1. DELTA AIR LINES January 2, 2015
Will Becker
wbecker@behindthenumbers.com
Founded in 1924, Delta Air Lines (DAL $49.18) is a
leading provider of scheduled air transportation for
passengers and cargo in the US and abroad. It also
provides maintenance, repair and overhaul services to
other aviation and airline customers. The legacy carrier
operates from gateway airports in Atlanta, Cincinnati,
Detroit, Memphis, Minneapolis/St. Paul, New York-JFK,
New York-LaGuardia, Salt Lake City, Paris-Charles de
Gaulle, Amsterdam and Tokyo-Narita. As of 12/31/13, DAL
owned or leased 743 passenger aircrafts.
Target price: $40 based on the fuel hedge keeping DAL’s
fuel costs higher than peers
Stock Data
Shares outstanding 836.9mm
Market Cap $41.2b
Enterprise Value $46.9b
Net cash/share n/a
Short interest 2.2%
3 month trading volume 12.9mm
Valuation
TTM PE 15
Forward PE 11
Price/Sales 1.0
Price/Book 3.4
Price/EBITDA 8.6
52-week H/L $49.2/$28.8
Last 4Qs Revenue and Earnings
3Q/14 2Q/14 1Q/14 4Q/13
Revenue $11.2b $10.6b $8.9b $9.1b
EPS $1.20 $1.04 $0.33 $0.65
Consensus Estimates
2015 2014 1Q/15 4Q/14
Revenue $41.7b $40.2b $9.5b $9.3b
EPS $4.52 $3.28 $0.71 $0.72
Bull Case:
 Falling oil prices should help reduce the largest
cost at Delta
 Adding new planes will be expensive, but should
also reduce operating costs going forward
 The airlines have it figured out on capacity and
demand and have been able to sustain profitability
for the first time
Primary Concern:
One of the toughest sectors to find consistent profitability is
the airlines. A 7/13/14 Wall Street Journal article disclosed
some sobering statistics regarding US airlines: Of the
nearly 400 carriers that have been authorized to operate by
the U.S. government since 1978, 264 have shut down, 62
never took off, and only 68 are currently flying. Just over
the last 20 years, there have been 77 bankruptcies and
multiple liquidations. In fact, all three of the current legacy
carriers – American Airlines Group (AAL), United
Continental Holdings (UAL) and DAL - have been in
bankruptcy protection at one point in time.
However, as the legacies have come out of bankruptcy and
subsequently consolidated, these carriers now find
themselves with the fleet size, capital and routes to
compete with the smaller discount airlines. Coupled with
discounter behemoth Southwest Airlines (LUV), these four
airlines now command more than 80% of the domestic US
travel market. Legacy profits have soared, aided by rising
fares from less capacity, lower fuel costs and other cost-
cutting measures. As a result of their potentially peak
profitability, these airlines are enjoying record-level share
prices and very high valuation multiples, as the following
table shows:
Valuation Multiples – Airline Industry
Airline P/Earnings P/Sales EV/EBITDA Div Yield
American 8 0.7 10.1 0.7%
United 17 0.6 8.5 -
Southwest 26 1.6 9.7 0.6%
DAL 15 1.0 8.6 0.7%
For perspective, DAL's current valuation multiples are
trading at about twice the level of its five-year averages.
Still, DAL faces some major obstacles that won’t take a few
quarters or even a few years to fix. First, DAL’s defined
benefit pension plan remains underfunded by
approximately $10.1 billion, the most in the industry. While
DAL has been able to generate that much in operating
cash flow over roughly the last three years, we remind
investors that total combined cash flow generated by DAL
and Northwest Airlines, which DAL acquired in 2008, only
amounted to $9.0 billion from 2000-09. Meanwhile, DAL
continues to operate the oldest fleet in the industry and
even as it ramps up its aircraft purchase program it should
still have the oldest fleet by the end of 2016. That will
make it more susceptible to rising fuel and maintenance
costs than its peers. It will also need to deal with the
expiration of its pilot union contracts in the near future.
Finally, cash flow must remain strong to support an
enormous debt load, an increased dividend and a renewed
share repurchase program.
