Delta Air Lines - Term Paper Example

? xxxxxx No. 12345 DELTA AIRLINES (A Competitive Analysis) ABC xxxxx xxxx College Department of xxxxx xxxxxx 30 April, 2013 Table of Contents Contents Page No Delta Airlines: A Brief History 03 Culture 04 Current Operations 04 Macro-level Analysis 05 PEST Analysis 05 Porter’s Five Forces Analysis 07 Micro-level Analysis 08 Financial Ratios of Delta Airlines 10 References 13 DELTA AIRLINES: A BRIEF HISTORY Delta Airlines, based with headquarters at Georgia in the United States, is one of the oldest airline industries in the world as established in September, 1929. C.E. Woolman along with a group of investors from Louisiana built the foundation of this airline company. After Northwest Airlines, the company has the second largest passenger carrier in the world. Delta Airlines is considered as one of the well-established, widely recognized, respected, and innovative airlines which has built a great reputation and widespread recognition since its inception. Today the company consists of a fleet size of 722 different passenger and cargo aircraft as well as more than 80,000 employees working across the world. Company has its major assets at eleven airports and its 247 aircraft operate at 247 international routes (Delta Stats and Facts). By the end of 2011, Delta Airline was enjoying a net income of $854 million with its total assets around $43.49 billion (Delta Airlines Annual Report, 2011). After five years of operations, Delta Airlines got a contract from United States Post Office. This contract made the company to shift its major set up from Georgia to Dallas. The company shifted from Atlanta (Georgia) to Dallas on 5th August, 1934 and after seven years returned back to its parent city. With the passage of time, Delta Airline followed on growth strategy as in 1953, it acquired Southern Airways and Chicago. In 1972, it did acquisition with Northeastern Airlines as well therefore; it expanded its routes to get an edge over its competitors. Delta Airlines executed its growth strategy quite well till the end of 1970s. Due to transporting of more than 3.3 million passengers in 1978, the company was ranked No.3 in the industry; however, the same year US government enforced the Federal Airlines Deregulations Act of 1978. The act put a negative impact on Delta Airline and some other dominating companies and therefore set a base for Low Cost Carriers (LCC). Moreover, the airline industry was serenely affected by several factors in 80s and 90s. These factors included global recession of early 80s, rising fuel prices towards late 80s, and first gulf war in early 90s. Delta Airlines also affected by these, however, its strong management and infrastructure made it again at No.3 in position in the airline industry. This year it took around 67.2 million passengers to their destinations in different parts of the world. The company also generated revenue of about $8.5 billion. Along with its successful growth, one of the biggest achievements of the company is its employee reward system which enabled the company to maintain a high employee retention rate. CULTURE According to a survey conducted by J.D Power, Delta Airline has been recognized as the 2nd best airline company with respect to customer service. In 2009, the company won three awards of ‘Business Traveler Magazine’ for the fourth consecutive year. These awards were given in the categories of ‘Best Airline Web Site’, ‘Best Frequent Flyer Program’, and ‘Best Airport Lounge’ (PR Newswire). Due to its vast experience in air operations, the company has created warms relations among its employees that have great retention as well as loyalty with the company. For example in 2006, pilots of the company got themselves away from a probable strike by accepting a deal with the organization in terms of their salary and other package. This willingly accepted agreement not only enabled the company to save about $280 million per year but also kept it firm with its routine operations. CURRENT OPERATIONS By April 2010, the operational network of Delta Airlines had reached more than 65 countries with around 355 destinations. The highest gravity of its network is found in North America as almost 68% of its revenue comes from there. From rest of the revenue, 18% is obtained from Trans-Atlantic countries, 5% from Latin America, and 9% from Pacific (Standard and Poor’s, 2011). The widespread network of Delta Airlines is based on a sophisticated hub system which is established at number of places. These areas include different parts of the world Atlanta, New York, Detroit, Minneapolis, Cincinnati, Salt Lake City, Memphis, Paris-Charles de Gaulle, Tokyo-Narita and Amsterdam. A fleet consisting of 722 aircraft supports the entire network. These aircraft vary from each in terms of size, seat capacity, and services (iStockAnalyst, 2010). MACRO-LEVEL ANALYSIS PEST Analysis The PEST analysis of Delta Airline highlights major influences on the airline industry. The competitive marketing environment continuously changes, therefore a well thought-out, composed, detailed and consistent analysis is necessary for best evaluation. Despite of the fact that PEST analysis is used on the basis of previous data, interestingly it can be used as a forecast model (Wilson and Gilligan, 1998).  