Delta airlines pitch

DELTA AIRLINES PITCH: DAL January 1, 2015

AGENDA

CONTENT SLIDE

INDUSTRY OUTLOOK 3

COMPANY OVERVIEW 4

INVESTMENT RATIONALE 5

CATALYSTS 6

RISKS 7

VALUATION 8-9

TARGET PRICE 10

INDUSTRY OVERVIEW MARGINS AND DISPOSABLE INCOME INCREASE SUPPLY AND DEMAND OF OIL BENEFIT DELTA

Valuation Catalysts & Risks Investment Rationale Company Overview Industry Overview

•  2015 Per capita disposable income: expected to increase. Inbound trips by non-US residents is anticipated to increase 3.5% per year on average during the five years to 2019

•  Airlines amongst the most vulnerable to global or local shocks

Contingencies include cash reserves, hedging of major risks •  Capacity utilization of the plane (passenger load factors), are predicted

to rise in the next five years as airlines use technology and adjustable price ticketing to increase loads. Revenue is then bolstered by higher load numbers

•  A large production increase in oil from the United States is putting downward pressure on oil prices. Jet fuel is distilled from oil

•  OPEC is also refusing to change production levels causing a price war to occur with the United States

•  A decrease in economic

value within Europe and China are causing a lack of demand for oil

•  Downward pressure is placed on oil, with a forecasted growth in oil demand of only 1% in 2015.

MARKET SHARE OF MAJOR US PLAYERS

SOURCE: IBIS WORLD

Price of Brent Crude Lowest Since 2009 ($56.4/BBL)

3

COMPANY OVERVIEW BUSINESS OVERVIEW GEOGRAPHIC SEGMENTATION

GROWTH IS STRONG AND RELIABLE


•  Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo worldwide. It also provides aircraft maintenance, repair, and overhaul services for aviation and airline customers, as well as offers staffing services, professional security and training services, and aircraft management and programs Headquartered in Atlanta, Georgia.

70% of its revenues is generated within North America

Revenue by Geographic Segment

North America

Atlantic

Pacific

Latin America

(20.0%)

0.0%

20.0%

40.0%

60.0%

12 months Dec-31-2011



LTM 12 months

Sep-30-2014

EBITDA Growth in Past 3 Years

EBITDA Linear ( EBITDA)

MANAGEMENT TEAM

Richard Anderson (CEO)

Paul Jacobson (E.V.P and CFO)

Gil West (E.V.P and COO)

25 years of aviation experience

Continental Airlines Northwest Airlines

Board member Owen graduate school

Aviation management advisory board in Auburn

Laidlaw Transit Services (CEO) Northwest Airlines

United Airlines & The Boeing Company.

4

INVESTMENT RATIONALE INCREASE IN SEATTLE GATES BOLSTER GROWTH


•  Airline companies are looking to expand western U.S hubs in areas such as Seattle. Delta Airlines is looking to triple its gates at the Seattle Airport (seeking 30 gates in the long term), challenging market leader, Alaska Air Group.

5

FLEET RESTRUCTURING IMPROVE MARGINS

Domestic Fleet Restructuring •  Delta Airlines is looking to

replace 50-seaters with fewer, larger aircrafts, improving margins through higher revenues and improved cost efficiency

•  So far this year, capacity increased by 2%; departures decreased by 4.5%

DELTA TO PROFIT FROM FALLING OIL PRICES

•  Historically low oil costs reduce fuel prices causing DAL’s operating costs forecasted to cut by half

•  Airlines are the most oil price sensitive businesses, DAL has a competitive advantage of owning its own refinery $2.70

$2.80 $2.90 $3.00 $3.10 $3.20 $3.30

2012 2013 2014E

Average Jet Fuel Price

Delta

Industry (ex DAL)

HEALTHY GROWTH IN AIR TRAFFIC

•  World GDP forecasted to grow 3.2% mainly from emerging markets

•  GDP growth is causing forecasted air traffic growth to be 5%

CATALYSTS CHINA VISA DEAL BOLSTERS GROWTH

Valuation Catalysts & Risks Investment Rationale Company Overview Industry Overview 6

•  Short-term visa extensions increase air traffic from China to the United States by 4 times. Creating healthy growth prospects for DAL as a leading company and its strong efficiency levels

INCREASING CASHFLOWS PROVIDE VALUE •  DAL’s dividend has recently increased by 50% due to successful

operations increasing cash flow

•  Announced that there will be $2 billion worth of share buy backs no later than 2016 increasing shareholder value

•  Decreased 2009 $17 billion debt to $7.4 billion within 5 years, signaling strong cash flow to repay debts DAL FOCUSES ON US GROWTH

•  Delta Airlines will shift most of its capacity growth next year into the domestic market after a strong performance this year.

•  Domestic capacity is expected to grow 3% in 2015, while international

capacity will increase less than a percentage point.

•  DAL is one of the strongest airline players in the United States with one of the highest margins, forcing them to be a primary contender in the domestic markets.