Key Points:
After producing huge gains in 2013, DAL’s big fuel
hedge has been hurting profits lately

2. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
2
 Jet fuel typically accounts for about 20-40% of an
airline’s total operating cost.
 Average fuel costs have been trending down in
recent years and have fallen sharply since 2Q14.
 While competitors like LUV and UAL have cut their
fuel hedges noticeably in 2014, DAL has
continued its strong hedging program, which is
now leading to losses with the sudden drop in oil
prices.
 DAL recently bought a jet fuel refinery that has
helped lower its fuel costs. However, it has
accused an undisclosed third party of
manipulating renewable fuel credits, known as the
RIN market, which has cut into its profitability.
Pension plans remain heavily underfunded
 Although DAL has managed to improve the
funded status of its plans recently, these plans are
still underfunded by approximately $10.1 billion as
of 12/31/13.
 This is easily the largest deficit in the airline
industry.
 DAL has been the most aggressive with its
actuarial assumptions in the industry.
DAL has the oldest aircraft fleet in the industry and this
is not likely to change any time soon
 As of 12/31/13, DAL’s operating aircraft fleet had
an average age of 17.1 years, easily the oldest in
the industry.
 DAL spent very little on aircraft purchases from
2011-13.
 Even though DAL will spend approximately $4.7
billion on new aircraft purchases from 2014-16
and assuming it dumps its oldest tranche of
aircraft, we estimate DAL will still likely have the
oldest fleet at 12/31/16.
Rising cash commitments could pressure cash flow
soon
 DAL posted strong operating cash flow of nearly
$5.5 billion over the last twelve months ended
9/30/14.
 However, cash flow can shrink quickly in the
airline industry. Combined operating cash flow for
DAL and Northwest Airlines, which DAL acquired
in 2008, was only approximately $9.0 billion for
the ten year period 2000-09.
 DAL has been aggressively increasing its dividend
and recently renewed its share repurchase
program.
DAL’s pilot union contract comes up for renewal soon
 DAL has done a commendable job of lowering its
union employee base in recent years.
 In 2Q12, DAL reached an agreement with DAL’s
pilot union - ALPA - that increased pay and
benefits for its pilots.
 The amendable date for ALPA is 12/31/15.
DAL continues to face tough competition
 In September, DAL announced it would begin a
number of daily flights from Los Angeles to Texas,
encroaching on American Airlines’ territory.
However, American quickly fired back by unveiling
nonstop service between Los Angeles and DAL's
Atlanta home.
 DAL has recently hit the Seattle market hard,
recently adding more than 25 new non-stop flights
from there. However, Seattle-based Alaska Air
has been ramping up capacity to combat DAL.
DAL’s Fuel Hedge Is Hurting Profits
Jet fuel costs are typically the largest expense item for
airlines, and can account for anywhere from 20% to 40% of
total operating expenses. The following table gives a
breakout of DAL’s operating expenses as a percentage of
the total over the last nine months ended 9/30/14:
Operating Expenses as % of Total
9mo14
Aircraft fuel and related taxes 27.5%
Salaries and related costs 22.0%
Regional carrier expense 14.6%
Aircraft maintenance materials and outside repairs 4.9%
Depreciation and amortization 4.8%
Contracted services 4.8%
Passenger commissions and other selling expenses 4.7%
Landing fees and other rents 3.9%
Profit sharing 3.0%
Passenger service 2.2%
Aircraft rent 0.6%
Restructuring and other items 2.3%
Other 4.7%
Total operating expenses 100%
Moreover, the market price for jet fuel is highly volatile and
can vary significantly from period to period. This key cost
was relatively stable in 2013 and 2012 and had been a
slight tailwind for the airline industry. According to DAL’s
2013 10-K,
Our operating results are significantly impacted by
changes in the price of aircraft fuel. Fuel prices have
increased substantially since the middle part of the last
decade and have been extremely volatile during the
last several years. In 2013, our average fuel price per
gallon was $3.00, an 8% decrease from our average
fuel price in 2012. In 2012, our average fuel price per
gallon was $3.25, a 6% increase from our average fuel
price in 2011. In 2011, our average fuel price per
gallon was $3.06, a 31% increase from our average
fuel price in 2010, which in turn was significantly higher
than fuel prices just a few years earlier. Fuel costs
represented 33%, 36% and 36% of our operating
expense in 2013, 2012 and 2011, respectively.
