Delta Air Lines Inc. (NYSE:DAL)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially decreased from 2017 to 2018, then recovered and increased through 2019 before experiencing a substantial decline in 2020. NOPAT showed a partial recovery in 2021, but remained significantly below levels observed in 2017-2019.

The cost of capital exhibited an increasing trend from 2017 to 2019, followed by a decrease in both 2020 and 2021. Invested capital showed a slight decrease from 2017 to 2018, then increased in 2019, decreased in 2020, and increased again in 2021, mirroring the trend in NOPAT to some extent.

Economic Profit Trend

Economic profit was negative throughout the entire period. The magnitude of the negative economic profit increased substantially in 2020, reaching its lowest point, before decreasing in absolute terms in 2021. The negative economic profit in 2020 was significantly larger than in any other year examined. While 2021 showed improvement relative to 2020, economic profit remained substantially negative.

Relationship between NOPAT and Economic Profit

A strong correlation exists between NOPAT and economic profit. The substantial decline in NOPAT in 2020 directly resulted in the largest negative economic profit during the period. The partial recovery of NOPAT in 2021 led to a less negative economic profit, indicating that improvements in operating profitability are crucial for enhancing economic profit.

Impact of Cost of Capital

The cost of capital, while decreasing in 2020 and 2021, remained a significant factor contributing to the negative economic profit. Even with a lower cost of capital, the insufficient NOPAT in 2020 and 2021 was unable to generate a positive economic profit. The initial increase in the cost of capital from 2017 to 2019 also contributed to the decline in economic profit during those years.

Invested Capital and Economic Profit

Fluctuations in invested capital appear to have a secondary impact on economic profit compared to NOPAT and the cost of capital. While invested capital increased in 2019 and 2021, coinciding with periods of higher NOPAT, the overall economic profit remained negative, suggesting that simply increasing invested capital is not sufficient to generate economic profit without corresponding improvements in operating profitability.

The financial data reveals significant fluctuations in key profitability metrics over the analyzed periods. Notably, net income exhibited a positive and steadily increasing trend from 2017 through 2019, rising from 3,577 million US dollars to 4,767 million US dollars. However, 2020 marked a sharp reversal, with net income declining drastically to a loss of 12,385 million US dollars. This adverse outcome was partially mitigated in 2021, which showed a rebound to a positive net income of 280 million US dollars, although this level remains substantially below the pre-2020 figures.

Similarly, net operating profit after taxes (NOPAT) followed a comparable trajectory. The company maintained strong operating profitability between 2017 and 2019, with NOPAT values ranging from 6,032 million to 6,651 million US dollars. In 2020, a pronounced downturn occurred, as NOPAT fell to a negative 13,902 million US dollars, indicating severe operational challenges during this period. The partial recovery in 2021 saw NOPAT increase to 1,932 million US dollars, signaling some restoration of operational profitability, albeit still at a reduced scale relative to the pre-2020 period.

Profitability Trends

Up through 2019, both net income and NOPAT demonstrated healthy growth and strong profitability.

The year 2020 experienced a drastic and abnormal downturn in profitability, reflecting an exceptional negative impact.

In 2021, there was a modest recovery, though profitability remained significantly below previous peak levels.

Operational Insights

The parallel movement between net income and NOPAT suggests that the core operations rather than extraordinary items primarily drove the financial volatility.

The deep losses in 2020 indicate substantial operational disruptions or extraordinary challenges during that year.

The recovery in 2021 implies initial success in addressing those challenges, though full recovery to earlier profitability levels was not yet achieved.

Overall, the data suggests a company that encountered a period of severe financial distress in 2020, likely due to external or market-wide factors, followed by an initial phase of recovery with cautious improvement in profitability metrics in the subsequent year.

Income Tax Provision (Benefit)

The income tax provision exhibits a fluctuating trend over the analyzed period. Starting at $2,124 million in 2017, it decreased notably to $1,216 million in 2018, before experiencing a moderate increase to $1,431 million in 2019. In 2020, there is a significant shift to a considerable tax benefit of -$3,202 million, indicating either substantial tax credits or loss carrybacks during this period, potentially related to extraordinary circumstances. In 2021, the tax provision returns to a positive value of $118 million, reflecting a recovery or normalization relative to the previous year.

Cash Operating Taxes

Cash operating taxes show a mixed and irregular pattern. In 2017, the amount was $381 million, followed by a negative value of -$38 million in 2018, suggesting a possible tax refund or adjustment. The figure then increases slightly to $44 million in 2019 and rises more substantially to $191 million in 2020. The upward trend continues in 2021, reaching $323 million. This increase in cash operating taxes over the last two years could indicate improving operational profitability or changes in tax payment timing and policies.

