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Investing in Delta Airlines: A must-know company overview (Part 13 of 14)

A dividend and share buyback program provides direct benefits to shareholders by proving regular income and better returns on investment

Stock dividends and share repurchases are generally declared by companies with excess cash after meeting working capital requirements, investments in expansion plans, and debt obligations. This excess cash is called “free cash flow” and is available to equity holders. Delta’s (DAL) operating cash flow is high ($4.5 billion) compared to its peers, so it manages to have a positive free cash flow even after meeting its capital expenditure ($2.57 billion). Capital expenditure is generally high in the airline industry. Delta manages to keep it low through its strategy of buying used aircraft.

In 2013, the cash generated from the operation of Delta’s competitors was as follows.

American Airlines (AAL)—$1.44 billion
United (UAL)—$0.68 billion
Jet Blue (JBLU)—$0.76 billion
Southwest (LUV)—2.48 billion

Dividend: Dividends provide investors with regular income, so investors are attracted to dividend-paying shares. Delta declared its intension to increase its dividend by 50% to $0.09 per share from the current $0.06 per share from September 2014.

Share buybacks: Share buybacks result in accretion of EPS (earnings per share) resulting from a decreased number of shares, which in turn can increase share prices. In addition to declaring dividends, Delta has scheduled a $2 billion share repurchase program to be completed by 2016.

Indirect benefits to shareholders through reduced risk and leverage levels

Shareholders can expect to indirectly benefit from Delta’s planned accelerated debt reduction program. Delta’s debt adjusted for operating leases has decreased by 40% from 21.7 billion in 2009 to 12.8 billion in 1Q14, and the company targets reaching adjusted net debt of $5 billion in 2016. Debt reduction will result in reduced interest expenditure, increasing earnings and share prices. Moreover, investors’ confidence in the stock should increase as debt levels decrease and leverage ratios improve.

Continue to Part 14

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Giraffes are not a native species to Ghana.Twitter/Fast Company

Delta Airlines is facing a social media firestorm after posting a congratulatory tweet in the wake of U.S. team 2-1 World Cup victory over Ghana and incorrectly representing the country with a picture of a giraffe.

The post featured the final score, with pictures meant to represent the two countries. The victorious U.S. was depicted as the Statue of Liberty and Ghana was represented by giraffe, expect there are no giraffes in Ghana. Twitter users who saw the post called the image racist and ignorant.

WOW @Delta. With ALL the #Africa traffic business you get, you think #Gha is only a SAFARI w giraffes?? Major business #travel #FAIL #US

— Semhar (@Semhar) June 17, 2014

Most ignorant and racist thing this week “@Delta: We’re sorry for our choice of photo in our previous tweet. Best of luck to all teams.”

— zellie (@zellieimani) June 17, 2014

@Delta go home you’re drunk

— viewfrom327 (@viewfrom327) June 17, 2014

While many posters were upset, some found humor in the situation.

I mean, there’s probably a zoo in Ghana with a giraffe.

— Josh Barro (@jbarro) June 17, 2014

I remember when I was in Ghana riding my giraffe on the beach @Delta

— Hambone (@Menphyel7) June 17, 2014

Someone at Delta was made aware of the gaffe and the offending tweet was removed, but not before Fast Company and other websites were able to capture screen shots.

An apology appeared soon after.

We’re sorry for our choice of photo in our previous tweet. Best of luck to all teams.

— Delta (@Delta) June 17, 2014

Delta Airlines thinks there are giraffes in Ghana. Los Angeles mayor drops f-bomb at LA Kings Stanley Cup parade These stories and more on BDC Now with Jenny Johnson.

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Delta Airlines thinks there are giraffes in Ghana. Los Angeles mayor drops f-bomb at LA Kings Stanley Cup parade These stories and more on BDC Now with Jenny Johnson.

Follow BDC Now on Twitter and like us on Facebook.

Delta Airlines has apologised for an “inappropriate” Tweet it sent to congratulate the USA soccer team following its win over Ghana in the World Cup.

The Tweet featured and image of the Statue of Liberty to represent the US and a giraffe to represent Ghana… which doesn’t have giraffes.

The story of @Delta’s giraffe gaffe, via @CNN: http://t.co/NIFFTWIJPv pic.twitter.com/3nGmDBkVPs

— Storify (@Storify) June 17, 2014

The company was inundated with criticism from social media users, claiming it was ignorant and offensive.

The company quickly deleted the tweet but they weren’t quite speedy enough to avoid eagle-eyed Twitter users:

Preemptively, I think someone should let Delta know that Africa is also not a country. pic.twitter.com/a1FHJWI2Yq

— Elizabeth Plank (@feministabulous) June 17, 2014

When I was in Ghana I rode my giraffe around Accra everyday on the way to my Africa teepee.

