0.5
0
0.5
1
1.5
2
RedFlagRevenueIndicators
DeltaAirLines
116
advance ticket sales in Air Traffic Liability and does not recognize SkyMiles earned
(customer loyalty program) until the flight ticket is redeemed. This proves that the
companyisnotrecognizingrevenuesearlierthantheyshould.
GrossMarginIndex(GMI):DeltaAirLines’grossmarginindexwasvolatilein2009and
2010. In 2009, the GMI was negative due to a negative gross margin that year. The
negative gross margin in 2009 was most likely due to lower revenues due to the
recession and the increased operating expenses from the acquisition of Northwest
Airlines. In2010 the indexmadeanenormous jump to1.59,which indicates that the
company’s gross margins have deteriorated and the management wants to improve
numbers.Thisisclearfromthelargeincreaseofgrossmarginsbetween2009and2010.
After 2010, the index began to stabilize, teeter-tottering from just above one to just
below.Deltaisclearlytryingtoimproveitsrevenueanddecreasecost.
Sales,GeneralandAdministrativeExpensesIndex(SGAI):DeltaAirLines’SGAItendsto
bejustbeloworjustaboveoneeveryyear.Theclosepremiseoftheindexaroundone
every year implies that the company’s expenses are increasing at a rate nearly equal
rate to sales. This is a good sign, this highlights that Delta is most likely not
overestimatingrevenuesduetothenearconstantrateincreaseinbothentities.
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117
Overall,Delta’srevenuerecognitionredflagsshowlittleconcern.Evenifconcern
doesarise,likeinthesalesgrowthindex,thenotesinthe10-KStatementsquicklyclarify
anyissues.
ANALYSTS’FORECAST
AnalysisForecastshistoricaldatacouldonlybefoundforDeltaAirLinesforthe
years2011,2012and2013.Extensiveresearchonmultiplesourceswascompletedand
data prior to 2011 cannot be found even in news articles, financial websites and
historicaldatacharts.
Year NumberofEstimates
High Low Consensus Actual
2011 17 1.38 1.22 1.30 1.41
2012 17 1.87 1.73 1.82 1.83
2013 16 3.39 3.04 3.13 3.15
2013 2012 2011
Actual 3.15 1.83 1.41
Consensus 3.13 1.82 1.30
11.251.5
1.752
2.252.5
2.753
3.25
EarningsperSha
re
EPSActualv.Analysts'Consensus
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118
Earningspershareanalysts’estimateswereclosetoactualearningspersharein
2013and2012withearningspersharebeatingthetargetonlyby.06percentand.05
percentrespectively.In2011,theanalysts’consensuswasfarofffromtheactual
earningspersharewithDeltaAirLinesrisingaboutthetargetby7.92percent.Delta
exceedingearningspersharetargetskeepshareholder’scontentandmangersoutof
trouble.
0.06% 0.05%
7.92%
0.00%0.25%0.50%0.75%1.00%1.25%1.50%1.75%2.00%2.25%2.50%2.75%3.00%3.25%3.50%3.75%4.00%4.25%4.50%4.75%5.00%5.25%5.50%5.75%6.00%6.25%6.50%6.75%7.00%7.25%7.50%7.75%8.00%
2013 2012 2011
PercentExceededAnalysts'ExpectaXons
DeltaAirLines
119
EARNINGSMANAGEMENT
Managershaveanimmenseamountofpressuretomeetanalysts’earningsper
sharetargetsandsometimesfirmswillresorttoalterationsinestimatestomeetthese
standards.DeltaAirLines’mostlikelydidnotmakealterationsto2011actualearnings
pershareduetothelargedifferencebetweenanalyst’sestimatesandtheactualvalue
attheendofthefiscalyear.Ontheotherhand2013and2012,aremuchmorelikelyto
havechangesinactualearningspersharecomputationalvaluestomeettargetamounts
duetotheminutedifferencebetweenactualandconsensusearnings.In2012and2013
DeltaAirLinesexceededitstargetvaluesbyonlytwocentsandonecentrespectively.
Managers may have felt pressure to meet these targets due to the large amount
earningspersharesurpassedtargetsin2011.Mangersoftenwillmakeactualearnings
per share seem higher than the target to try to convince stockholders of the firm’s
success.Ontheotherhandsomemanagersmaywanttoshowearningspersharebelow
targetvaluesforcertainyears.Amanagerwoulddothisiftheearningsweresobadthat
theycouldnotbereprimandedtobeatthetargetvalues.Themanagerwouldtherefore
pushtheearningspersharetowardsalowerartificialamounttocarrythecostoffuture
coststhatwoulddamagelaterearningspershare.Themindsethereisthatit’sbetterto
haveonereallybadyearthanmultiplemarginalbadyears.PossibleentitiesthatDelta
AirLinescouldhavemanipulatedtoreachtargetearningspershareareclassificationof
DeltaAirLines
120
costs as period rather than product to increase gross margin, altering depreciation
estimation, treating ordinary repairs asmajor capitalized repairs to increase earnings
andpriceconcessionstoincreasesales.Deltawouldbemorelikelytoalterequipment
such as aircrafts because that is large portion of their assets and is heavily based on
estimates suchasdepreciationandmajor repairs. In termsof sales,passengerairfare
has the ability to easily be offered at concession prices to increase sales asmuch as
possible.DeltaAirLinesmostlikelyhandlemostearningsmanagementthroughairfare
salesandproperty,plantandequipmentbasedassetvalues.
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121
CHAPTEREIGHTCAPITALIZATIONOFOPERATINGLEASES
UtilizingDelta Air Lines’ 10-K LeasingObligationsNote, the company has both
operating and capitalized leases. Capital leases haveboth the lease asset and liability
reportedonthebalancesheet,whileoperatingleaseshaveneithertheleaseassetnor
theliabilitystated.ThismeansthatfinancialanalysisdatathatwascalculatedinChapter
6 need to be adjusted for the capitalize leases to accurately depict the company’s
financial standings. The first step in this process is imputing the discount rate,which
involvesfindingtheIRRbaseduponthecapitalleasestousetocapitalizetheoperating
leases.Steponeisdepictedbelow:
DISCOUNTRATE(inmillionsofdollars)PVoffutureminimumcapitallease
payments($497)
2014 $165
2015 $158
2016 $143
2017 $100
2018 $54
IRR 9.34%
Steptwointhecapitalizationofoperatingleasesistocomputethepresentvalue
of future operating lease payments. To complete this step, first the operating lease
paymentisdiscountedbythediscountfactor,whichcalculatesapresentvalueamount.