Total reported debt & leases

From 2017 to 2019, the total reported debt and leases showed a declining trend, decreasing from $21,021 million to $17,255 million. However, there was a significant increase in 2020, with the amount rising sharply to $35,548 million. This elevated level was largely maintained in 2021 at $34,679 million, indicating a substantial buildup of debt and lease obligations during the later years.

Stockholders’ equity

Stockholders' equity exhibited relative stability from 2017 through 2019, fluctuating moderately around the $13,600 to $15,300 million range. In 2020, equity experienced a dramatic reduction to $1,534 million, reflecting severe erosion likely due to losses or adjustments during that period. In 2021, there was a partial recovery, with equity increasing to $3,887 million, though it remained substantially below pre-2020 levels.

Invested capital

Invested capital showed an overall upward trend from 2017 to 2019, rising from $44,409 million to $47,580 million. In 2020, it decreased to $44,197 million, likely driven by changes in debt and equity components as noted. The capital base rebounded in 2021, climbing back to $47,166 million, close to the high point observed in 2019, suggesting efforts to stabilize and restore invested capital after the disruptions of 2020.

The period under review demonstrates a volatile performance in economic value creation. Economic profit consistently registers as negative across all observed years, indicating the company’s returns are insufficient to cover the cost of capital. However, the magnitude of these losses fluctuates significantly.

Economic Profit

Economic profit begins with a relatively modest loss of US$51 million in 2017. This loss escalates substantially to US$663 million in 2018 and further to US$742 million in 2019. A dramatic increase in the loss is then observed in 2020, reaching US$18,970 million, before decreasing to US$3,330 million in 2021. This suggests a particularly challenging year for the company in 2020, likely influenced by external factors, followed by some recovery in 2021.

Invested Capital

Invested capital exhibits a more stable pattern. It declines from US$44,409 million in 2017 to US$43,326 million in 2018, then increases to US$47,580 million in 2019. A slight decrease is noted in 2020 to US$44,197 million, followed by an increase to US$47,166 million in 2021. The fluctuations are less pronounced than those observed in economic profit, indicating capital allocation remained relatively consistent despite performance variations.

Economic Spread Ratio

The economic spread ratio mirrors the trend in economic profit, starting at -0.11% in 2017 and declining to -1.53% in 2018 and -1.56% in 2019. The ratio experiences a significant deterioration in 2020, reaching -42.92%, reflecting the substantial economic loss. A considerable improvement is then seen in 2021, with the ratio moving to -7.06%, though it remains negative. The ratio consistently indicates that the company’s return on invested capital is below its weighted average cost of capital.

The substantial decline in the economic spread ratio in 2020, coupled with the largest economic loss, warrants further investigation to understand the underlying drivers. While 2021 shows improvement, the continued negative economic profit and spread ratio suggest ongoing challenges in generating returns exceeding the cost of capital.

The economic profit margin exhibited significant fluctuations between 2017 and 2021. Initially negative, the margin deteriorated substantially before showing signs of improvement. A review of the underlying figures reveals a complex relationship between economic profit and adjusted operating revenue.

Economic Profit Margin Trend

In 2017, the economic profit margin stood at -0.12%. This margin worsened to -1.48% in 2018 and further declined to -1.58% in 2019. A dramatic decrease was observed in 2020, with the margin plummeting to -108.10%. While still negative, the margin improved considerably in 2021, reaching -11.00%.

Economic Profit

Economic profit itself was consistently negative throughout the period. Losses increased from US$51 million in 2017 to US$663 million in 2018 and US$742 million in 2019. The largest loss occurred in 2020, amounting to US$18,970 million. Economic profit improved to a loss of US$3,330 million in 2021, aligning with the improvement in the economic profit margin.

Adjusted Operating Revenue

Adjusted operating revenue generally increased from US$41,436 million in 2017 to US$47,094 million in 2019. However, a substantial reduction occurred in 2020, with revenue falling to US$17,549 million. Revenue partially recovered in 2021, reaching US$30,276 million, though it remained below pre-2020 levels.

The substantial decline in the economic profit margin in 2020 appears directly correlated with the significant decrease in adjusted operating revenue, coupled with a large economic loss. The improvement in 2021 suggests a partial recovery in revenue and a reduction in the magnitude of the economic loss, leading to a less negative margin. The consistent negative economic profit throughout the period indicates that the company’s returns are not covering the cost of capital.