— Mat Johnson (@mat_johnson) June 17, 2014

This is how @Delta reasoned. Giraffes are from Zambia. Zambia is in Africa. Ghana is in Africa so a Giraffe is Ghanaian @CedricMcCay

— Elias Munshya (@munshyamunshya) June 17, 2014

I was off Twitter for a few minutes. Has the emergency shipment of giraffes arrived in Ghana yet?

— Josh Barro (@jbarro) June 17, 2014

Hey Internet, maybe @Delta was trying to start a giraffe conservation discussion! Historical giraffe range: pic.twitter.com/isWyFXuXRQ

— anthony brown (@anthonybrown) June 17, 2014

my last @Delta flight pic.twitter.com/HUv1QVEzvA

— k8 (@rolling_2) June 17, 2014

Delta admitted that the original tweet was “inaccurate and inappropriate” and apologised for their choice of photo.

We’re sorry for our choice of photo in our previous tweet. Best of luck to all teams.

— Delta (@Delta) June 17, 2014

“As a global airline, we understand the role images play in shaping global perceptions,” it said in the statement.

“We also recognize our responsibility to create messages that are both accurate and inclusive. We take this responsibility seriously.

“Yesterday, we failed to meet this responsibility. For this, we sincerely apologize.”

Atlanta-based Delta, which has nearly 690,000 followers on Twitter, said that it is reviewing its procedures “to ensure that future images and posts reflect both our values and our global focus”, reports Fox Sports.

Delta Airlines was only trying to do what millions of Americans were doing Monday evening — celebrating the United States Men’s National soccer team’s dramatic World Cup victory over its nemesis, Ghana — a country that defeated the U.S. in each of the last two World Cup tournaments.

But everything went wrong with a Twitter posting issued by Delta, when someone at the airline’s social media operation appeared to think that just because Ghana is part of Africa, that it is the same as all of Africa — a gaffe that other Twitter users interpreted as, at best, thoughtless and poorly researched, or at worst, racist.

The tweet has since been removed, but because nothing ever really disappears on the internet, a screen capture of the deleted posting can be seen below. The numerals “2″ and “1″ represent the score of the memorable match — U.S.A. 2, Ghana 1. But while the U.S. is represented in the image by the very symbol of freedom, the Statue of Liberty, Delta Airlines chose to represent Ghana with — a giraffe?

As Delta quickly learned from a veritable army of Twitter users, just because giraffes are native to some African countries, doesn’t mean that giraffes live in Ghana. They don’t.

Why is @Delta making the US look bad by using a Giraffe image for Ghana? Like, they don’t even have Giraffes there… #tool

— ProfB (@AntheaButler) June 17, 2014

@AntheaButler wtf. Lol. Welcome to the new age of global literacy. Oh wait, nope, just western ignorance in perpetuity. I mean seriously!?? — Jake Erickson (@jacobjerickson) June 17, 2014

You can book flights to Accra, the capital of Ghana, on @delta‘s website. Do not take those flights. They will end up in the Serengeti.

— Rodger Sherman (@rodger_sherman) June 17, 2014

Can’t say I’m too surprised Delta doesn’t know where giraffes live. They think Atlanta is on the way to everywhere. — Ian Actual (@iboudreau) June 17, 2014

I’m guessing that when you book a flight to any of Nigeria or Kenya or the Ivory Coast or Ghana, @Delta tickets just say ‘Africa, whatever’

— Bruce Arthur (@bruce_arthur) June 17, 2014

While many of the offended Twitter users replied with humor, albeit biting and outraged humor, some pointed out that Delta’s apparent assumption that Ghana must have giraffes simply because it is a country in Africa was nothing short of racism.

“It’s racial stereotyping which is a form of racism,” wrote Australian sportswriter Andy Cussen. “Sorry if people are offended by people being offended.”

Indeed, as even a quick Wikipedia search would have revealed to Delta Airline social media department, Africa at 11.7 million square miles is the world’s second-largest continent behind only Asia. There are 54 different countries on the African continent, and more than a billion people. Of those, about 24 million live in Ghana.

Indeed, if Delta Airlines really wanted to use an animal as a Ghanaian avatar, the social media people there could have picked one of the two animals that Ghana chooses to represent itself, rather than one that doesn’t inhabit Ghana at all. The Ghana national coat of arms depicts two animals, the Tawny Eagle and the lion.

Delta later apologized for the tweet, but even made a mess of its mea culpa. The airline’s first attempt at an apology read, “We’re sorry for our choice of photo in our precious tweet.”

No, the original tweet was not especially “precious.” Delta Airlines then corrected its typo and posted a new apology.