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122
These values are summed together to get the Present Value of Operating Lease
Payments.Steptwoisillustratedbelow:
PRESENTVALUEOFOPERATINGLEASEPAYMENTS(inmillionsofdollars)
Year OperatingLeasePayment
DiscountFactor(IRR=.0934)
PresentValue
1 $1,429 0.914593737 $1,307
2 $1,356 0.836481703 $1,134
3 $1,186 0.765040927 $907
4 $1,026 0.69970164 $718
5 $831 0.639942737 $532
Thereafter $831 1.12058801 $931
PVofOperatingLeasePayments
$5,529
Finally, now that the present value of the operating lease payments has been
foundthefinancialanalysisdatamustbeadjustedtoincludetheoperatingleaseasset
andliability.NOAincreasedduetotheadditionoftheoperatingleasesasanasset.The
NNOthereforealsoincreasesduetotheadditionoftheleasepresentvalue.TheNOPAT
slightly grows because the company is reporting overall less expense by deducting
operating lease payments even though depreciation expenses increase at a smaller
amount. RNOA before the adjustment appears larger. This misconceptionmakes the
company seem to havemore return on equity fromoperating activities than actually
exists.NOATishigherbeforetheadjustment,meaningtheassetsarenotturningoveras
quicklyasoriginallybelieved.
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123
ADJUSTEDBALANCEAFTEROPERATINGLEASECAPITALIZATION OriginalValue AdjustedBalance
NOA $19,060 $24,589
NNO $7,471 $13,000
NOPAT $14,182 $14,996
RNOA 109.56% 60.99%
NOPM 37.55% 40.00%
NOAT 2.92 2.40
FLEV 1.72 1.85
Companies like to structure their leases as operating rather than capitalizing
thembecauseitbenefitstheirfinancialdata.Thecompany’sincomewillappearhigher
inyearswithanoperatingleasebecausetherentexpenseofanoperatingleaseisless
thanthedepreciationand interestexpenseofacapital lease.Thismeansthat income
will be higher in years where operating leases are held. So if a company wanted to
artificiallyraiseitsprofitseachyear,itcouldaddmoreoperatingleaseseachyear.Rising
profitslookbettertoshareholder’s,whichencouragesmanagerstoreportleasesinthis
manner.Althoughtheadditionofoperatingleaseslooksgoodintheshort-runitisnota
goodpermanentfixforincreasingprofits.Theissuewiththisisthatincomeisnotreally
that high because the company is increasing its debt, which is not an ideal business
strategy in the longrun. Inotherwords,managersutilizeoperating leasesasa“quick
fix”toincreaseprofitsandthereforeshareholdervalue.
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124
WEIGHTED-AVERAGECOSTOFCAPITAL
Weighted-average cost of capital is an important financial analysis indicator
utilized in performance evaluation and stock valuation models. In order to find
weighted-averagecostofcapital(WACC),firstthecostofequityandcostofdebtmust
be computed. The cost of equity is computed by take the risk-free interest rate (2.5
percent)plusbeta (.58) times the spread (sixpercent). The risk-free interest rateand
the equity spread are constantmarket factors anddonot differ between companies.
ThebetacanbefoundonYahoo!FinanceandDelta’sbetawasfoundtobe.58.Thecost
ofequitycomputationisdepictedbelow:
CostofEquityBeta 0.58
RiskFreeRate 2.5%
EquitySpread 6.0%
CostofEquity 5.98%
Afterthecostofequityisfound,thecostofdebtiscomputed.Thecostofdebtis
calculated by finding the average interest-bearing debt, which consists of both long-
termandcurrentliabilitieslikenotes,leases,etc.thatpayinterest,anddividinginterest
expense by that value. The answer to that computation gives the company’s cost of
debtbefore tax.DeltaAir Lines’valuewas5.80percent.To find theafter-taxcostof
debt, the cost of debt before tax is simplymultiplied oneminus the tax rate. Delta’s
DeltaAirLines
125
effectivetaxratefor2013wasa317.20percenttaxbenefit,whichcausedtheafter-tax
costofdebttobequitehigh.Thecomputationisdepictedbelow:
CostofDebt(dollarsinmillions)AverageInterestBearingDebt $12,026
InterestExpense 698
CostofDebtbeforeTax 5.80%EffectiveTaxRate -3.172
After-TaxCostofDebt 24.22%
Onceboth the cost of equity anddebt has been calculated, theWACC canbe
found.TheequationforWACCisthestockholder’sequityin2013dividedbythesumof
stockholder’s equity and total debt in 2013. That value is called the equity weight.
Taking one minus the equity weight finds debt weight. Finally, WACC is equated by
multiplying the cost of equity by equity weight plus the cost of debt times the debt
weight.DeltaAirLineshasaWACCof14.98percent.WACCdepictstheaveragecostof
raisingcapital.
Weighted-AverageCostofCapital(dollarsinmillions)Stockholders’Equity $11,643
TotalDebt $11,342
EquityWeight 50.65%
DebtWeight 49.35%
Weighted-AverageCostofCapital 14.98%
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126
SALESFORECASTING
Salesgrowthforecastingwascomputedbyfirstlookingatsalesgrowthpercent
overthepastfiveyears.Thesalegrowthoverthelastfiveyearshassteadilydecreased,
buthasbeguntoplateautoamoreconstantamountafter2012.Forthisreasonutilizing
theaveragesalesgrowthoverthelastfiveyears(about10percent)isnotanaccurate
estimateofsalesgrowthforthenextfiveyears.Theaveragesalesgrowthoverthepast
fiveyearswouldbetoohighduetothe largerangeofvaluebetween2009and2013.
Therefore,itwasmuchmorereasonabletoutilizeaconstantpredictivegrowthrateof3
percentoverthenextfiveyears.
Belowaretheforecastedsalesfrom2014to2018.2013isincludedasthebase
line last reported year of sales. It is also important to note, that since 2018 is the
terminationyearaoncepercentgrowthratewillbeutilized insteadof thestandard3
percent.
23.64%
13.16%10.58%
4.43%3.01%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2009 2010 2011 2012 2013
SalesGrowthPastFiveYears
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127
STOCKVALUEPERSHARE
Stockvaluationcanbecompletedusingoneoftwomodels:DCFandROPI.DCFis
apopularandwidelyusedstockvaluationmodel that isbestwhenthe firmreportsa
positive FCFF. FCFF is operating activity cash flows plus investing activity cash flows.