Volatility in fuel costs has had a significant negative
effect on our results of operations and financial
condition.
However, with crude oil prices falling into the high-$50s
from the low-$100s over the last six months, jet fuel has
declined in price and volatility. The following table shows
DAL's average fuel price per gallon since 2010:

3. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
3
Average Fuel Price Per Gallon
3Q14 3Q13 9mo14 9mo13
$2.90 $2.97 $3.08 $3.01
2013 2012 2011 2010
$3.00 $3.25 $3.06 $2.33
According to its 2013 10-K, DAL has taken steps to lower
its fuel costs through the retirement and replacement of
certain elements of its fleet and with newer, more fuel
efficient aircraft. However, even though fuel prices have
fallen sharply lately, DAL actually saw its fuel cost as a
percentage of operating expense increase significantly
year-over-year for 3Q14 due to rising losses from its fuel
hedging program. The following table shows fuel costs as
a percentage of operating expenses since 2010:
Fuel Cost as % of Operating Expenses
3Q14 3Q13 9mo14 9mo13
28.5% 25.7% 27.5% 27.6%
2013 2012 2011 2010
33% 36% 36% 30%
In recent years, DAL has benefited from some large fuel
hedge gains. In 2013, DAL's airline segment fuel hedge
gains were $444 million, including $276 million of MTM
adjustments. These MTM adjustments are based on
market prices as of the end of the reporting period for
contracts settling in future periods. Such market prices are
not necessarily indicative of the actual future value of the
underlying hedge in the contract settlement period. For
2012 and 2011, DAL posted a $66 million fuel hedge loss
and a $420 million gain, respectively. DAL adjusts fuel
expense for these items to arrive at a more meaningful
measure of fuel cost. Thus, its average price per gallon,
adjusted (a non-GAAP financial measure) was $3.07 in
2013, which was 7 cents or 2.3% higher than the reported
$3.00 price per gallon for the year.
DAL continued to enjoy fuel hedge gains through the first
half of 2014. However, when oil prices began to crater
back in June, DAL’s hedges quickly turned and the
company reported a fuel hedge loss of $284 million for
3Q14. These losses are obviously expected to continue for
4Q14. On the 3Q14 call, CFO Paul A. Jacobson noted,
“At current crude prices, we'll have approximately $100
million of hedge losses in the December quarter, while
our 2015 hedge book is near breakeven with a solid
amount of protection at current price levels. Even with
these hedge losses, we have participated in 80% of
the price decline since late June. With the expected
December quarter losses, our hedges reduced our
overall fuel cost by roughly $160 million for 2014.”
However, considering that the price of oil has continued to
crater since that 10/16/14 earnings call, we would expect
DAL’s anticipated $160 million fuel hedge gain for 2014 to
be much smaller. So while DAL’s average fuel price of
$2.90 for 3Q14 was the lowest among its peers, with UAL
at $3.02, ALK at $3.15, AAL at $2.97 and LUV at $2.99, we
believe this trend could turn sharply in 4Q14 as fuel hedge
losses begin to weigh on DAL.
So does fuel hedging really make sense? According to
The Barrel (9/1/14), sources said US airlines had already
reduced hedging volumes and lengths in recent years to
about 30-40% of fuel consumption no more than 18 months
out. The newly merged AAL announced that it had
completely sold off its fuel hedging contracts by the end of
2Q14. Granted, this move was not totally unexpected
given that merger partner US Airways had not hedged fuel
since 2008. One jet trader added,
"My sense is less hedging overall. Take AA. They've
adopted the US Airways model so they are entirely out
of it. Nobody wants to catch a falling knife, plus
consolidation has created less demand for hedging."