The distressing incidents at the start of 21st century have turned out as the most difficult times for the airline industry. These incidents included the terrorist attacks in New York on September 11, 2001 and in London on July 7, 2005. Moreover, wars in Iraq and Afghanistan have caused an extraordinary political instability in different parts of the world. Due to such political instability and security situations, European Union and United States formulated new security regulations which came into effect in summer 2006. Although governments have taken essential safety and security measures and controlled the activities at the airports effectively along with pricing and planning policies but even then the new political strategy reduced the customer’s traveling confidence on airline. During last few years, substantial regulatory reforms have taken place which has given more opportunities to Delta Airline and such other airlines. As far as, United States political environment is concerned, that is good. There is no threat of political instability. Government institutions are strong and reliable. In current scenario, there is no such situation or government agreement that has a negative effect on air operations of Delta Airlines. The airline industry is always characterized by peaceful environment and high earning elasticity. Therefore, the air travel business is directly proportional to the peace and stable economy. A persistent political instability has occurred due to war in Iraq and war against terrorism, therefore during last few years, the fuel cost has risen tremendously throughout the world. In response of fuel cost, Delta Airlines has increased the cost of its services. Delta Airlines transports the people to their destinations throughout the world for both business and tourism. In case, the global economy falls down, corporate environment decreases, ultimately less number of people will use the air traveling mode for business and exciting holidays. Culture refers to a set of value system, learned belief, habit etc and the social and cultural environments vary in different societies. They mainly depend on the nature of business, demographic aspects and custom values. These factors highlight the customers’ trends and the strength of the potential markets. Delta Airlines has the slogan of listening and thinking of its customers, passengers and workers to execute comfortable and effective flights. The flight operations of Delta Airlines revolve around innovation with the focus on globalization. English is the working language in the broad network of the company consisting of more than 65 countries (Datamonitor, 2009). There is a huge contrast between the nationalities of 65 countries and their cultures and it may cause problems of communications and understanding. Previously, the demand of an airline was based on its facilities but due to global economic downturn, the trend has been changed and now it is primarily associated with the prices. Delta Airlines is needed to rebuild the confidence of customers especially from Asian countries. A growing pressure on costs and prices builds up by the influence of technological advancements. It includes the online reservations and cost synergies from the industry consolidation. In order to a competitive advantage on its competitors, Delta Airlines has to emphasize on the field of e-commerce, aircraft manufacturing, and MOR (maintenance, overhaul, and repairing) operations. Porter’s Five Forces Analysis The competition in airline industry is considered as one of the fiercest competition in business world. A huge number of competitive airlines are in business, operating at global scale. It includes Southwest Airways, Alaska Airlines, United Airlines and many others. Although there is strong competitive environment exists in airline industry, however, Federal Airlines Deregulations Act of 1978 has provided more options for new entrants. Further easy loan access from banks has also reduced the barriers to new entries. As far as international routes are concerned, there are no better substitutes available against aircraft. However, at domestic routes, Delta Airlines is facing challenges from other modes of transports like buses, trains, private cars which are comparatively much cheaper than air traveling. Bargaining powers of suppliers is high for Delta Airlines but surprisingly bargaining powers customers is weak. In terms of suppliers, it has just two suppliers i.e. Airbus and Boeing. These are the companies which provide act as suppliers to most of the airline companies. In terms of customers, although customers have numbers of choice to opt, however, high fares of Delta Airlines make the bargaining power of customers weak. MICRO-LEVEL ANALYSIS Strengths Except Antarctica, worldwide operational network spread in six continents Part of Skyteam, the world’s 2nd largest alliance of airline industry Great reputation. According to a survey conducted through 20,000 consumers with respect to Airline Reputation Quotient (RQ), Delta Airlines was considered among top ten