DCF has the advantage of cash flows not being affected of accrual accounting,which
means that noncash or unearned activities will not affect the stock valuation. DCF is
poor at calculating cash investment in plant assets because it shows a cash outflow,
eventhoughtheseitemsaddvaluetothecompany.
$37,773
$38,906
$40,073
$41,275
$42,513$42,938
$35,000
$36,000
$37,000
$38,000
$39,000
$40,000
$41,000
$42,000
$43,000
$44,000
2013 2014 2015 2016 2017 2018
ForecastedSales2014-2018AssumedGrowthRate3%,InTerminalYear(2018)1%
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128
DCFMODEL(inmillionsofdollars)
Year 2013 2014 2015 2016 2017 2018Operating $4,504
Investing ($2,756)
FCFF $1,748 $1,800 $1,854 $1,910 $1,967 $2,026
DiscountFactor 0.869 0.756 0.658 0.572
PVofHorizonFCFF $1,566 $1,403 $1,257 $1,126
Cum.PVofHorizonFCFF $5,351
+PVofterminalFCFF $14,495
=TotalFirmValue $19,846
LessNNO ($13,000)
=FirmEquityValue $6,846
SharesOutstanding(inmillions) /869
StockValuePerShare $7.88
TradingPrice12/31/2013 27.19
Delta Air Lines’ DCFModel Stock Valuation output a stock value per share of
$7.88.OnDecember31,2013,DeltaAirLine’sstockhadatradingpriceof$27.19,which
meansthatthestockwasveryoverlyvalued.ThiscouldbeduetothefactthatDCFdoes
notcalculateplantassetsasavalueaddingactivity.Thisisahugeissueforacompany
such asDeltaAir Lines that is heavily property, plant and equipment based.Muchof
Delta’sassetsaretheaircraftsthemselves,whichaddvaluetothecompany,butthese
arenotincludedintheDCFmodelcalculation.Therefore,theDCFmaynotbethebest
optionforcalculationstockvalueforDeltaAirLines
The other option for calculating stock valuation is the ROPI model. The ROPI
model focuses on value drivers like asset turnovers, specifically NOAT, and profit
margins, specifically NOPM. The model unlike the DCG model is affected by accrual
DeltaAirLines
129
accountingandutilizesnumbersfromthebalancesheetandtheincomestatement.The
model is best for companieswithmost assets and liabilities reported on the balance
sheet and that have off-balance sheet items aswell. Although a disadvantage of the
ROPImodelisthefinancialstatementdonotalwaysdepictalltheassetsofacompany
suchasknowledgebasedassets.
ROPIMODEL(inmillionsofdollars)
Year 2013 2014 2015 2016 2017 2018Sales $37,773 $38,906 $40,073 $41,275 $42,513 $42,938
GrowthRate 3.0% 3.0% 3.0% 3.0% 3.0% 1.0%
NOPM 0.40 0.4 0.4 0.4 0.4 0.4
NOPAT $15,109 $15,562 $16,029 $16,510 $17,005 $17,175
NOAT 2.4 2.4 2.4 2.4 2.4 2.4
NOA $15,739 $16,211 $16,697 $17,198 $17,714 $17,891
ResidualIncomeModel 1 2 3 4 Terminal
RequiredReturn $2,358 $2,428 $2,501 $2,576 $2,654
ROPI $13,204 $13,601 $14,009 $14,429 $14,521
DiscountFactor 0.86972 0.75641 0.65786 0.57215
PVofHorizonROPI $11,484 $10,288 $9,216 $8,255
Cum.PVofHorizonROPI $39,243
+PVofTerminalROPI $103,873
=TotalFirmValue $143,116
LessNNO ($13,000)
=FirmEquityValue $130,116
SharesOutstanding(inmillions)
/896
StockValueperShare $145.22
TradingPrice12/31/13 $27.19
DeltaAirLines
130
TheROPIModelcalculatedastockvaluepershare$145.22,andthetradingprice
on December 31, 2013 was $27.19. This valuation method shows that the Delta Air
Lines’ stock is heavily undervalued. TheROPIModel ismost likely thebestmodel for
DeltaAirLines largelyduetotheenormousamountofplant,propertyandequipment
assets the company owns. The company also has a large interest in balance sheet
liabilities such as leases. These items are not included in the DCFModel causing the
stocktoseemgreatlyovervalued,whenreallytheoppositeistakingplace.Utilizingthe
ROPI Model, potential stockholders should invest in Delta Air Lines due to the
undervaluation of its current stock price. This is line with analysts’ predictions of
consistentgrowthandencouragementtoinvestinDeltaAirLinesandDelta’scontinued
improvementinareassuchasprofitsanddecreasedexpensesoverthelastfiveyears.
DeltaAirLines
131
CHAPTERNINEMANAGEMENTASSERTIONS
Everyassertionreportedonapubliccompany’sfinancialstatementsmustbe
auditedagainstmanagementassertions.Managementmakesmanyassertionsabout
assets,liabilities,equity,revenuesandexpensesandthesenumbersneedtobecheck
foraccuracyandvalidity.Thefivemanagementassertionsthatmustbecheckedare:
existenceoroccurrence,completeness,rightsandobligations,valuationorallocation,
andpresentationanddisclosure.Eachoftheassertionshasquestionsthatauditorsmust
trytoansweraswell.
• DotheaccountsontheBalanceSheetactuallyexist?• Didthetransacjonoccurduringtheperiod?
ExistenceorOccurence
• Arealltransacjonsandbalancesincludedinfinancialstatements?
• Areitemsoverstated?
Completeness
• Doestheorganizajonhavetheownershipornoncancelableuseofitsassets?• Areliabilijestheobligajonofthecompany?
RightsandObligajons
• Howdoesthecompanyvalueitsrightsandobligajons?
ValuajonorAllocajon
• Areallbalancesandtransacjonscorrectlyclassified?• Arenecessaryfootnotesandnotajonsincludedonfinancialstatements?