Meanwhile, LUV said it hedged only 25% of fuel cost for
2014, which is about half the 51% it hedged in 2013. UAL
reported hedging only 21% for the rest of 2014, 19%
for 2015 and 1% for 2016 consumption. DAL appears to
be the exception, as it has continued its aggressive
hedging strategy that helped it deliver jet fuel prices that
were 10-15 cents per gallon below its competitors in 2Q14,
according to The Barrel. Mike Corley, President of
Mercatus Energy Advisors, an independent energy hedging
advisory firm, added,
“We have certainly seen some North American carriers
reduce the overall percentage of fuel they are hedging.
One CFO told me that the primary reason he can
justify it is that such a large percentage of their
revenue and profits are now coming from
baggage fees, change fees, etc., as opposed to
actually operating planes. Another said that their
board doesn’t see it as being as necessary as it was a
few years ago given the decline in price volatility.”
So, should oil prices remain depressed for an extended
period of time with little volatility, will DAL be hurting its
profitability playing with hedges while its competitors
benefit from getting out?
Lastly, we note that DAL bought a Pennsylvania oil refinery
in May 2012 in hopes that it would save roughly $300
million per year in jet fuel costs. The shuttered Trainer, PA
refinery complex was bought from ConocoPhillips (COP)
for approximately $150 million, including a $30 million grant
from the state. DAL also spent another $100 million in
equipping the plant to maximize jet-fuel production. This
deal was heavily criticized as Trainer is one of the older
refineries that relies on the most expensive grades of crude
oil as feedstock. With the deal completed during the oil
price spike from the Iran nuclear controversy, many also
believe DAL acted desperately and warned it would be a
wasted investment if the oil price fell. Gee, didn’t the price
of oil just fall by 50% over the last six months?
While the refinery posted a $19 million profit in 3Q14, which
lowered DAL’s fuel price by 2 cents per gallon, it has run
into problems complying with the renewable fuel standard.
According to Breaking Energy (10/28/14), the refinery
doesn’t blend renewable fuels and must purchase
renewable fuel credits know as RINs on the open market.
In its latest 10-Q, DAL disclosed,
“The refinery is exposed to the market price of RINs.
The price at September 30, 2014 was $0.46 per RIN,

4. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
4
which exceeds historical averages. We recognized
$18 million of expense related to the RINs requirement
in the September 2014 quarter, which is included in
the refinery’s results. Additionally, we have accrued
$79 million related to our unsettled 2013 and 2014
RINs obligation as of September 30, 2014.”
However, DAL accused an undisclosed third party of
manipulating the RIN market and is “pursuing legal,
regulatory, and legislative solutions to this problem.”
Additionally, while DAL’s refinery helps increase the supply
of jet fuel and lowers the airline’s fuel cost, it also reduces
competitor’s prices too. Needless to say, it will be
interesting to see how the recent fall in oil prices will impact
DAL’s hedging strategy, the refinery’s operations and the
RIN litigation.
The following table breaks out DAL’s total fuel expense
over the last three years and shows the impact from fuel
hedges and the refinery:
Total Fuel Expense (in $mil)
2013 2012 2011
Fuel purchase cost 11,792 12,122 12,203
Fuel hedge (gains) losses (444) 66 (420)
Refinery impact 116 63 -
Total fuel expense 11,464 12,251 11,783
So, DAL’s total fuel expense fell by $787 million year-over-
year in 2013. However, when one accounts for the
combined $457 million positive swing from fuel hedges and
the refinery over the year, one realizes DAL’s fuel purchase
cost only improved by about $330 million. Assuming a
35% effective tax rate, a $457 million swing in operating
income translates to approximately 35 cents in EPS. For
perspective, DAL reported adjusted EPS of $3.22 over the
last twelve months ended 9/30/14.
Lastly, one must wonder if this fuel environment is as good
as it gets for DAL. With this rapid and significant decline in
oil prices, this means passengers have more discretionary
income to fly more. Obviously, this translates to more
revenue for DAL at the same time the carrier faces lower
fuel costs. The airline stocks have already reacted to this
benefit. So, what happens to DAL and other carriers when
oil prices flatten out or start to rise again?
DAL Pension Plans Remain Heavily
Underfunded
Like most of its competitors, DAL sponsors defined benefit
pension plans for eligible employees and retirees. These
plans are now closed to new entrants and are frozen for
future benefit accruals. The Pension Protection Act of
2006 allows commercial airlines to elect Alternative
Funding Rules for defined benefit plans that are frozen.
