In this article I'll have a closer look at Delta Air Lines (DAL), which is one of the largest airline companies in the world. I will provide my view on the 2013 financial statements and the balance sheet at year end. I'll also discuss the outlook for 2014 and this will result in my conclusion at the end of this article.
All images in this article were sourced from the company's press release. The sentence in italics is a direct quote from this press release.
My view on the financial statements
During the entire year 2013, Delta Air Lines recorded a total revenue increase of 3%, which was mainly caused by a $1.4B increase on mainline revenues which compensated for a decrease in revenues in the regional carriers-segment. On top of that, Delta Air Lines was able to reduce its operating expenses by $122M. This was caused by a sharp reduction in the fuel costs which dropped by 7% in 2013 compared to 2012.
The combination of increasing revenues and decreasing costs has led to a 56% increase in operating income, from almost $2.2B in 2012 to $3.4B in 2013. The net profit has increased to $10.5B, but this was mainly caused by a (non-recurring) tax benefit of $8B. As this obviously doesn't give a good representation of the underlying business, I think the cash flow statements will shed some more light on the Delta's 2013. Delta provides its own free cash flow calculations, which indicate a free cash flow of $2.1B in 2013, which is approximately $2.46/share. However, as Delta adds $300M SkyMiles benefit, I'd prefer to deduct this $300M from the free cash flow as I'm quite conservative. This results in a free cash flow of $1.8B for 2013, or approximately $2.10/share.
This means that Delta Air Lines is currently trading at approximately 15 times its 2013 free cash flow for a Free cash flow yield of 6.66%, which isn't bad at all.
My view on the balance sheet
Moving over to the balance sheet, Delta Air Lines was able to turn a negative equity position of -$2.1B around to a positive position of $11.6B, which is obviously mainly caused by the tax benefit which was recorded in 2013. The current book value per share stands at $13.57, so Delta Air Lines is trading at approximately 2.3 times its book value. This isn't exactly cheap but also not expensive, as the company seems to be on the right track and is adding $2.1/share in free cash flow per year (if the company can repeat the 2013 results).
Outlook for 2014
Delta Air Lines hasn't provided an official guidance for 2014, but I'm expecting a continuing revenue growth of 3% per year for this year, as the demand for air travel seems to be increasing. However, it will be quite difficult to calculate the impact of the weather disruptions on Delta's flight schedules in January of this year, so I'm looking forward to see the results of the first quarter of 2014. I also expect Delta to keep its costs relatively stable, as the fuel costs in Q1 seem to be decreasing slightly from the 2013 numbers (as per the company's official Q1 2014 guidance).
I would be aiming for a free cash flow of approximately $2B in 2014 and $2.1B in 2015, which would definitely help Delta Air Lines to reduce its debt profile. If Delta would use $1.5B of its free cash flow per year to reduce its total debt, I'm expecting the interest bill to decrease by another $100M per year, which obviously will increase the free cash flow even further.
Delta Air Lines had a solid 2013 but investors should be aware the net profit will never again even come close to the EPS of $12.41. In fact, the net profit from Q1 2014 on will take an average tax rate of 39% into account (according to the press release). This means that the net profit will drop dramatically, and that's why I'd urge all investors and potential investors to focus on the free cash flow instead of at the net profits. Even though Delta will use a tax rate of 39%, the company claims (see press release):
'there will be no cash impact as Delta's net operating loss carryforwards will offset cash taxes on more than $15 billion of future taxable income.'
I can only hope Delta Air Lines will use the cash flow to reduce its total debt position which will have the longer-term benefits of a lower interest bill.