We’re sorry for our choice of photo in our previous tweet. Best of luck to all teams.

— Delta (@Delta) June 17, 2014

Investing in Delta Airlines: A must-know company overview (Part 11 of 14)

(Continued from Part 10)

Delta’s fleet

A comparison of the fleet sizes of Delta Airlines with its competitors reveals that American Airlines Group (AAL) has overtaken Delta (DAL) and United (UAL), as its total fleet reaches 1,511 after its merger compared to Delta’s 1,275 aircraft and United’s 1,265 aircraft in 2013. Southwest (LUV) operates 680 Boeing aircraft and Jet Blue (JBLU) operates 194 aircraft. Out of the 743 mainline carriers that Delta operates, 592 aircraft are owned and 151 are leased. As of December 2013, Delta has purchase commitments of 174 aircraft and options to purchase 93 additional aircraft. In 2013, Delta incurred capex of $2.6 billion and expects capex of $2.3 billion in 2014, as it plans to buy an additional 47 aircraft.

1.1. fleet restructuring: A cost-benefit analysis

The need for fleet restructuring arises with the dual objective of improving revenue and reducing the cost of operating the aircraft. Delta can benefit from the following advantages of restructuring.

Reduced repair and maintenance cost
Reduced fuel consumption
Use of advanced technology aircraft
Staying ahead of competition
Improved reliability and customer satisfaction
Compliance with environmental regulations for noise and emissions

However, the cost of restructuring is an important consideration, and the decision of the type and model of aircraft or the aircraft size should match with the company’s operations after a careful cost-benefit analysis in order to avoid undesired results.

A trade-off between fixed costs and variable costs

Restructuring strategies vary among airlines. While most airlines, such as United Continental, replace older aircraft with brand-new aircraft, Delta prefers to buy a combination of new and used or previously owned aircraft. Two types of costs are involved in selecting each of these strategies—fixed costs and variable costs.

Fixed costs

United Continental’s strategy to buy new aircraft comes with higher fixed costs, as aircraft purchase prices are far higher than the prices Delta would buy a used aircraft at. So Delta enjoys capacity expansion with a lower capital base, increasing the potential for higher returns on invested capital.
Fixed costs will remain constant. Unit costs can, however, reduce by increasing the frequency of flights and spreading the cost across the increased number of seats flown. The cost of idle capacity when demand decreases is higher for United Continental than for Delta.

Variable or operating costs

New aircraft generally run on lower maintenance costs compared to used aircraft. So Delta’s variable costs would be higher than United’s.
Variable costs vary according to the usage of the aircraft. Even though Delta may incur higher variable costs during high usage, when demand lowers, Delta will be in a better position to lower capacity at a lower cost than its peers.

Delta, with an aging fleet at an average age of 17 years, compared to 13.5 years for American Airlines group and United Continental, recorded restructuring charges of $402 million in 2013 (growth of 37%) as it considered the following restructuring initiatives to improve operational efficiency and reduce costs.

Delta has signed agreements with SkyWest Airlines and Bombardier Aerospace to replace more than 200 50-seat CRJ aircraft (which are the least fuel-efficient and rank lowest in customer satisfaction) and older B-757-200 aircraft with new, fuel-efficient CRJ-900, B-717-200, and B-737-900ER aircraft.
In 2012, Delta shut down its operations of Comair, a wholly owned regional airline subsidiary, in order to reduce its number of regional jets.

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Investing in Delta Airlines: A must-know company overview (Part 5 of 14)

(Continued from Part 4)

Agreements in the airline industry

Airlines expand their network through strategic alliances and joint ventures to minimize investments in capacity expansion and instead optimally use resources in a way that’s mutually beneficial. This cooperation happens at different levels of integration. Carriers that engage in revenue or profit sharing joint ventures with anti-trust immunity, or ATI, granted by the United States Department of Transportation, have the highest degree of cooperation, while the degree of cooperation is lower for carriers engaging in just code sharing, frequent flying programs (or FFP), and lounge access.

Strategic alliances

Airline alliances are formed by two or more airlines to share resources, flights, routes, and benefits from increased efficiency in network management and resource utilization, mainly through code sharing. Under code sharing agreements, two or more airlines share the same flight. The airline that provides the flight, crew, and ground handling services is called the “operating carrier” and the airline that only sells tickets for the flights provided by the operating carrier is called the “marketing carrier.” Around 60 airlines are part of one of the three global passenger airline alliances: Star Alliance, Sky Team and One world. Delta Airlines (DAL) is the founder member of the SkyTeam and has code sharing arrangements with around 16 international carriers. United Airlines (UAL) is part of the Star Alliance group, while American Airlines (AAL) belongs to the One World Alliance group. Southwest (LUV) and JetBlue (JBLU) aren’t members of any of these three alliances.