Under the Alternative Funding Rules, the unfunded liability
for a frozen plan may be funded over a fixed 17-year
period. The unfunded liability is defined as the actuarial
liability and is calculated using an 8.85% interest rate. DAL
elected these rules for the Delta Non-Pilot Plan, effective
4/1/07.
Following DAL’s freeze of defined benefit plans, the
company now sponsors several defined contribution plans.
These plans generally cover different employee groups and
employer contributions vary by plan. Not surprisingly,
defined contribution plan costs have been trending higher
in recent years, as the following table shows:
Pension Contribution Plan Costs (in $mil)
2013 2012 2011
490 426 377
To replace pensions, DAL also went with an employee
profit sharing plan, which is already reflected in cash flow.
For 2013, DAL paid its employees record profit sharing of
$506 million, which represented over 8% of an employee’s
annual pay, and was a 36% year-over-year increase. This
record will be easily surpassed in 2014, as the company
paid out $823 million in profit sharing over the first nine
months ended 9/30/14.
Meanwhile, although DAL has recently improved the
funded status of its defined benefit plans, these plans are
still underfunded by approximately $10.1 billion as of
12/31/13. This is easily the largest pension deficit in the
industry. Meanwhile, pension contributions continue to
head higher. DAL contributed $914 million in 2013,
including $250 million above the minimum funding levels,
$697 million in 2012 and $598 million in 2011 to its defined
benefit pension plans. For 2014, DAL estimates the
funding under these plans will total approximately $925
million in 2014, including $250 million above the minimum
funding requirements. The following table shows the
pension funding impact on DAL’s operating cash flow over
the last four years:
Operating Cash Flow Adjusted for Pension Funding
2014E 2013 2012 2011
CFO before pension
funding
5,546 5,418 3,173 3,432
Pension contributions (925) (914) (697) (598)
Reported CFO 4,621 4,504 2,476 2,834
Funded status ? (10,123) (13,293) (11,504)
Note: Reported 2014 CFO figure based off Bloomberg estimates.
Next, the following table compares DAL's 2013 actuarial
assumptions with the rest of the legacy airline carriers:
2013 Actuarial Assumptions
DAL AAL UAL
Discount rate – Liability 5.01% 5.10% 5.09%
Discount rate – Cost 4.10% 4.20% 4.48%
Expected rate of return 9.00% 8.00% 7.56%
Funded status (10,123) (4,842) (1,603)
Additionally, it should be noted that DAL has been the most
aggressive with its actuarial assumptions in the industry.
Not only does it have the lowest discount rate to determine
the projected benefit obligation (PBO), but it also carries a
very high 9% expected rate of return. DAL has kept its
expected rate of return at 9% for years, justifying that its
actual historical annualized three- and five-year rates of
return was approximately 9% and 12%, respectively, as of
12/31/13. Still, this return assumption is very high and a

5. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
5
0.50% decrease in this return was estimated to raise 2014
pension expense by approximately $50 million.
Finally, it should be mentioned that the Society of Actuaries
(SOA) just updated their mortality tables after 14 years and
essentially raised the average life expectancy for 65-year-
old Americans by more than two years. With this longevity
risk soon to be implemented into plan sponsor calculations,
estimates show that PBOs for defined benefit plans could
be raised by as much as 8%. Given DAL’s heavily
underfunded plan, this could mean DAL may face much
higher pension contributions. Please see our 10/31/14
BTN Accounting Insight report: Pensions Must Account For
Longevity Risk.
DAL Still Has Oldest Fleet and Future Cash
Commitments Remain High
Upon acquiring Northwest Airlines in 2008, DAL inherited
the carrier's ancient fleet. At the time, Northwest easily had
the oldest fleet among the legacy carriers, operating 290
aircraft that averaged 17.5 years. Considering that DAL's
578 aircraft at the time only averaged 12.4 years, the
acquisition essentially added a full year to the average age
of DAL's combined fleet and was 13.6 years as of 12/31/09.