PresentajonandDisclosure
DeltaAirLines
132
LookingatDeltaAirLines’financialstatements,theassertionscanbeansweredforeach
majoraccount:
ASSETS
Account ExistenceorOccurrence
Completeness RightsandObligations
ValuationorAllocation
Presentationand
DisclosureCashandCashEquivalents
Bank
Reconciliation:
makesure
accounts
match
Cashreceived
shouldequal
transactioncost
Ifthe
companyhas
thecashin
possession
thanthey
havethe
righttothe
asset
Cashvaluedby
totaleconomic
valueinUS
dollars
Classification:
CurrentAsset
Footnotes:
None
Short-TermInvestments
Correct
valuationof
short-term
investmentsto
ensurenot
overstating
assets
Investments
shouldmatch
valueofitem
andentity
relatedto
Companyhas
rightbecause
ofownership
inshortterm
investments
Investments
shouldbe
recordedat
fairmarket
valuetoavoid
overstatement
Classification:
CurrentAsset
Footnotes:
Valuation,
Investment
details
RestrictedCash,CashEquivalents,&Short-TermInvestments
Theamountof
cash
equivalent
shouldbe
recordedin
bank
statements
andportfolios
Cash
equivalents
receivedshould
beequaltothe
transactioncost
Likecash,
companies
havearight
tocash
equivalents
becausethey
have
possessionof
theasset’s
use
Investments
shouldbe
recordedat
fairmarket
valuetoavoid
overstatement
Classification:
CurrentAsset
Footnotes:
FMV
valuation,
whatit
contains
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133
AccountsReceivable
Accounts
receivable
shouldbenet
baddebts
expenseand
amountowed;
shouldmatch
toa
transaction
obligationthat
hasoccurred
butnotyet
beenpaid
Accounts
receivabledue
shouldmatch
thetransaction
valueitisin
accordance
with,netcash
already
received
Thecompany
has
performedan
obligation
andhasright
toreceivable
inreturn
Amountdue
from
customers
minusan
estimated
uncollectible
amountbased
uponhistorical
data,write-
offs,
bankruptcy,
etc.
Classification:
CurrentAsset
Footnotes:
Valuation
method,and
detailson
receivables
owed,bad
debtsexpense
FuelInventory
Allfinished
goods,
physicalcount
ofinventory
Inventorylevels
recordedin
correcttime
period,paired
with
transaction
sales
Companyhas
therightto
theinventory
itproducesor
owns
Valuedat
lowerofcost
ormarket;
FIFO
Classification:
CurrentAsset
Footnotes:
Valuation,
itemsin
inventory
ExpendablePartsandSuppliesInventories
Physicalcount
ofpartsto
ensure
amounts
Inventorylevels
recordedin
correcttime
period,match
transaction
sales
Companyhas
therightto
theinventory
itproducesor
owns
Valuedat
moving
averagecost
andchargedto
operations
when
consumed
Classification:
CurrentAsset
Footnotes:
Valuation,
disposal
DeferredIncomeTaxes
Temporary
difference
between
financial
statements
andtaxreturn
values
Alldifferences
mustbe
originatedand
thenreversed
torecognize
thetemporary
difference,then
diminishit
Taxrightthat
will
eventually
allowtaxable
incometo
equalincome
beforetaxes;
caused
because
taxable
incomeis
greaterthan
income
beforetaxin
originating
year
Valuedusing
theLiability
method;
carrying
temporary
differences
Classification:
CurrentAsset
orNon-
CurrentAssets
Footnotes:
Originatingor
reversing
status;
valuation
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134
PropertyandEquipment
Physicalcount
oflong-term
assets,
comparingto
marketprices,
estimatesfor
lifearemore
difficultto
confirm
Property,plant
andequipment
needstobe
property
depreciatedto
currentvalue
Deltahasa
rightofthe
propertythat
itwithholds
Recordatcost
and
depreciated
onastraight-
linebasis
Classification:
PPEAssets
Footnotes:
Valuation,
depreciation,
types
Goodwill Hardtocount
duetolackof
physical
presence;
mustfollowa
clearaudit
trailof
goodwill
valuationand
beginnings
Fairvalue
impairmentof
goodwillmust
representthe
currentvalueof
theasset
Goodwillisa
rightbecause
itisanasset
thatDelta
holds
Fairvalue
impairment
carryingvalue
testto
determine
goodwill
value;valued
usingmarket
capitalization
andincome
approach
valuation
techniques
Classification:
OtherAssets
Footnotes:
Valuation
IdentifiableIntangibles
Hardtocount
duetolackof
physical
presence;
mustfollowa
clearaudit
trailofwhere
intangibles
camefrom
Allintangibles
mustbe
accountedfor
attheaccurate
carryingvalue
Intangibles
arearight
thatisnot
physicalbut
Deltastill
owns
Shouldbe
recordedat
grosscarrying
valueand
amortizedat
estimated
aggregate
value;valued
usingmarket
capitalization
andincome
approach
valuation
Classification:
OtherAssets
Footnotes:
Valuation
OtherNoncurrentAssets
Many
assumptions
areusedin
valuationdue
tolimited
marketdata
musthave
clearaudit
trailof
valuation
techniques
Alllongterm
investments
mustbe
updatedeach
yeartocurrent
marketvalue
Long-term
investments
arearight
because
Deltaownsa
pieceof
another
entity
Valuedat
quotedmarket
prices
Classification:
OtherAssets
Footnotes:
Valuationof
long-term
assetsànot
veryclearon
valuation
calculations
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135
LIABILITIES
Account ExistenceorOccurrence
Completeness RightsandObligation
ValuationorAllocation
Presentationor
Disclosure
CurrentMaturities&Long-TermDebt&CapitalLeases
Mustmature
(bepaid)innext
year;amount
paidshould
equalamount
recognized
Amount
maturinginthe
nextyear;must
removefrom
longterm
obligations
Thelong-term
obligationsthat
thecompany
mustpaythis
year
Adjusted
portionofthe
longterm
debtthatis
currentlydue
inthenext
year
Classification:
Current
Liabilities
Footnotes:By
typeof
liability
(leases,loans
etc.)
