Delta Air Lines

  • Sector: Transportation
  • Sub Sector: Airlines
  • Country: US
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Fundamental View

AS OF 15 May 2023
  • DAL reached positive EBITDAR in 3Q21, now focusing on returning to and above 2019 profitability levels by the end of 2023 through continuation of strong leisure demand, ramp up of corporate, eventual full return of international markets, and successful structural cost cutting.

  • Capex for fleet rejuvenation is still relatively low as DAL seeks full IG ratings.

Business Description

AS OF 15 May 2023
  • DAL is one of the world's largest airlines with a network comparable to UAL and AAL in size and distribution.
  • DAL has an extensive global network of airline affiliations, including Air France/KLM, Virgin Atlantic, Aeromexico, LATAM, and China Eastern.
  • 2019 revenue breakout was 72% domestic, 15% Atlantic, 7% LatAm, and 6% Pacific. Atlantic revovery has been strong with Pacific still lagging.
  • DAL management is the most evolved of the US network airlines, previously focused on used aircraft to lower capital costs and setting up full-cycle maintenance programs, buying a refinery to hedge crack spread, and developing non-commodity products including the leading loyalty program.

Risk & Catalysts

AS OF 15 May 2023
  • DAL faces all the industry exogenous risks: geopolitical events, pandemics, oil price volatility, and now recessionary fears.

  • DAL previously used its strong liquidity position to purchase a wide range of assets: equity in Virgin, GOL, Aeromexico, China Eastern, and LATAM; a refinery; used aircraft; and its own equity and pay dividends.

  • High fuel cost and potential for recessionary demand erosion are current issues.

Key Metrics

AS OF 15 May 2023
$ mn LTM 1Q23 Y22 Y21 Y20
Revenue 53,993 50,582 29,900 17,095
Operating Income 4,168 3,662 1,886 (12,471)
Quarterly EBITDAR 6,734 6,155 (216) (5,485)
Cash 6,611 6,534 11,319 14,096
Interest and Aircraft Rent Coverage 4.5x 4.0x -0.1x -4.1x
Lease and Pension Adj Net Debt to EBITDAR 2.9x 3.4x -95.5x -4.4x
Net Adj Debt: Total Debt plus 8X Annual Aircraft Rent plus Unfunded Pension Liability less Cash.
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CreditSights View

AS OF 27 Jun 2023

Demand/supply imbalance still drives high fares, overcoming cost inflation headwinds. Ā  Yields has been running 20% above 2019 across the industry, driving record quarterly revenues. Ā DAL 1Q23 EBITDAR lagged 1Q19, but total 2023 EBITDAR expected to reach 2019 levels. Ā DAL CASM ex will decline later in the year as pilot headcount is restored and capacity grows to full operational utilization. Ā Leverage will remain above pre COVID levels. Ā We expect AAL spreads will continue to narrow relative to DAL.

Recommendation Reviewed: June 27, 2023

Recommendation Changed: January 04, 2022

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  • International Container Terminal Services (ICTSI)

International Container Terminal Services (ICTSI)

  • Sector: Transportation
  • Sub Sector: Shipping and Infrastructure
  • Country: Philippines
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Fundamental View

AS OF 10 May 2023
  • We believe ICTSI’s FY23 credit metrics could improve even amid growth slowdown concerns, owing to anticipated yield improvements, inorganic EBITDA accretion and China’s post-pandemic reopening.

  • ICTSI has deleveraged consistently over the past 5 years, which is indicative of prudent financial management.

  • While ICTSI is exposed to material EM-related geopolitical, regulatory and operating risks, we think the impact is mitigated by its geographically diversified revenue base across 20 countries that limits country-specific risks.

  • ICTSI’s bonds tend to experience greater volatility from exogenous events.

  • While sizable capex and high dividend payouts could strain ICTSI’s credit profile, we take comfort in ICTSI’s robust operating cash flow generation.

Business Description

AS OF 10 May 2023
  • ICTSI develops and operates common user container terminals, with a focus on those within Origin and Destination (O&D) ports based in emerging markets.
  • ICTSI provides integrated ports services that facilitate the receiving, handling and storage of cargo. These are broadly split into four streams: vessel charges (i.e. services relating to moving cargo on and off ships), yard charges (i.e. services relating to moving cargo in the container and storage yards), storage fees (i.e. services relating to cargo and container storage), and other ancillary fees.
  • ICTSI currently operates across 33 port concessions in 20 countries. As of end-FY22, ICTSI's revenues are well diversified across the Philippines (34% of total), Other Asia (12%), EMEA (21%) and the Americas (34%).
  • ICTSI operates its container terminals under long-dated concession agreements (typically ~25 years) with the relevant local port authorities or governments. For some concessions, fees charged to customers are regulated by the authorities that prescribe maximum price limits and, in some cases, allow for CPI-linked tariff hikes. For other concessions, fees charged are unregulated and allow for greater price-setting flexibility and volatility too.
  • ICTSI is required to make periodic fee payments to the respective authorities for the right to operate the concessions. These payments are typically a combination of fixed charges and variable charges based on cargo traffic volume or gross revenues.

Risk & Catalysts

AS OF 10 May 2023
  • ICTSI is exposed to material EM-related geopolitical, regulatory and operating risks. That said, we think the impact is mitigated by its geographically diversified revenue base across 20 countries that limits country-specific risks.

  • Being an EM-focused port container terminal operator, ICTSI’s bonds tend to experience greater volatility from exogenous events.

  • Sizable post-pandemic capex and high dividend payouts could strain ICTSI’s free cash flows and credit metrics, though we think the impact is mitigated by ICTSI’s robust operating cash flow generation.

  • ICTSI has sizable exposure to FX depreciation risks, as it derives most of its revenues and cash expenses in EM currencies, while a bulk of its debt is pegged to the $.

Key Metrics

AS OF 10 May 2023
$ mn FY20 FY21 FY22 1Q22 1Q23
Debt to Book Cap 69.5% 73.7% 71.9% 78.3% 73.7%
Net Debt to Book Cap 57.5% 62.2% 58.2% 67.5% 64.5%
Debt/Total Equity 228.2% 279.7% 255.3% 361.1% 279.8%
Debt/Total Assets 68.6% 67.5% 62.5% 68.0% 63.4%
Gross Leverage 4.8x 3.7x 3.1x 3.6x 3.1x
Net Leverage 4.0x 3.1x 2.5x 3.1x 2.7x
Interest Coverage 3.4x 3.9x 4.6x 4.1x 4.5x
EBITDA Margin 58.2% 61.1% 62.8% 64.0% 61.9%
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CreditSights View

AS OF 10 May 2023

We have an Outperform recommendation on ICTSI. We think ICTSI’s Jun-2030 bond should trade 40-50 bp tighter than Aboitiz’s Jan-2030 bond (current: 3 bp wider) and ICTSI’s Nov-2031 bond should trade 20-30 bp tighter than Globe Telecom’s Jul-2030 bond (current: 13 bp wider). We believe ICTSI’s credit metrics could stay resilient amid growth slowdowns owing to anticipated yield improvements and disciplined financial management. While ICTSI is exposed to EM-related geopolitical, regulatory and operating risks, we believe these are mitigated by its highly geographically diversified revenues and expectations of a weakening $ that would support EM currencies. We also expect ICTSI’s robust cash-generative business to drive positive free cash flows, even amid higher capex and persistent dividends.

Recommendation Reviewed: May 10, 2023

Recommendation Changed: April 18, 2023

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