Although DAL has been active in its efforts to "right-size" its
operations, removing a number of older mainline
passenger and freighter aircraft, the carrier still operates
some very old aircraft with the average age of aircraft rising
to 17.1 years as of 12/31/13. The following table shows
DAL's active owned and leased aircraft and gives average
ages as of 12/31/13:
Operating Aircraft Fleet - 12/31/13
Aircraft Owned Capital
Lease
Operating
Lease
Total Avg. Age
B-717-200 - 4 9 13 12.1
B-737-700 10 - - 10 4.9
B-737-800 73 - - 73 12.9
B-737-900ER 12 - - 12 0.1
B-747-400 4 9 3 16 20.1
B-757-200 100 20 18 138 19.7
B-757-300 16 - - 16 10.8
B-767-300 10 2 4 16 22.9
B-767-300ER 51 5 2 58 17.8
B-767-400ER 21 - - 21 12.8
B-777-200ER 8 - - 8 13.9
B-777-200LR 10 - - 10 4.8
A319-100 55 - 2 57 11.9
A320-200 50 - 19 69 18.8
A330-200 11 - - 11 8.8
A330-300 21 - - 21 8.4
MD-88 71 46 - 117 23.5
MD-90 57 8 - 65 16.7
DC9-50 12 - - 12 34.9
Total 592 94 57 743 17.1
* Excludes certain aircraft DAL owns or leases which are operated
by regional carriers on DAL's behalf.
Today, DAL continues to have the oldest fleet in the
industry, as the following table shows:
Average Age of Aircraft
Carrier Avg Age Owned Leased Total
American Airlines (AAL) 13.0 475 495 970
JetBlue Airways (JBLU) 7.1 130 64 194
Southwest Airlines (LUV) 10.9 516 164 680
United Continental Hldg (UAL) 13.5 415 278 693
DAL 17.1 592 151 743
* Mainline aircraft only, excludes Regional aircraft.
Thus, we calculate that 57% of DAL's operating fleet is over
17 years old and 20% is over 22 years old. For
perspective, it was only about a decade ago that airlines
used to typically depreciate their aircraft over 20 years.
Although DAL did not spend that much on its fleet over the
last four years, the carrier is stepping up its purchases to
freshen its aging fleet. According to its 2013 10-K, these
were purchase commitments for additional aircraft as of
12/31/13:
Aircraft Purchase Commitments
Aircraft 2014 2015 2016 After 2016 Total
B-737-900ER 19 19 19 31 88
A321-200 - - 15 15 30
B-787-8 - - - 18 18
CRJ-900 28 - - - 28
A330-300 - 4 4 2 10
Total 47 23 38 66 174
DAL also has options to purchase additional aircraft
starting in 2015. Next, let’s look at these future aircraft
purchase commitments in dollar terms as of 9/30/14:
Aircraft Purchase Commitments (in $mil)
Period Cost
4Q14 200
2015 1,355
2016 1,730
2017 1,500
2018 1,035
Thereafter 2,700
Total 8,520
At 9/30/14, future aircraft purchase commitments totaled
approximately $8.5 billion and included 73 B-737-900ER,
45 A321-200, 18 B-787-8, 6 CRJ-900, and 10 A330-300
aircraft. DAL reported airline capital expenditures of
$1,552 million through the first nine months ended 9/30/14,
of which about $1,385 million would have been spent on
aircraft purchases covering 15 B-737-900ER and 22 CRJ-
900 aircraft. The company still plans to spend an additional
$200 million on the remaining 6 CRJ-900 and 4 B-737-
900ER aircraft in 4Q14, totaling roughly $1,750 million on
aircraft.
