Delta Airlines Vs. American Airlines

Proposal 

The paper analyzes American airlines and Delta airlines' financial statements, which are among the biggest companies in the airline industry in the United States and the world. Both airlines carry millions of passengers and fly to over 200 destinations around the world. These two companies are close rivals, as revealed by various metrics used in the airline industry. According to the 2019 industry data, American Airlines had the highest passenger traffic, measured in revenue passenger miles (RPM)at 241 billion RPMs while Delta came in third at 238billion. However, in terms of total revenue, Delta realized higher revenues than American, with over $1billion more.

The American revenues from operations in the same year were $45800(million) while Delta realized $47000(million). In 2020, American airlines also realized 91825 revenue passenger miles,20000 higher than Delta's 73412. However, the two companies realized an equivalent amount of operating revenues in the same year. Delta had $17095(million) in revenues while American realized $17337(million). The rivalry between the two is also exhibited in the Fortune 500 list. Delta airlines rank higher at position 68, while American airlines occupy position 70. Throughout the paper, an analysis of financial statements and company backgrounds is evaluated to explain the differences in operating results and the Fortune 500 ranking.

The industry is going through a challenging period for the last twelve months due to the COVID-19 pandemic. Demand for air travel plummeted amid rising aircraft maintenance costs and other operating costs. The impact of the pandemic will continue to affect the industry into the future adversely. The emergence and spread of the virus occurred when the industry was dealing with overcapacity challenges. There are more available seats than ever, forcing airlines to reduce fares which leads to low liquidity. Fuel is a critical component of the industry and accounts for 30per cent of airlines operating costs leading to the imposition of fuel price surcharges on the ticket prices and presents challenges for companies to reduce their daily cash burn to increase efficiency.

Module 7 

Accrued Liabilities 

Delta has accrued liabilities under current liabilities represented in accrued salaries and wages and other accrued liabilities. Total accrued liabilities for 2020 is $3756 (million). The proportion of these liabilities in the total liabilities is 5.33% which is low.

The main operating liabilities relate to the current portion of debt and operating leases, air traffic liabilities, accounts payable, accrued salaries and benefits and loyalty programs. Others are fuel card obligation and other liabilities.

American airlines have reported accrued liabilities in salaries and wages and other accrued liabilities in the current liabilities section. Total accruals for the year are $3961 representing a proportion of 6.11%, less than 10per cent thus low.

Operating liabilities is comprised of current portion of the long-term debt and leases, accounts payable, accrued salaries and wages, air traffic liability and other accrued liabilities.

Short- and long-term debt 

Delta airlines utilizes debt finance inform of secured and unsecured notes, government grant and loans, leases, bonds and revolving credit facilities. The revolving credit facilities are usually advanced by banks and none of the debts is publicly traded. The largest portion of these debts have maturity dates longer than one year, thus are long term and the company has complied with all debt covenants in the year. Debt covenants with a maturity date between 2021 and 2025 total $11.4(billion) whereas those after 2025 are $12.5(billion). Debts payable within the next one year are $1.5(billion).

American airlines utilize debt inform of secured and unsecured notes, government loans, term loans and revolving credit facilities from financial institutions.

Credit Rating 

Delta airlines credit rating was reviewed by three credit rating agencies including Standard and Poor, Moody and Fitch. A downgraded rating of BB by Standard and Poor (S&P) was received in March,2020 while Fitch’s rating was B+ in the following month. Moody’s rating remained unchanged at Baa3. The reduced credit rating is attributed to the subdued demand in 2020 as a result of the prevailing economic conditions that caused a deterioration of the financial condition of the company.

Fitch announced an upgrade of the company’s credit rating to BB+ in March 2021 after a positive outlook report which was occasioned by improvements in the company’s balance sheet and a sustained solid financial performance since the last assessment last year (Durrant, 2021) .

S&P downgraded American’s credit rating from B to B- in June 2020 and removed it from credit watch due to a negative outlook report as the company was grappling with the effects of reduced demand in air travel. Fitch downgraded its rating to B- in September and placed the company under negative rating watch ("Fitch Affirms American Airlines at 'B-'; Removes Rating Watch Negative", 2021) . The credit rating was affirmed in March 20201 but removed the company from negative rating watch due to improving liquidity position of the airline since the last rating assessment was done.

