Delta Airlines - Research Paper Example

? Finance and Accounting of the Table of Contents Table of Contents 2 2 Delta Airline 3 Management of Income and Expenses 3Selling of Tickets 5 Employee Payroll 6 Rent 6 Government Fees 7 International Operations 7 Financial and Operational Risks 8 Reference 10 Delta Airline Delta Airlines started its operation in the year 1925 as the world’s leading privately owned airlines. Delta Air Lines was founded by C.E. Woolman, who started the movement in the year 1929 by buying Huff Daland and later renaming it as Delta Air lines that started providing passenger service in the year 1929. Delta Air Line primarily operated in the Southeast. After its merger in 1972 with Northeast Airline, they opened new routes for its operation from New England and New York to Florida. As measured in operating revenue, Delta Air Lines became the third leading domestic passenger carrier after its merger in 1987 with Northeast Airlines. Delta Air Lines got its global reach after acquisition of its transatlantic routes. In the year 2002, they became the second largest passenger carrier in terms of number of passengers flying and third largest in terms of revenue (Rivkin & Therivel, 2005). This study focuses on the ways in which the company manages its various operations. Management of Income and Expenses Delta Air Lines pays their employees in home currency, whereas the other expenses like supplies, rent and landing fees are paid in local currency. Again fuel which is a major expense in airlines industry is paid in dollars. The main challenge for the company is to adjust the income and expenses while operating in different currencies. While operating in several international markets that deals in different currencies, ‘Currency Risk’ is the major risk to which the company is exposed to. This is specially a major issue for the airline industry in which the companies incur cost in one currency while they receive income in a different form of currency. Like in this case of Delta Air Lines, the maintenance facility of the airline is in United States but it operates in many international routes starting from New York till France. The income which is generated in the form of selling of tickets is received in Euro but the maintenance cost that is incurred is in form of US dollars. Generally a fluctuating exchange rate exists between dollar and euro which implies that one euro is not always equals to one dollar. Hence Delta Air Lines in order to finance its day to day operations has to exchange the euro for the dollars. The airline can be at a disadvantageous or in an advantageous position depending upon the current market situation. This leads to distortion in the earnings of the airlines as the currency exchange affects the revenue of the company. If euro is high as compared to dollars then while Delta Airline is converting its earning, which is from euro to dollar then the company will be able to benefit from this situation. Like for instance if 1 Euro = $ 1.20, then for every euro the company will get more dollar than what it had got if the situation is just reverse. Therefore, cost incurred in monetary terms by the company is of less or more value than company’s income recognized in monetary terms depending on the market condition. The airline company engages in currency hedging in order to mitigate currency risk. Currency hedging signifies protecting against the fluctuations in the exchange rates by locking in a particular exchange rate or a series of exchange rates (Vasigh, Fleming & Mackay, 2010; Papaioannou, 2006)). Delta Air Line participates actively in the Fuel hedging program in order to manage the fuel price risk. This program helps in reducing financial impact that occurs due to change in the price of jet fuel. Different commodity and contract types are used in this fuel hedging program. The economic efficiency of the hedge portfolio is evaluated on a regular basis with the financial targets of the company. According to the prevailing market condition the hedge portfolios are rebalanced, which leads to locking of losses and gains of hedge contract before their settlement dates (Delta Air lines Inc., 2013; Doganis, 2012). Selling of Tickets Delta is an airline that is operating all around the world. It has largest presence in United States but beside this they are also present in countries outside USA from where they generate significant amount of revenue. It is the largest US airline in Japan. Delta also operates in the hubs like Amsterdam, Paris and many other markets dealing in Euro currency. It is also operating in various emerging markets like Shanghai, Cairo, Lagos and Nigeria. Delta’s operations like airline maintenance, sales and other operation takes place in Amsterdam, Tokyo and Paris. The tickets of the flights for Delta Air Lines are sold through various channels like online travel agencies, global distribution system, delta.com and telephone reservation. The number of ticket selling through delta.com has increased dramatically, which allows the company to establish direct contact with the customer and reduces the distribution cost. The company has launched new platform of Delta.com, which is expected to increase the sales of the service and tickets. The company is aiming to transform the distribution from commodity approach to merchandising and differentiated approach. The merchandising initiatives that the company is implementing through delta.com are expected to generate additional revenue for the company by reducing distribution cost and enhancing the experience of the customers. The company provided opportunity to the customers to get the value that they deserve like SkyClub passes, WiFi access, seating comfort along with economy and first class upgrades. The increase in traffic provides an opportunity to the company to increase their revenue through selling of third party merchandise and advertising along with other services like trip insurance, hotels and car rentals (Delta Air lines Inc., 2013; Shaw, 2007). Employee Payroll For Delta Air Lines the salaries of the employees are seen to increase due to the increase in the pay of the employees, rise in the pension expense and other benefits. The increase was also due to the average increase of 3% in the headcount of the employees and the rise in the pay. During the quarter of June 2012 the company reached to an agreement with ALPA so that the salaries and other benefits of the pilots are increased. The