DeltaAirLines:AFinancialAnalysisandCorrespondingRecommendationsfor

DeltaAirLines,Inc.

by

EmilyMarieBush

AthesissubmittedtothefacultyofTheUniversityofMississippiinpartialfulfillmentof

therequirementsoftheSallyMcDonnellBarksdaleHonorsCollege.

Oxford

May2016

Approvedby:

___________________________________Advisor:ProfessorVictoriaDickinson

ii

©2016

EmilyBush

ALLRIGHTSRESERVED

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.

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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.

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**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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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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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

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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

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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

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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

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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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29

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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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

DeltaAirLines

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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41

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.

DeltaAirLines

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.

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46

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

47

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

DeltaAirLines

48

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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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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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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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

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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

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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

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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

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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

DeltaAirLines

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

DeltaAirLines

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

DeltaAirLines

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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