Module 8 

Contributed Capital 

The proportion of assets financed by equity 

American Airlines has a negative net worth, implying it has negative equity to asset ratio. Therefore, the company has more liabilities than assets, and the majority of the assets are financed through debt. Delta airlines have a proportion of 2.13per cent of its assets financed through equity, which indicates the level of appetite for debt for both companies.

Both companies have two classes of equity, the common stock, and the treasury stock. Delta airlines issued an additional paid-up share for the employee share ownership scheme equivalent to $120(million) and retired an additional common stock worth $104(million). Besides, the company issued share warrants to the US Treasury Department worth $114(million)as part of the COVID-19 CARES Act that provided liquidity to the country's airline industry.

Delta airlines has treasury stock valued at $259 as the close of 2020. The Treasury stock is held primarily for tax purposes and held at a weighted average price per share of $54.90 and $52.17 for 2019 and 2020. In 2020, the company repurchased extra shares worth$23(million)in the year. The shares were repurchased at a premium because its shares were traded at $ 40.21 by the end of December 2020.

American Airlines issued an additional common stock worth $2970 (million)and repurchased shares equivalent to $145(million). The treasury stock is also held for payment of taxes. A $320(million) is part of the debt that became convertible to equity in the course of the year and forms part of the additional paid-up shares reported in the year. It issued share warrants to the treasury department equivalent to $25(million) as part fulfilment of the CARES Act grant and loans for American airlines.

All of the company's treasury stock of 6.44million shares was purchased in the first quarter of 2020 at a weighted average price of $22.77per share, while at the same time, the prevailing market price for each at the stock market was $12.19, signifying that the repurchase was done at a premium.

Stock-based compensation plans 

Both companies have schemes providing equity compensation for long-term performance rewards and equity options for qualifying employees. Delta airlines maintain broad-based cash and equity reimbursement plan for the issuance of stock options, restricted stock, and stock-based performance awards. The total number of shares authorized in the plan is 163 million shares, and 21million shares are accessible for use in future grants.

A share-based compensation plan for American airlines authorizes the issuance of shares in the form of stock options, performance awards, stock appreciation rights, restricted stock awards, and deferred stock awards. The plan authorized the issuance of 43 million common stock, and 7million remained outstanding at the close of 2020 for use in future incentive plans.

Market capitalization 

Delta Airlines outstanding common stock as of December 31, 2020, is:

(1500000000 – 647352203) * stock market prices as at that date; $40.21 per share

Therefore, market capitalization is $34000(million)

The book value of equity is nil because its par value is $0.0001 per share.

American airlines reported 621479522 outstanding shares as of December 31, while the stock market price at the same date is $15.77 making its market capitalization $9800(million). The book value of equity is $6214(thousand). The airline industry has an average market-to-book ratio of 3.22 as of January 31, 2021.

The two airlines have a market-to-book ratio of zero and $19.16 for American and Delta airlines. American Airlines has a zero market to book value, which can be attributed to book value's consistent negative to the last two years.

Earned capital 

Return on equity 

Delta airlines:

2018: $ 3935/ $(13687+13910)/2 = 30.02%

2019: $4767 / $(15358+13687)/2 = 32.82%

2020: $12385 / $(15358+1534)/2 = -146.64%

American airlines:

2018: $1412 / $(3926+-169)/2 = 75.17%

2019: $1686 / $(-118-169)/2 = -11.75%

2020: $-8885 / $(-6867-118)/2 = -25.44%

Delta airlines is more profitable than American airlines despite it being smaller in terms of fleet number and destinations serviced. In 2018 and 2019, Delta airlines reported higher net incomes than American which is reflected in the ROE ratio. The higher ROE for American airlines in 2018 is high due to the negative shareholder equity recorded in that year whereas Delta airlines had no negative shareholder equity. The company recorded an increase in ROE between 2018 and 2019 as the profitability levels increased while American airlines ratio deteriorated in the same period due to the rising negative shareholder equity.

Both companies recorded a negative ROE in 2020 due to the impact COVID-19 had on the demand for air travel. The revenues declined and the financial position deteriorated but for American airlines the situation was not ideal in the shareholder equity due to the worsening accumulated comprehensive loss and the pandemic only accelerated the already bad situation.

The Delta airlines statement of comprehensive income reports the net loss in 2020 and profits for 2019 and 2018. Net adjustments are then added or subtracted in negative. Then, net changes in the pension and other benefits account follow below. The two adjustments are added to the reported net profits to get the comprehensive income for the year. In the year 2020, Delta airline reported a net loss of $12385(million), which is adjusted by other comprehensive losses of $66(million) in derivative contracts and pension, resulting in an annual comprehensive loss of $13434(million).