In 3Q14, DAL announced it would retire its older B-747-400
fleet over the next four years. For a rough exercise, let’s
assume over the next three years that DAL also retires its
ancient MD-88, MD-90 and DC9-50 fleet too. So, let’s
figure out what DAL’s fleet average age will look like at
12/31/16:

6. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
6
Fleet Composition Changes – 2014-16
No.
aircraft
Cost
(in $mil)
Avg Age Weighting
Fleet total, 12/31/13 743 17.1 12,705.3
Retirements:
B-747-400 16 20.1 (321.6)
MD-88 117 23.5 (2,749.5)
MD-90 65 16.7 (1,085.5)
DC9-50 12 34.9 (418.8)
Fleet less retirements 533 15.3 8,129.9
Add three years to
existing fleet 533 18.3 9,753.9
Additions:
2014 47 1,585 2.5 117.5
2015 23 1,355 1.5 34.5
2016 38 1,730 0.5 19
Fleet total, 12/31/16 641 4,670 15.5 9,924.9
In summary, DAL will have spent approximately $4.7 billion
on new aircraft from 2014-16. In comparison, DAL only
spent approximately $805 million on aircraft over the prior
three-year period 2011-13. Yet, under our somewhat
probable scenario in which DAL would dump the oldest
portion of its fleet over the 2014-16 period, DAL would
almost certainly still find itself operating the industry’s
oldest fleet at approximately 15.5 years as of 12/31/16.
Rising Cash Commitments May Soon
Pressure Cash Flow
In recent years, DAL and the rest of the airline industry
have benefited heavily from consolidation and capacity
constraint, which have led to rising load factors and better
profitability. Not surprisingly, DAL has been reporting
strong cash flow results lately, as its operating cash flow
jumped by 40% year-over-year to reach nearly $5.5 billion
for the last nine months ended 9/30/14. Still, we caution
investors that operating cash flow for the airlines can be
very choppy. In fact, combined operating cash flow for
DAL and Northwest Airlines, which DAL acquired in 2008,
was only approximately $9.0 billion for the ten-year period
2000-09, as the following table shows:
DAL’s Operating Cash Flow – 2000-09
Operating cash flow Amount (in $mil)
Delta Air Lines 2000-07 $5,276
Northwest Airlines 2000-07 $4,064
Successor DAL 2008-09 ($328)
Total $9,012
Thus, strong cash flow years don’t last forever and DAL is
still a very cyclical company. However, as a result of its
strong cash flow lately, DAL has been able to easily handle
its recent cash commitments and the following table shows
DAL’s adjusted free cash flow (after covering dividends and
share repurchases) over the last five twelve-month periods
ended September:
Adjusted Free Cash Flow (in $mil)
12 Months Ended: 9/14 9/13 9/12 9/11 9/10
Operating cash flow $5,496 $3,923 $3,084 $1,994 $2,441
CapEx $2,541 $2,154 $1,798 $1,307 $1,391
Free cash flow $2,955 $1,769 $1,286 $687 $1,050
Dividend $227 $51 $0 $0 $0
% FCF paid in
dividends
7.7% 2.9% 0.0% 0.0% 0.0%
Share repurchases $757 $93 $0 $0 $0
Surplus/(Shortfall) $1,971 $1,625 $1,286 $687 $1,050
# of shares outstanding 837 857 850 847 789
% Growth (2.3%) 0.8% 0.4% 7.4% 1.2%
We believe DAL’s operating cash flow will face several
upcoming pressures. First, DAL’s large fuel hedge could
hit profits and thus cash flow in a falling fuel environment.
Additionally, as we discussed earlier, rising pension
contributions could sting DAL’s cash flow in the near future.
However, DAL’s operating cash flow will likely need to
remain elevated as the company plans to increase its
dividend and continue to up its recently renewed share
buyback program going forward. In May, DAL announced
it would increase its quarterly dividend payment by 50%,
equating to an annual payout of roughly $300 million.
Meanwhile, DAL will also launch a new $2 billion share
repurchase plan to be completed by year-end 2016. For
perspective, DAL paid out $100 million in dividends in 2013
after initiating its dividend in May of 2013. The company
also completed $250 million of share repurchases in 2013.
Finally, while we appreciate the fact that DAL is trying to
return cash to shareholders in the form of higher dividends
and share repurchases, we also remind investors that DAL
still holds a lot of debt. Granted, the company has done a
nice job of steadily reducing its financial leverage since
2009, but total debt was still at approximately $10.1 billion
as of 9/30/14 and will likely continue to put some strain on
cash flow for the foreseeable future. While $10.1 billion in
debt certainly appears manageable with free cash flow at
around $3.0 billion, we remind investors that DAL’s free
cash flow has typically been more in the range of $1-1.5
billion in recent years. With high CapEx and likely higher
pension funding coming, this lower range of free cash flow
may be expected in the near future.