Joint ventures

Joint ventures are generally formed by fewer carriers, usually two airlines, and mostly concentrated on specific markets. The Delta, Air France, KLM, and Alitalia joint venture, for example, formed to improve coverage on transatlantic routes. These partners market themselves as a single entity, share revenue and costs, and fly under a shared operating certificate.

So, in a joint venture, the cooperating companies don’t remain independent companies. These agreements are more legally binding than a strategic alliance, under which the cooperating companies remain independent and enjoy more flexibility.

Continue to Part 6

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Premier passenger carrier Delta Airlines Inc. (DAL) has further strengthened its Seattle hub by launching a non-stop service to Hong Kong on June 16. The addition of Hong Kong makes it the ninth long-haul international destination from the coastal city.

Scheduled departure time of the flight from Seattle-Tacoma International Airport (SEA) is 2.24 pm while arrival at Hong Kong is 7.35 pm on the next day. The return flight leaves Hong Kong at 10.25 am local time and is scheduled to reach Seattle on the same day.

The Atlanta-based airline will operate flights on the Hong-Kong route six days a week with Sunday as the only exception. Delta will operate a 234 capacitor Airbus 330-200 aircraft for the route having both business and economy class cabins along with in-flight Wi-Fi service.

The passenger carrier has fortified its position in Seattle by adding several international and domestic routes, and is building the coastal city as a key part of its Pacific network restructuring. In the last one year, Delta has enhanced its peak day departures by 30% and expects to emerge as Seattle’s fastest growing airline by Dec 2014. Recently, the carrier announced its plans to add skiing destinations like Spokane, Calgary and Bozeman from Seattle.

Delta already connects Shanghai, Beijing, Tokyo and Seoul to Seattle. With Hong Kong also in its kitty, the carrier now offers services to all the five leading commercial destinations of Asia. Post this new route, Delta now has 2,500 daily seats to offer to top business markets across Europe and Asia from Seattle.

Further, to lure passengers to fly from SEA, the carrier has also launched a double miles promotion for SkyMiles members from Seattle. This will allow customers to collect double miles while flying to and from the coastal city.

Notably Hong Kong is a major financial hub in Asia. We believe Delta has initiated its latest service to tap corporate customers looking for a hassle-free travel from the U.S. to Asia, and alongside, boost up performance in the Pacific region.

Delta currently carries a Zacks Rank #1 (Strong Buy). Other stocks also worth considering within this sector are Southwest Airlines Co. (LUV), American Airlines Group Inc. (AAL) and Hawaiian Holdings Inc. (HA), all of which sport the same Zacks Rank as Delta.

Read the Full Research Report on LUV
Read the Full Research Report on DAL
Read the Full Research Report on HA
Read the Full Research Report on AAL

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Investing in Delta Airlines: A must-know company overview (Part 8 of 14)

(Continued from Part 7)

Airlines industry margins

As you can see in the chart below, Delta (DAL) has outperformed its peers in terms of margins continuously for the past four years, followed by Southwest Airlines (LUV), American Airlines (AAL), and United Continental (UAL). Delta has been able to increase its EBITDA (earnings before interest, tax, depreciation, and amortization) by increasing revenue through higher yield, as we discussed in the previous article of this series, and through cost reduction initiatives.

A study of Delta’s operating cost breakdown

Two major expenses dominate Delta’s operating expenses, comprising around 46% of total operating expense. These are fuel cost (24.9%) as well as salaries and profit sharing agreements (21.7%).

Fuel cost in 2013 reduced by 7% due to lower purchase costs and hedging gains. Delta also expects to have lower fuel costs, though it expects profits (currently loss-making but expected to make profits in 2Q14) from a refinery acquired by its subsidiary. However, like all airline companies, Delta is also vulnerable to sudden volatility in crude prices.

Delta has 78,000 full-time employees (18% represented by unions). According to IATA (the International Air Transport Association), the airline industry is highly unionized, with around 49% of working being union members. All other U.S. airlines except Delta are highly unionized. Despite this difference, Delta’s salaries increased 6.2% in 2013. Labor unions generally have high bargaining power because of the high costs involved in disrupting operations caused through strikes. There was also a 36% increase in profit sharing ($506 million in 2013), representing 8% of an employee’s annual pay.

Other expenses include DA (depreciation and amortization), aircraft maintenance, aircraft rent and landing fees, and restructuring charges. Delta has managed to lower its non-fuel unit cost growth from 4.6% in 2012 to 0.3% in 1Q14, and it targets keeping this cost growth below 2% in the long run.

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