AirTrafficLiability
Shouldbeequal
totheticket
salesoccurred
Totalpresold
ticketsales
accountedfor,
mustbe
decreasedwhen
provideservice
Obligationto
provide
transportation
toconsumers
forticket
purchases
Valueof
advance
ticketssold;
marketvalue
Classification:
Current
Liabilities
Footnotes:
valuation,
descriptionof
liabilityitems
AccountsPayable
Hedgevalues,
mustbe
evaluated
correctly
Valuationof
hedges,risk
accountedfor
eachyear
Theobligations
thefirmmust
meetinthe
nextyear
Margin
funding
contractsof
hedges
Classification:
Current
Liabilities
Footnotes:
Hedges
AccruedSalaries&RelatedBenefits
Numberofdays
andamountof
payworkedbut
notpaid
Adjustingentry
madeatendof
year,mustbe
paidnextpay
period
Obligationto
payemployees
Valueof
salary/wage
promisedto
employees
Classification:
Current
Liabilities
Footnotes:
None
TaxesPayable
Salestimesthe
taxrateshould
equalthe
amountofsales
taxdueand
recorded
Alltaxesshould
beappliedand
recordedas
obligationuntil
paidto
government
Obligationof
taxesdueto
foreign,
nationalorlocal
entities
Taxrate
timesthe
currentvalue
ofsales
Classification:
Current
Liabilities
Footnotes:
None
FuelCardObligation
Shouldnotbe
overcardlimit;
shouldbeequal
tofuel
inventory
received
Mustbepaid
monthly,
recordedwhen
purchasetakes
place
Obligation
becauseis
paymentdue
forpurchased
fuelandoilto
American
Express
Valueof
purchaseson
thecards
Classification:
Current
Liabilities
Footnotes:
valuation,
limitations
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136
OtherAccruedLiabilities
Valueof
FrequentFlyer
milesthatare
availablefor
sale
Mustrecognize
saleandmoveto
revenueupon
transaction
Obligationto
sellFrequent
Flyermilesto
meetmile
obligations
Residual
method;
marketing
component
oftheloyalty
program
Classification:
Current
Liabilities
Footnotes:
description,
frequentflyer
footnote
Long-TermDebtandCapitalLeases
Checkaudittrail
oflease
footnoteand
calculate
accuracyof
leases;acquired
shouldequal
owed
Totalleasesand
debtminuswhat
iscurrently
maturing
Obligationsthat
mustbemetin
thelong-term
(plane
purchases,
leases,etc.)
Adjusttofair
valuewith
discountrate
Classification:
LongTerm
Liabilities
Footnotes:
lease
footnote,
valuation
Pensions Benefitaccruals
shouldremain
frozen,somust
justcalculate
contribution,
interestcost,
servicecost,
etc.
Have
calculationsfor
eachiteminthe
pension
worksheet
Obligationsof
benefits
providedto
employees
post-retirement
Frozenfrom
futurebenefit
accruals;
amortized
over17year
oldperiod
Classification:
LongTerm
Liabilities
Footnotes:
Pension
worksheet
DeferredIncomeTax
Temporary
difference
between
financial
statementsand
taxreturns
Alldifferences
mustbe
originatedand
thenreversedto
recognizethe
temporary
difference,then
diminishit
Taxobligation
thateventually
isdiminished
thatoriginated
duetoincome
beforetax
beinggreater
thantaxable
income
Valuedusing
theliability
method;
carrying
temporary
differences
Classification:
Current
Liabilities
Footnotes:
Originatingor
reversing
status,
valuation
FrequentFlyerDeferredRevenue
Recordingmiles
earnedatfair
marketprices
Establishavalue
permiletoavoid
overstatement
ofamountdue
Thisisan
obligation
becauseitisa
ticketforthe
numberof
milesowedto
customers
Milesearned
bycustomers
ofloyalty
programat
valueof
ticketprice
formiles
Classification:
LongTerm
Liabilities
Footnotes:
Frequent
FlyerProgram
DeltaAirLines
137
AUDITRISKS
Anaudit risk ismost likely tooccurwhen threeareasof the fraud triangleare
met: pressure, realization, and opportunity. Assets easily meet all three of the
requirements,makingassetsalargeauditriskforDeltaAirLines.Managementmayfeel
the pressure to increase asset amounts because this usually helps improve financial
analysis data and therefore shareholder value. Realization that assets can be easily
manipulated to higher values furthers the ability to commit fraud.Many of Delta Air
Lines’ assets are valued with predicted amounts rather than the predetermined
paymentvalues like liabilitiesdue. In termsofopportunity,assetsalsohaveaneasier
accessibility because they are the right of the company and therefore can be
misconstruedduetothelackofobligationtopayorprovideaservicetoanotherentity.
Inotherwords, thecompanycanactsinglehandily inasset fraudbecausethere isno
involvementwithother companies.Therefore,auditors shouldconcentrateheavilyon
what the company reports as owned because they have a smaller audit trail than
liabilities due to the lack of multiple entity involvement. Furthermore, assets have a
higheraccessibilityfrompersonnelduetheirabilitytobetangibleitems.Theimmense
sizeofproperty,plantandequipmentand theestimationsutilizedallows foranaudit
risk to occur and the lack of clarity in inventory controls creates a risk there aswell.
There are five main internal control categories that aid in decreasing the audit risk:
DeltaAirLines
138
authorizationofactivities,maintenanceofadequateaccountingrecords,limitedaccess
toassets,andindependentverificationandsegregationofduties.