Pilot Union Contract Is Coming Up Again
DAL had approximately 78,000 full-time equivalent
employees as of 12/31/13. Of these employees, various
labor unions represented 13,940, or approximately 18%.
After buying union-heavy Northwest Airlines in 2008, DAL
has done a good job of lowering its union employee base in
recent years, as the carrier had approximately 39% of its
full-time employees unionized as of 12/31/09. The
following table breaks out the following domestic employee
groups represented by unions and gives the date on which
their respective collective bargaining agreements become
amendable:

7. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
7
Upcoming Union Dates
Employee Group Active
Employees
Union Amendable
Date
Delta Pilots 10,700 ALPA 12/31/15
Delta Flight Superintendents 370 PAFCA 12/31/13
Endeavor Air Pilots 1,820 ALPA 1/1/20
Endeavor Air Flight
Attendants 990 AFA 12/31/18
Endeavor Air Dispatchers 60 DISTWU 12/31/18
* DAL recently negotiated new labor contracts with Flight
Superintendents.
Although negotiations with Delta Pilots likely won't heat up
until next year, we remind investors that it is easily DAL's
largest union employee group. Thus, any agreement
reached next year with ALPA could potentially increase
DAL's labor costs noticeably. In 2Q12, DAL reached an
agreement with ALPA that increased pay and benefits for
its pilots. The carrier's pilots and substantially all other
employees received base pay increases on 7/1/12 and
received additional increases on 1/1/13.
Competition Remains Fierce
DAL has been aggressively adding routes in markets that
are considered strongholds for several of its competitors.
In September, DAL announced nine daily flights from Los
Angeles to Texas, encroaching on American Airlines’ (AAL)
territory. On November 3rd, a DAL regional partner began
flying four Delta Connection flights a day between
Dallas/Fort Worth International Airport and Los Angeles
International Airport, part of a build-up of Texas-LAX
service. In addition, DAL added a third Delta Connection
flight to its Austin-Los Angeles schedule on November 2nd
and will begin two Delta Connection flights on 4/7/15
between San Antonio and Los Angeles. DAL, AAL and
United Airlines (UAL) are all using Los Angeles as a hub
with each expanding international service out of there.
Meanwhile, Fort Worth-based AAL recently unveiled
nonstop service between Los Angeles and DAL's Atlanta
home.
Meanwhile, DAL continues to add more flights out of
Seattle as it establishes its West Coast hub. This past
spring and summer, DAL added more than 25 new non-
stop flights out of Seattle. As a result, DAL now has routes
that are among the most popular in Seattle-based Alaska
Airlines’ (ALK) network. In fact, DAL currently
competes in markets that account for ~25% of Alaska's
system capacity, up from as little as 10% earlier this year.
However, ALK has certainly not backed off its home turf,
expanding aggressively over the last year to compete with
DAL. According to The Seattle Times (5/27/14), ALK’s
senior vice president of communications and external
relations Joe Sprague said,
“Alaska Airlines has been flying out of Seattle for more
than half a century and we’re proud to offer our
customers nearly four times the departures to more
destinations than any other airline.”
In fact, while the number of ALK passengers has managed
to climb, this growth has not kept up with the carrier’s
expansion, leading to a lower load factor. On a combined
basis, ALK reported a 5.6% increase in traffic year-over-
year for the nine months ended 9/30/14, while capacity
increased by 6.0% over the same period. This resulted in a
0.3 point decrease in ALK’s load factor to 85.7%. Thus,
competition between DAL and ALK should remain fierce
and should keep ticket prices low.

8. Delta Air Lines Behind the Numbers
Will Becker January 2, 2015
8
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Jeffery B. Middleswart (214) 378-4186
Bill E. Whiteside, CFA (682) 224-5715
William N. Becker (636) 821-1319
Jeffrey N. Dalton (214) 378-4176
Rob Peebles, CFA (214) 378-4183
JR Riddlehoover, CPA (817) 447-7067