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ANNUAL REPORT PROJECT DAL – DELTA AIR LINES

Norwalk Community College Intermediate Accounting II

Intermediate Accounting II Prof. Stephen Mersereau Norwalk Community College

Sandra Goryunov Annual Report Project

DAL – DELTA AIR LINES Company Overview Delta Airlines is a global airline based in the United States. As an airline, the company provides air transportation services for both passengers and cargo. Delta delivers a variety of services such as online and kiosk check-in, reservations, seating, reseating, and flight cancellations. Delta remains committed to technological advancements that support their operations while also providing tools for their employees. This includes infrastructure and technology architecture improvements to unify and improve access to data sources, as well as ongoing innovation in customer-facing applications. With over 1,100 aircraft, the company continues to serve over 1,000 destinations in 60 countries across six continents. Performance Income Statement Delta's revenue for 2020 totaled $17 billion, nearly $30 billion less than in 2019. Furthermore, revenue has steadily increased between 2016 and 2019. Delta's gross margin for 2020 was at the level of 27%. The company underperformed compared to the industry average of 73% and previous two years, when Delta gross margin remained above 50%. The total operating expense increased from 86% to 172% of total operating revenue. As a result of the operating loss and decrease of total revenue, profit margin dropped to -72% from previous 10%. In 2020 due to the impact of the global pandemic, Delta underperformed when compared to industry averages, however, 2019 and 2018 ratios indicate that delta outperformed the industry averages for each ratio. Balance Sheet Delta's 8.2x receivables turnover is slightly lower than the industry average of 25.2x. The majority of Delta's accounts receivable are sums owed from credit card companies. Another factor that can play a role is significantly lower revenue compared to previous years. Delta managed to keep its inventory turnover at 12.5x, which is close to the industry average of 13.6x. To manage the risk of fluctuating fuel prices and ensure that operational rates are not affected, the inventory primarily consists of fuel. Delta's asset turnover (0.25x) is significantly lower than the industry average (0.9x), however when compared to the industry's low (0.26x) in 4Q 2020, Delta's ratio is at similar level. In previous years, the company's asset turnover was greater than 0.75x. A lower ratio is the consequence of a decrease in sales as a result of the global pandemic. When it comes to Return on Assets (-18.1%), Delta once again comes up short, while an industry average equal 6.62%. A negative ROA as a result of my net loss suggests that the company did not use its assets efficiently in 2020. 1

Solvency and Liquidity Delta's ability to pay off short-term debt has improved since 2019. The ratio for 2020 is 1.09x, compared to 0.41x in 2019 and 0.68x for the industry as a whole. A previous year ratio may indicate that the company's assets are not being used efficiently enough to generate income. In 2020, however, the company's current assets, particularly cash, have increased significantly, resulting in an improvement in the current ratio and the ability to meet its current liabilities more efficiently. Similar conclusion can be drawn from Delta's quick ratio (0.97x), where it outperformed its peers in the industry (0.44x), and its 2019 ratio (0.28x). The company's most liquid assets are now more sufficient to meet its current liabilities. When a company's ratio exceeds one, it will be able to repay all of its current liabilities immediately. The debt to total assets ratio for Delta equals 98% from previous 76%. In both years the company fell short behind the industry average of 32%. Currently, creditors finance % of assets. A high ratio also indicates that a company may be putting itself at risk of loan default if interest rates rise suddenly. Valuation / Accounting Measures Fuel inventory costs are calculated using the FIFO (first-in, first-out) method. Costs include raw material consumption as well as direct manufacturing costs such as labor, utilities, and supplies incurred, as well as an applicable portion of manufacturing labor. Expendable parts and supplies inventory costs are calculated using the moving average cost and charged on an operations-byoperation basis. Property and equipment is stated at a cost less accumulated depreciation, and depreciated using straight-line basis to their estimated residual value over their estimated useful life. Delta's plant assets have an average useful life of around 22.4 years, with an average age of 7.6 years. Airlines typically use the 'straight-line' depreciation method because the pattern of future economic benefits to the airline is typically consistent throughout the aircraft's life, despite the fact that the fair market value may not decrease on a straight-line basis. Shareholder Returns Delta's return on equity (-146.6%) and price-earnings ratio (-2.06x) have both dropped significantly since 2019, from 32% and 7.99x, respectively. Both of these ratios became negative as a result of the net loss. It also calculates a negative dividend payout ratio of -2.1%, down from 20.6%. Delta has negative retained earnings (-438 million from 12,454 million), which can be a sign of bankruptcy because it implies a long series of losses.

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Conclusion Thanks to this throughfall analysis n this analysis we were able to understand current Delta’s performance and how it compares to peers and previous periods. In most of the relevant metrics Delta falls behind industry average. Although Delta's short-term debt repayment has improved, this is most likely due to the acquisition of long-term liabilities to help cover maturing debt. The global pandemic, which began in March 2020, is to blame for the drop in ratios, sales, and net income. Because most countries closed their borders to tourists, the event grounded all airlines. Because of lower revenue, airlines were forced to take out new loans to cover maturing liabilities. Delta is gradually recouping from the loss. Since December 2020, the company's stock price went up from $40 to $48. Delta is on its way to rebuilding its operations and regaining its position. Given that all businesses are recovering from the pandemic, I would recommend investing in DAL, primarily because the company will return to full operating capacity and generate more revenue over time. Other Relevant Information Delta restructured its aircraft order books with Airbus and MHJ RJ Aviation Group (manufacturer of CRJ aircraft) in 2020 in order to better align aircraft deliveries with their network and financial needs over the next several years. The change in delivery schedule is intended to allow Delta to continue simplifying and modernizing their fleet while keeping their Airbus book order. Future aircraft purchase commitments totaling approximately $13.9 billion (total of 224 aircrafts) as of December 31, 2020 are listed below.

Delta has suspended future dividend payments until March 2020, due to the impact of the COVID-19 pandemic. The CARES Act Payroll Support Program initially restricted dividend payments until September 2021, but this has been extended until March 2022 under the terms of the payroll support program. Delta received $5.6 billion through this program, with $4 billion coming in the form of a grant and $1.6 billion coming in the form of an unsecured 10-year lowinterest loan. Delta's liquidity at December 31, 2020 was $16.7 billion, an increase of $10.8 billion from December 31, 2019 due to proceeds from loan and debt issuances, support payments under the CARES Act payroll support program, and other liquidity initiatives.

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