INTERNALCONTROLS:
1. Property,PlantandEquipment:
Property, Plant and Equipment should be tested to ensure that financial values
presented are what actually exist. First the auditor should take a physical count of
equipment(theaircrafts).Theauditorshouldalsoresearchthefairmarketvalueofthe
assets using current average sales prices. The biggest estimation for PPE is the
calculation of depreciation expense. Delta Air Lines uses straight-line depreciation
meaning the depreciation expense should be equal for each asset every year. The
companymustestimatetheuseful
lifeoftheassetinordertodeterminedepreciationexpense.Thebestwayofdoingthis
is to lookathistoricaluseful lifeofsimilarassetsanddetermineastandarduseful life
AuthorizaXonofAcXviXes
MaintenanceofAdequateAccounXngRecords
LimitedAccesstoAssets
IndependentVerificaXon
SegregaXonofDuXes
DeltaAirLines
139
dependingonproducttype.Usingaudittrailstheauditorshouldensurethatthecostof
thePPE,depreciationandotherinvestmentaspectscalculatetothereportedadjusted
basis of the asset. Internal controls are also important to decrease audit risk for the
valuationofdepreciation,saleandpurchaseofpropertyandequipmentasseenbelow:
InternalControl Recommendation EffectofRisk
AuthorizationofActivities
MaintainHistoricalPriceList Ensurethattheitemisbeing
depreciatedatconstantrate
usingstraight-linemethodandto
comparevaluationofassetsover
time
MaintenanceofAdequateAccountingRecords
Usepredetermineduselife
foraircrafts
Determiningasetuselifeof
equipmentsuchasaircrafts
basedoffhistoricallifewillallow
formoreconsistentandaccurate
deprecationcomputations
LimitedAccesstoAssets
LedgersandJournals
Maintained
Limitwhocanupdatevalueof
PPE
IndependentVerification
VerifythatPPEdisposalvalue
hasthecorrectadjustedbasis
(checkoriginalcost,
depreciationandsaleprice)
Ensuringthatallnumbersare
calculatedcorrectlyleadstoless
errorsonfinancialrecords
SegregationofDuties
SellingorPurchasingPPE
differsfrompersonnel
postingtoledger
Makesitharderforsomeoneto
getakickbackorextra
commissionfromthesaleor
purchaseofPPE
2. Inventory:
Inventoryneeds tobe checked toensure thatending inventory, inventorypurchased
andinventorysalesandrecordedaccuratelyinthefinancialstatement.Firsttheauditor
shouldtakeaphysicalcounton inventorytodetermine ifunit levelsarecorrect.Then
DeltaAirLines
140
theauditorneedstochecktheaudittrailtoensuretransactionsoccurredatreasonable
limits.Thecompanyshouldcreateapricelimittoensurethattransactiondatawasnot
incorrectly entered for the sale or purchase of inventory, but also to detect if a
personnel is selling inventory or purchasing inventory at higher values and pocketing
some of this as commission illegally. Audit trails are essential in detecting fraud
occurringininventory.Inventoryshouldbevaluedutilizingcurrentmarketdataonthe
fairmarketvalueoftheitemswithheld.Internalcontrolsareimportantforreducingthe
auditriskofinventoryassets.Thisisdescribedinfurtherdetailbelow:
InternalControl Recommendation EffectonRiskAuthorizationofActivities
Establishanauthorized
customerlistthatspecifies
whatcustomersareapproved
forinventorytransactions
Maintainhistoricalpricelist
Thesereducestheriskofalias
customersandthereforefakesale
transactions
Usedtocomparewithpurchase
priceofassetsanddetermineif
priceisastandardamount
MaintenanceofAdequateAccountingRecords
Embedcheckdigitsinaccount
numbers
Thiscreatesabarrierbetweenthe
creationofthecheckandthe
depositwhichmeansunauthorized
personalwouldhaveadifficult
timestealingroutingnumberetc.
tostealmoney
LimitedAccesstoAssets
Moveinventoryonlywhen
approvedwith
documentation
Securewarehouseinventory
Inventoryshouldnotberemoved
fromthewarehouse
Makesureinventoryislockedand
securelykepttrackofwillreduce
opportunitytosteal
DeltaAirLines
141
IndependentVerification
Comparedocumentation:
Unitsshippedandamount
billed
Thedollarvaluesoldshouldequal
thevalueofthenumberofunits
shipped;thiswilldetectifthereis
fraudoccurringsuchasillegal
commissionsonsales
SegregationofDuties
Salesfromcreditapproval
Shippingfrombilling
Salesfromreceivableposting
Salescanonlyoccurtoreputable
Personshippingthegoodsand
billing
Personmakingthesalecannot
havecontrolofmoneytodecrease
likelihoodoffraud
FOREIGNTAXRATESSource:KPMGForeignTaxRates
The United States has a statutory corporate tax rate of 35 percent plus the
statutory tax rate for corporations of the state the company performs operations in,
creatinganoverallaveragecorporatetaxrateof40percent.TheUnitedStateshashigh
corporation taxes compared to other countries. The countries chosen to compareUS
40.00%35.64%
26.50%30.00%
34.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
UnitedStates Japan Canada Mexico Brazil
CorporateIncomeTaxes
DeltaAirLines
142
statutorytaxratewithwere:Japan,Canada,MexicoandBrazil.JapanandCanadaare
the two countries that Delta performs the most transactions in and has the highest
amountof foreigncurrencyexchangewith. Japan’s tax rate isonly fivepercent lower
than the United States while Canada’s is about 15 percent lower. Mexico and Brazil
were also included on the comparison due to Delta’s large investments in aircraft
manufacturersthere.AlthoughtheUnitedStateshasthehigheststatutorytaxrateDelta
shouldnotmoveitsoperationstoanothercountry.First,countrieswithextremelylow
statutorytaxratesoftendonothavetheinfrastructuretosupportalargeairportandair
servicecorporation.AsforcountrieslikeCanadaandMexico,thetaxrateis lowerand
infrastructureforlargeairportsisinplace,butleavingtheUnitedStatescouldalsomean
a loss in revenues because Delta most likely would lose many of its bids on airport
terminalsandhaveincreasedbarrierstooperateintheUnitedStatesairservicemarket.
TAXCREDITSSource:NYTimes“LawmakersMayEndTaxBreakonJetFuel,toDelta'sDismay”;TheStreet"DeltaAirLines(DAL)StockSoaringTodayAfterEarningsRelease."
Deltahasahugeadvantageduringthismostrecentperiodofgrowthduetopast
lossesthatcannowbeutilizedascarryforwards.In2008and2009alone,DeltaAirLines
hadovertwobilliondollarsoflossesthatitcannowcarryforwardforthenext20years
tooffset futureearnings.Plus thecompanyhas losses fromyearsprior to that,which
arestillapplicable to thecarry forwardpolicy.According thecompany’s10-K in2013,
DeltaAirLines
143
the company still has15.3billionof loses that relates toeightbilliondollars tooffset
future incomes.Thecompanydoesnotexpecttohavetopayany incometaxes inthe
nextfewyearsduetothesecarryforwardsandothertaxbenefits(Bachman).DeltaAir
Linesalso receivesa taxcredit for itspurchaseof jet fuel.This taxwascredit in2004
when Delta was struggling financially, but there have been talks of ridding this tax
becauseofthelargetaxbenefitDeltaalreadyreceives.ThistaxbreaksavesDeltaabout
23milliondollarsayearandisvitaltothehugeamountofsavingsDeltareceivesfrom
taxavoidance.