The American airlines statement of comprehensive income shows a net loss in 2020 and net incomes for 2019 and 2018. The incomes and loss are then adjusted by other comprehensive incomes or losses in each year. These items are pension and other post retirement benefits and investments. The pension shows losses for all three years while investments show a loss in 2018 adjusted by a gain in 2019 with none in 2020. After the adjustments, the statement shows a total comprehensive loss of $9657 in 2020 and profit of $1251 and $1292 in 2019 and 2018.

The companies have consistently paid out dividends in all three years and in 2020 there is a declared cash dividend payout of $0.40 and $0.10 per share for Delta and American Airlines. Total dividend payments in the year were $263(million) for Delta airlines while American paid $43(million).

Dividend payout 

Delta airlines:

2018: $909 / $3935 = 23.10%

2019: $980 / $ 4767 = 20.56%

2020: $260 / $-12385 = 0%

American Airlines:

2018: $186 / $1412 = 13.17%

2019: $178 / $1686 = 10.56%

2020: $43 / $ -8885 = 0%

Delta airlines has a higher payout ratio than American airlines due to the higher dividend payout and net income. The payout ratio is declining in both companies despite the rising profitability levels between 2018 and 2019.However, the companies maintained the consistency of dividend payment in 2020 to avoid steep decline in stock prices as it was mainly an exceptional year and could not suspend dividend payments due to a single bad year.

Dividend yield 

Delta Airlines:

2018: $1.31 / $48.25 = 2.72%

2019: $1.51 / $58.08 = 2.60%

2020: $ 0.40 / $40.21= 0.99%

American Airlines:

2018: $0.40 / $31.60 = 1.27%

2019: $0.40 / $28.57 = 1.4%

2020: $0.10 / $15.77 = 0.63%

Both companies have maintained a consistent dividend yield between 2018 and 2019 though the ratio is declining implying that the investors are receiving a declining return per each dollar invested in each company.

Module 9 

Investment in marketable securities 

Delta airlines raises capital through short term and long-term debt covenants. They include issue of promissory notes, and term loans secured by the company’ assets. The notes are either secured and unsecured. Also, Delta uses sale and lease back transactions as a financing activity and revolving credit facilities from financial institutions used as and when needed.

The firm holds equity investments in privately held companies such as LATAM and Hanjin-KAL in South Korea as an initiative to strengthen strategic alliance.

American uses short term and long-term financing debt financing methods. It has a revolving short-term credit facility, loan facility from the government under the CARES Act, guaranteed through issue of unsecured promissory notes. The company also uses revenue bonds, issue of common stock, sale and lease back transactions and equipment trust certificates.

Both companies generate sufficient liquidity from their operations to service the various debt covenants without default.

Investments with significant influence 

Delta has various investments in form of joint ventures and equity investments. Joint ventures are with airlines companies that improve on the strategic relationships. Delta airlines has a significant influence in LATAM where it holds 20% of the shareholding. The investment was made in January 2020 at $1.9(billion).

The investment in Hanjin-Kal. Other equity investments are held in Grupo Aero-Mexico where it has a non-controlling stake of 51per cent but eliminated the investment after the company filed for bankruptcy in the year. Other investments in equity are in Air France KLM at 9%, and China Eastern at 3per cent.

American airlines investments are short term valued at either fair value or available for sale. It has also invested in money market funds to provide liquidity for its projects and as a collateral for employee compensation obligations.

Investments with control 

Delta controls subsidiaries MIPC and Monroe Energy that jointly operate a refinery business that produces jet fuel, diesel and gasoline. The refinery reported $216(million) in operating losses in 2020 mainly due to reduced revenues and increased compliance costs.

American airlines control a subsidiary, American Eagle which is engaged in air travel business. The group also has a 100per cent control of the following subsidiaries; Envoy Air Inc, PSA Airlines Inc and Piedmont Airlines Inc.

References 

Durrant, M. (2021). Delta earns another ratings upgrade, outlook "positive." Retrieved 10 March 

2021, from https://news.delta.com/delta-earns-another-ratings-upgrade-outlook-positive 

Fitch Affirms American Airlines at 'B-'; Removes Rating Watch Negative. (2021). Retrieved 10 

March 2021, from https://www.fitchratings.com/research/corporate-finance/fitch-affirms-american-airlines-at-b-removes-rating-watch-negative-08-03-2021