SOURCE: SEEKING ALPHA

RISKS CHANGE IN JET FUEL PRICES THREATEN GROWTH

Valuation Catalysts & Risks Investment Rationale Company Overview Industry Overview 7

•  Delta’s heavy reliance on crude oil and jet fuel prices being low increase risk if input prices reverses in an upward trend

•  Potential crude oil export ban being lifted in the states if oversupply gets too strong

ADVERSE WEATHER CONDITIONS

•  Poor weather conditions can cause air traffic to decrease leading to a decrease in growth

•  Profitability may be harmed as flight delays will occur

STEEL PRICE CHANGES •  With steel being a major input price in planes. A higher steel price may

decrease airline margins in the future.

•  Steel demand growth is forecasted to be 2% in 2015

Market Risk Sensitivity Index of Steel

VALUATION COMPARABLES ANALYSIS

Valuation Catalysts & Risks Investment Rationale Company Overview Industry Overview 8 SOURCE: CAPITAL IQ

All values in millions, except per share data and ratios.

Company Comp Set Market Cap ($MM)

Total Enterprise Value ($MM)

EV/EBITDA Dividend Unlevered Free Cash

Flow Passenger

Revenue/ Kms LTM 2015E Yield American Airlines Group Inc. (NasdaqGS:AAL) 32,312.7 41,503.7 7.3x 4.64x 0.9% 417.3 92,776 United Continental Holdings, Inc. (NYSE:UAL) 21,513.1 28,093.1 7.0x 4.61x - 603.9 90,225 Southwest Airlines Co. (NYSE:LUV) 26,925.8 26,134.8 8.7x 6.35x 0.6% 947.8 45,901 International Consolidated Airlines Group, S.A. (LSE:IAG) 13,727.3 15,074.7 6.0x 3.88x - - 58,206

High 32,312.7 41,503.7 8.7x 6.35x 0.9% 947.8 92,776 Low 3,711.8 5,333.8 6.1x 4.39x 0.6% (140.8) 13,269 Mean 18,362.5 21,582.7 7.2x 4.98x 0.8% 409.5 51,694 Median 21,513.1 26,134.8 7.0x 4.64x 0.9% 417.3 45,901 Delta Air Lines, Inc. (NYSE:DAL) 37,486.6 43,880.6 6.8x 5.44x 0.8% 1,659.6 91,658

VALUATION DCF ANALYSIS


WACC CALCULATION

Corporate Tax Rate 35% Total Equity 12296 Total Debt 10760 Value of Firm 23056 Return of Market 0.08 Risk Free Rate 0.0211 Beta 0.86 Cost of Equity 7.18% Cost of Debt 2% WACC 5.00%

Dividend Discount Model Growth Rate 4% Discount Rate 6.26% DDM 96174.39609 Terminal Value 85414.39609 PV of Terminal 52437.0

Enterprise Value -> Equity PV UFCF $11,893.37 PV of Terminal 52,437.03 EV $64,330.40 Add Cash Equivalents 4607 Less Debt 15229 Equity Value $53,708.40 Shares Outstanding $825.00 Target Price 65.10

DELTA CASH FLOW PROJECTIONS

FY 2011 FY 2012 FY 2013 FYE 2014 FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 FYE 2020 FYE 2021 FYE 2022 FYE 2023 Revenue 31,284.0 32,744.0 33,879.0 35,522.0 38,008.54 40,669.14 43,515.98 46,562.10 49,821.44 53,308.94 57,040.57 61,033.41 65,305.75 EBITDA 3,702.0 4,089.0 5,074.0 6,475.0 6,928.25 7,413.23 7,932.15 8,487.40 9,081.52 9,717.23 10,397.44 11,125.26 11,904.02 Operating Income 2,243.0 2,600.0 3,526.0 4,832.0 5,170.24 5,532.16 5,919.41 6,333.77 6,777.13 7,251.53 7,759.14 8,302.28 8,883.43

Less: Taxes (85.0) 16.0 (8,013.0) (7,163.0) (2,016.4) (2,157.5) (2,308.6) (2,470.2) (2,643.1) (2,828.1) (3,026.1) (3,237.9) (3,464.5)

Add: Depreciation & Amortization 1459 1489 1548 1643

1728.93 1819.35 1914.50 2014.63 2120.00 2230.87 2347.55 2470.33 2599.52 Less: Increase in Working Capital 894 26 (497.0) (683.0) (717.2) (753.0) (790.7) (830.2) (871.7) (915.3) (961.0) (1,009.1) (1,059.6)

Less: Capital Expenditures (1,254.0) (1,968.0) (2,568.0) (2,725.6) (2,874.1) (3,030.8) (3,196.0) (3,370.1) (3,553.8) (3,747.5) (3,951.7) (4,167.1) (4,394.2)

Unlevered FCF 3,257.0 2,163.0 -6,004.0 -4,096.6 1,291.5 1,410.2 1,538.7 1,677.9 1,828.5 1,991.5 2,167.8 2,358.5 2,564.7 PV of UFCF -$3,901.52 $4,654.25 $1,218.16 $1,265.91 $1,314.68 $1,364.48 $1,415.34 $1,467.28 $1,520.32 $1,574.47 Sum of Unlevered FCF $11,893.37 Target Price $65.10

TARGET PRICE RETURNS


Price January 2, 2015: $49.18 Capital Gains 32.37%

Dividend Yield 0.73% Total Implied Return 33.10%

Target Price $65.10

THANK YOU

11

Kelvin Li COMM 17

Delta airlines pitch

Business

Transcript of Delta airlines pitch