pilots and other significant employees got their base pays increased (Delta Air lines Inc., 2013). A large number of companies have stop hiring new employees and do not release people on payroll. For past 35 years Delta Air Lines has not been seen to lay off their permanent employees. Delta Airlines have discharged temporary workers who work on part time basis. They are seen to contribute 8% of the total workforce. However the company has decided to increase this number (Krau, 1998). The company is having a huge payroll of 22,000 employees (Henig, 2001). Rent There are a number of facilities that are provided by the airport where the airline operates. The airport looks for increasing their total income from commercial sources that creates both concession fees and rents. The rental income arises primarily by renting and leasing the space either directly or indirectly to the airport users like the handling agents, freight forwarders and airlines. On the other hand, concession fees are payment made by the service providers to the airport authority (Doganis, 1992). Delta Air Lines that is operating in various countries also pays rent to the airport authority for using their space. The rent that the airline pays depends upon the area occupied by the company and the number of facilities operating in the airport. In case of Delta Airlines, the rent that the airline pays to the John F. Kennedy International Airport depends upon the share of baggage count and total passengers availing the terminals, the number of gates occupied and other expenses required for the operating at that terminal (Delta Air lines Inc., 2013). Government Fees The airline industry is subjected to significant and substantial amount of legal and regulatory compliance that has resulted into huge cost. For instance, the directives given by FAA sometimes require some expenditure related to the operation and maintenance of aircraft. Delta Air Lines continues to incur cost in order to comply with the regulations of FAA. Moreover, the airport rates, taxes, regulations and laws are also seen to contribute significantly towards the increase in cost and reduction in revenue (Delta Air lines Inc., 2013). International Operations The international operations of the company are subjected to competition from both foreign and domestic carriers. In such a scenario, the airline in order to operate profitably has entered into alliance with foreign carriers in which they have implemented code sharing and marketing agreement that in turn will increase the ability to sell international transportation and go beyond the traditional gateway cities like Asia and Europe. At the same time the other airlines that have entered into alliance has also benefitted from the alliance by entering into US market. Apart from this, the company is also heavily dependent upon technology for their day to day operations. It has not only provided the company with competitive edge but also enhanced customer service and reduced cost. For instance, the company has made significant investment towards mobile device application, check-in kiosks, delta.com and other related initiatives. This technology has made their operations easier while conducting business from a third party location. Since the technological development is very fast so the company is looking forward to invest more money so that the company remains technologically updated (Delta Air lines Inc., 2013). Financial and Operational Risks Rise in the cost of fuel is imposing adverse affects on the financial condition of the company. The change in the fuel price has affected the operating results of the company (Sabbadini & Lim, 2011). Since the middle part of the last decade, the fuel prices have increased at dramatic pace. It has been very volatile for the last few years. On the other hand the company is unable to pass this rise in price to the customers wholly, since it may affect the competitive nature of the industry. The fares of the flight could not be increased at the pace at which the price of the fuel is increasing. Most peculiarly when fuel price increases the company cannot offset the whole part because the passengers have a tendency to buy air tickets much in advance (Delta Air lines Inc., 2013). Delta Air Lines have significant indebtedness that may limit their operational and financial activities. Due to this they may be more vulnerable to adverse industry conditions and economic downturn, restrict them from borrowing money required for research and development, investment, capital restructuring and working capital (Delta Air lines Inc., 2013). The operations of the company are also affected by labor related disruption and employee strikes. The business of Delta Air Lines is labor intensive. They require several persons like ground support personnel, maintenance technicians, flight attendants, pilots and other personnel for their operations. If they enter into strikes then their operations gets disturbed. On December 2012, 15% unionization of workforce took place. Apart from this, weather conditions or any failure in the hub airport also affects the operations of the airline (Delta Air lines Inc., 2013). Reference Delta Air lines Inc. (2013). FORM 10-K. Retrieved from http://www.delta.com/content/dam/delta-www/pdfs/about-financial/DeltaAirLines_10K_2012.pdf. Doganis, R. (1992). The airport business. London: Routledge. Doganis, R. (2012). Flying off course: The economics of international airlines. London: Routledge. Henig, J.R., Hula, R.C., Orr, M. & Pedescleaux, D.S. (2001). The color of school reform: Race, politics, and the challenge of urban education. New Jersey: Princeton University Press. Krau, E. (1998). Social and economic management in the competitive society. Berlin: Springer. Papaioannou, M. (2006). Exchange Rate risk measurement and management: Issues and approaches for firms. Washington: International Monetary Fund. Rivkin, J.W. & Therivel, L. (2005). Delta Air Line (A): The low-cost carrier threat. Harvard Business School. Retrieved from http://case-club.ru/page/resources/case_samples/Delta_Airlines.pdf. Sabbadini, A. & Lim, M. (2011). Cash flow risk management – in good times and bad. Retrieved from http://www.ermsymposium.org/2011/pdf/Sabbadini.pdf. Shaw, S. (2007). Airline marketing and management. Burlington: Ashgate Publishing, Ltd. Vasigh, B., Fleming, K. & Mackay, L. (2010). Foundations of airline finance: Methodology and practice. Burlington: Ashgate Publishing, Ltd. Read More