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Delta Airlines Modules 4 and 5

Delta Airlines Modules 4 and 5. Laura Conti. Delta Airlines. Delta has 18.6% of the market share in the domestic airline industry Headquarters : Atlanta, Georgia Annual passengers: greater than 160 million. Analysis. RNEA: Rate of return on capital invested in the enterprise activities

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Delta Airlines Modules 4 and 5

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  1. Delta AirlinesModules 4 and 5 Laura Conti

  2. Delta Airlines • Delta has 18.6% of the market share in the domestic airline industry • Headquarters: Atlanta, Georgia • Annual passengers: greater than 160 million

  3. Analysis • RNEA: Rate of return on capital invested in the enterprise activities • EPM: How profitable are the enterprise operations? • EATO: Are the enterprise resources being used efficiently?

  4. Breaking Apart Return on NEA (RNEA) • RNEA = EPAT/avg (NEA) * Sales/Sales • RNEA = EPAT/Sales * Sales/avg (NEA) • RNEA= EPM * EATO • RNEA can be broken apart into two components: • EPM: indicates the profit generated by each dollar of sales (profitability) • EATO: indicates the sales generated by each dollar of NEA (efficiency)

  5. Enterprise Profit Margin (EPM) • EPM: How profitable are enterprise operations? • Affected by gross profit (depends on product prices and manufacturing or purchase costs) • Affected by the level of enterprise expenses the firm needs to support its products or services (includes overhead costs such as wages, marketing, occupancy, etc) • Affected by the level of competition (product pricing) and ability to control costs • EPM = EPAT / Sales • Interpretation: For each dollar of sales, Delta earned 7.02 cents (2013) after all enterprise expenses and taxes

  6. Enterprise Asset Turnover (EATO) • Measures the productivity of the firm’s enterprise assets • Reveals the level of sales the firm realizes from each dollar invested in enterprise assets • Can be increased by increasing sales for a given level of investment in enterprise assets or by reducing the amount of enterprise assets necessary to generate a dollar of sales • EATO = Sales / average (NEA) • Interpretation: For each dollar of enterprise assets employed, Delta generated $1.60 in sales during 2013

  7. Delta and Spirit Airlines

  8. Southwest and JetBlue

  9. Delta Airlines

  10. Using averages from previous slide..

  11. Valuation Using Cash Flows • Calculating free cash flows • Cash flow valuation is used because the valuation is based on the opportunity to receive cash payoffs in the future • Determining the amount, timing and uncertainty of future payoffs can be challenging

  12. FCF = EPAT - ΔNEA

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