TAXRECOMMENDATIONSOURCE:SECTION179.ORG Deltaalreadyhasquitealargeamountoftaxcreditsanddoesnotexpecttopay
cash income taxes for at least the next few coming years. To continue receiving tax
credits,Deltamustchosemorelong-termtaxsavingoptionsbecausethetaxcreditfrom
carry forward losseswill eventually run out and the fuel tax credit is possibly ending
soonaswell.OnepossibletaxrecommendationthatwouldbenefitDeltaAirLinesisto
acquiremoreaircraftsutilizingleasesratherthanownership.Deltacurrentlyownsmore
planesthanitleases,butleasinghasmoretaxcredits.Leasepaymentsaredeductibleas
expensesandhigherpricedassetsusuallyhavehighertaxbenefitsthroughleasing.This
is because the company candeduct thewhole valueof the equipment in the yearof
DeltaAirLines
144
lease, but not actually pay that amount in the year because payments are split into
smallerleasepaymentamountsovermultipleyears.Sometimes,theamountdeducted
exceedspaymentamounts inthefuturebecausetheasset isnot leasedforthelength
(value)ofitsfullcost.CurrentlyDeltaowns583ofitsaircraftsandonlyleases181;the
recommendationistoincreasethenumberofleasesdrastically.
DeltaAirLines
145
CHAPTERTENTHEBALANCEDSCORECARD
The balanced scorecard indicates to organizations such as Delta Air Lines
possible area for improvement based on some key performance measures. The
balancedscorecard issplit intofourperspectivesthatbuildupononeanother:growth
and learning, internal process, customer and financial. Each perspective has main
descriptorsthatmakeup itsbuild.Thesedescriptors indicatethetypeofperformance
measurement that will indicate the effectiveness or growth of that perspective. For
example, measures that analyze human capital relate to the growth and learning
perspective. Below is the list of all balanced scorecard perspectives with their
correspondingdescriptors:
BALANCEDSCOREDCARDPERSPECTIVES
FinancialPerspecXveProducjvityStrategies GrowthStrategies
CustomerPerspecXveProductAmributes ServiceAmributes Relajoinship Image
InternalProcessPerspecXveOperajonsManagement
CustomerManagement
InnovajonRegulatoryandSocial
GrowthandLearningPerspecXveHumanCapital InformajonalCapital OrganizajonCapital
DeltaAirLines
146
As statedbefore, theseperspectivesbuild onone another. So the growth and
learning perspective improves the firm’s infrastructure and basic processes. This
improvement allows for better improvement on internal processes, or how the firm
performs tasks and manages multiple business areas. This leads into customer
perspective, which is all about improving customer relations and the number of
customers the companyattains. Internal processes and customerperspectives in turn
improvethefinancialperspectivesofproductivityandgrowthbymakingthecompany
moreefficientandcreatingalargercustomerbase.Clearly,thebalancedscorecardhas
casual linksbetweenperspectives.Nowwewill takea lookatwhichkeyperformance
measurearevitaltotheefficientoperationsofDeltaAirLines.
GrowthandLearningPerspectiveObjective:toimprovefirm’sbusinessprocessesandcustomerrelationships
PerformanceMeasure Description
EmployeeTurnoverRate
HumanCapital:Identifiesemployeeretentionrateandcan
aidinevaluatingemployeesatisfaction
TimeSpentonEmployeeTraining
HumanCapital:Traininghasapositiveeffectonemployee
performanceandunderstandingofconductandstandards
MultilingualEmployees
InformationalCapital:Withmanyflightsbeinginternational
havingmultilingualemployeescanaidinincreasedglobal
networking
DeltaAirLines
147
InternalProcessPerspectiveObjective:Operateefficientlyanddelivervaluetocustomers
PerformanceMeasure DescriptionNumberofFlightsonTime
OperationsManagement:Consumersrelyontimeflightsto
traveltotheirneededdestination,consistencyiskeyhere
TimeBetweenFlights Operations Management: This includes layover time,
boarding time,andground timebetween flights,goal is to
decreasenon-valueaddedtime
BaggageLost Customer Management: Managing customers baggage to
ensure correct placement and arrival of baggage to
customers,improvingthiswillaidincustomersatisfaction
NumberofRegulatoryComplianceIssues
RegulatoryandSocial:Planesmustbeuptocodeandin
workingcondition.Planesnotincomplianceraise
awarenessinissueswithequipmentandcreatebarrierto
efficiency.
CustomerPerspectiveObjective:Determinecustomerbasisandcreatevalueandgrowththroughthose
customersPerformanceMeasure
Description
NumberofCustomerComplaints
Relationship:Are customers satisfiedwith your service?This
relateshighlywithcustomerretentionrate
NumberofCustomersUtilizingLoyaltyProgramorApp
ServiceAttributes:Theserviceprovidesaloyaltyprogramand
an application that allows customers to gain incentives for
flyingDeltaandmakestraveleasierthiswillcorrespondhighly
withincreasingretentionrate
FinancialPerspectiveObjective:Createshareholdervalue
PerformanceMeasure
Description
NetIncome Productivity Strategy: Are revenues increasing while costs arefalling? How can we gain larger revenues while keeping costs
lower
SalesGrowth Growth Strategy:How can we increase our sales basis?What
newcustomerscanwereachtocontinuesalesgrowth?
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RECOMMENDATIONONESOURCE:USATODAY“AIRLINESPADFLIGHTSCHEDULESTOBOOSTONTIMERECORDS”BY:THOMASFRANK
Airlinecorporationsputahugeamountofweightonthebalancescorecarditem
“Number of Flights on Time” under the Internal Processes Perspective. The problem
withthisisthatinrecentyearsairlineshaveputtoomuchfocusonthis.In2012,more
flightsarrivedearlythateverrecordedinairlineservicehistory,butthisrevealsaneven
larger issue. Airline industry corporations tend to now “cushion” flight schedules by
allowingextratimeforflightssomoreflightsarrive“early”duetotheoverageoftime
scheduled.AccordingtoUSAToday,95percentofflightsin2012werescheduledlonger
than in 1995. The biggest problem with cushioning schedules is this increases the
amount of time planes remain idle between flights. This highlights the Internal
ProcessesPerspectivebalancedscorecardkeyperformancemeasureof“TimeBetween
Flights.” 2012 was the first time ever that early flights (1,213,842) was more than
problem flights (1,106,539).On time flights satisfy customers, but idle time creates a
lossofpotentialsales.AccordingtotheFederalAviationAdministrationthenon-value
time costs airline companies 3.7 billion dollars in sales. My recommendation is to
decreaseidletimebacktoits levels inthelate1990’sandthereforegaining3.7billion
dollars in sales.Thebestway todecrease idle time is for thecompany toutilize their
ERPsystemwithflight lengths.Utilizingtheactual lengthof flight,plusadequatetime
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betweenflightswithouttoomuchofacushionwillallowtheairlinestocompletemore
flightsperdayandthereforehaveanincreaseinsales.
RECOMMENDATIONTWOSource:NYTimes“LawmakersMayEndTaxBreakonJetFuel,toDelta'sDismay”
Delta needs to further invest in their refinery segment. Recent reports have
announced that the state tax benefit Delta receives on jet fuel purchases may be
rescindedincomingyears.ThetaxcreditwasputinplacewhenDeltaAirLineshadto
fileforbankruptcyin2005inthestateofGeorgia(Delta’sheadquarterstate),butdueto
the continual growth and success of Delta since that time, Georgia is considering
removingthecredit.ThismeansDeltaAirLineswillnolongerreceiveataxcreditwhen
purchasingjetfuel.Theissuewithcrudeoilisvolatilityinprice.Whenpricesarelowit
benefits Delta to purchase already refined jet fuel, but when oil prices are high it
benefitsDeltatopurchasecrudeoilandrefineitonitsowntoavoidfurtherpricemark
ups. Currently, Delta is refining some of its jet fuel and purchasing some as well. I
recommendthatDelta invest further into its refinerybusinessbecause it ismorecost
effective topurchase rawmaterialsearlier in the supply chain.Additionally,Deltahas
already paid for the bulk of its refinery infrastructure cost, leaving the only expense
requiredtorefine is thepurchaseofcrudeoil,direct laborandfactoryoverhead.This
will allow for further growthon incomeand customerbase for the companybecause
nowtheywillbesellingtobothpassengersandotherairlinecompanies.
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RECOMMENDATIONTHREESource:Heisler,Yoni."ApplePay:AnIn-depthLookatWhat'sbehindtheSecurePaymentSystem." Thecompanyalreadyhasanonlinewebsiteandanapplication,FlyDelta,where
consumerscanbuytickets,checkflighttimes,check-intoflightsandcompletevarious
other functions. This data is shared through Delta’s ERP system, which allows ticket
purchasestoautomaticallybeupdated intothe ledgerFlyDeltaApplicationapplies to
theCustomerPerspective“NumberofCustomersUtilizingLoyaltyProgramandApp.”In
order to increase the number of people that utilizes Delta Air Lines application, the
companymustprovideasecurenetwork forpaymentsandstoringdata.Theproblem
with allowing purchasing on the application is that Delta Air Linesmust regulate the
payments through PCI Compliances to protect purchasers’ secure data. On average,
companies spend up to 355 million dollars a year on meeting PCI Compliances.
Requirements for PCI include: encryption of credit card data, firewalls, secure
passwords,anti-virusandsecurityupdates,restrictaccesstopurchaser’spersonaldata,
andtestingandmonitoringthesystem.
A cost saving route that many companies take is outsourcing the credit card
purchasingprocesstoathirdparty.Soalthoughitmaylookorfeelliketheconsumeris
stillusingtheDelta’sapplicationstopaybasedonthe interface,thecompanyactually
processes thepayments througha thirdpartycompany.ThisallowsDeltaAir Lines to
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forgo any PCI compliance costs it may incur. This will decrease overall company
expenses and therefore allow the company to invest the money in other entities. I
recommendusingasystemsuchasApplePayorGoogleWalletforoutsourcing.Apply
Pay and Google Wallet are both great options because the installation costs of the
systems are free. In other words, companies do not have to pay a fee to utilize the
paymentsystemswithintheirapps.
How the system works is that it ensures secure encryption of credit card
information.FirstthecustomermustentertheircreditcarddataintoApplePay.Apple
paythentakesthecardinformationandcreatesauniquedeviceaccountnumberthatis
unrelated to thecreditcardnumber.Whena transactionoccurs,ApplePaysends the
merchanttheuniqueaccountnumberandthemerchantverifiesthisnumberandsends
it to a corresponding credit card company. The credit card company this has the
authorization to link the unique account number to the Apple Pay account with the
creditcarddataandthenthetransactioniscomplete.Thekeyattributeofthissystemis
thatthemerchant(Delta)wouldneveractuallywithholdtheconsumer’spersonaldata.
This takes all need to meet PCI compliances out of the hands of Delta and into the
responsibilityofthethirdpartyhandlingthetransactionandwithholdingthecarddata.
BecauseDeltaAirLineshassuchalargeamountoftechnologyusedinitsoperationsand
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purchases, it should reduce some IT risk by outsourcing credit card payment risk to
avoidcostsassociatedwithPCICompliance
EFFECTOFRECOMMENDATIONS Theeffectofallthreeofmyrecommendationswouldbechangesinsalesandin
expenses.TheITrecommendationwouldmostlyaffectexpensesbyreducingcostsand
therefore increasing net income. This may be somewhat canceled out due to
recommendation twowith the increase in purchases of crude oil. Reducing idle time
would increase sales by 3.7 billion dollars. Investing more money in the refinery
segmentwouldcreateapproximatelyabillionmoreinrefinerysaleseachyear.Bothof
theseincreasesinsaleswouldcausesalesgrowtheachyeartoincreasefrom3percent
to 10 percent. This was calculated by recalculating sales growth in terms of the
recommendations from 2013 to predict for 2014. The change in sales growth would
affect our ROPI. ROPI measures stock valuation and with the recommendations the
company’s stock valuewould rise evenmore, causing the company to be evenmore
undervaluedandagoodbuyforinvestor
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ROPI 2013 2014 2015 2016 2017 TerminalSalesGrowth 10% 10% 10% 10% 1%
Sales 37773 43,439 47783 52561 57817 58395
NOPM 0.40 0.4 0.4 0.4 0.4 0.4
NOPAT 15109 17376 19113 21024 23127 23358
NOAT 2.4 2.4 2.4 2.4 2.4 2.4
NOA 15739 18100 19910 21900 24091 24331
ResidualIncomeModel 1 2 3 4
RequiredReturn 2358 2711 2982 3281 3609
ROPI 15018 16402 18042 19846 19749
DiscountFactor 0.86972 0.75641 0.65786 0.57215
PVofHorizonROPI 13061 12406 11869 11355
Cum.PVofHorizonROPI 48692
PVofTerminalROPI 141269
Totalfirmvalue 189961
LessNNO 13000
FirmEquityValue 176961
SharesOutstand 896
StockValuepershare 197.50
TradingPrice12/31/13 27.19
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