airline companies in the world. One of the unique companies due to its innovative effectiveness. In 2008, it introduced Gogo, an Aircell mobile broadband network which facilitated the passengers to connect internet with laptops, PDAs, and smartphones etc. Due to strategic merger with Northwest Airline, Delta has become the second largest passenger airline company in the world. This strategic alliance supported the company to improve its overall revenue, administrative and maintenance operations, and joint procurement agreements (Corridore, 2003, p. 7). It is the only airline company which offers no expiration on Sky miles Weaknesses In respect of customer service, the record of Delta Airlines is not effective. Even the ranking is declining continuously and the merger with Northwest Airlines also didn’t improve the customer service because it also had a poor record in this category. The fares of Delta Airlines are quite high especially as compared to low cost carriers such as JetBlue, Spirit Airlines, and Southwest Airways. During past couple of years, the company is operating at a loss of $8.9 billion. Opportunities Obama government has set a consistent fuel pricing formula which could be a good opportunity for airline industry to flourish and earn revenue (Hunt, 2010). Exclusively offers aircraft maintenance, repair, and overhaul (MRO) services. MRO industry is expected to make progress in the next six to ten years. A moderate growth rate likely in the global freight and transportation industry (Datamonitor, 2009). Threats Delta Airlines is one of few airline companies which is non-unionized. A possible easy entry for any new entrant in the industry. Extreme pressure from Environmental Protection Agencies (EPAs) because of excessive emission of carbon dioxide in the atmosphere. According to US Department of Transportation, in 2010 the numbers of complaints raised by the customers were highest against Delta Airlines Unending competition in the industry with respect to facilities, fares, services, and entertainment (Datamonitor, 2009). Fluctuating fuel prices which are likely to increase due to war on terrorism in different parts of the world. Any threat from terrorism FINANCIAL RATIOS OF DELTA AIRLINES Gross Profit Margin Gross profit margin is a financial tool to measure the economic stability and health of an organization. It is the money which is basically a proportion of left over from revenues after taking the cost of goods sold into consideration. The ratio provides a guide for extra cost and future savings. The Gross Profit Margin = (Revenue – COGS)/Revenue, where COGS stands for cost of goods sold. Although this ratio is quite useful when the existing results are compared with previous years, however, one of the shortcomings of the ratio is that it gives distorted results if the company has a huge portfolio. GPM (in billion) of Delta Airlines from 2008 to 2012 is given in the table below. Income/Year 2012 2011 2010 2009 2008 Revenue 36.67B 35.12B 31.76B 28.06B 22.70B Cost of Revenue 20.05B 19.33B 15.69B 14.87B 13.78B Gross Profit 15.01B 14.21B 14.40B 13.19B 8.914B Gross Profit (%) 45.32% 44.96% 50.59% 47% 39.29% (Source: YCHARTS: http://ycharts.com/financials/DAL/income_statement/annual) Since the above table indicates that each year GPM>33%, it means that services and products of Delta Airlines are marked up at least 50%. Net Profit Margin (%) Net profit margin is a financial ratio which elaborates the profitability of an organization. In more precise words, it indicates how much each dollar of a company is converted into profits. The formula of this ratio is given below. Net Profit Margin = [Net profits (after paying taxes)] / Net sales. The quarterly net profit margin of Delta Airlines (2008-2012) is shown in the following table. Year 2012 2011 2010 2009 2008 1st Quarter 39.40 41.40 48.83 43.27 - 2nd Quarter 39.86 43.69 52.77 5243 39.95 3rd Quarter 51.99 45.32 52.49 48.68 37.75 4th Quarter 26.49 30.40 26.26 48.41 40.94 Operating Profit Margin Operating profit margin or operating margin ratio that indicates the operating income as a percentage of revenue. It is computed as Operating margin = (Operating income) / Revenue. Recently Delta Airlines has predicted that it will obtain an operating profit margin of 2.5% to 3.5% by the end of 2nd quarter of 2013. In terms of passenger unit, an improvement of profit margin is expected from 4% to 4.5% while in transportation, the company has estimated a profit margin to improve from $1100 million to $1150 million (Centre for aviation). Working Capital Gross profit margin indicates a general health of a company while working capital is associated with the company’s overall capabilities with respect to its short-term financial health. The working capital is calculated as Working capital = Current assets – Current liabilities. Delta Income/Year 2012 2011 2010 2009 2008 Total current assets (billion) 8.9 7.74 7.31 7.73 8.27 Total current liabilities (billion) 11.02 9.8 11.39 12.7 13.27 Working capital (billion) -2.12 -2.06 -4.08 -4.97 -5 Current ratio 0.81 0.78 0.64 0.61 0.62 (Source: Market Watch). In above table, it is clear that Delta Airlines is facing a working capital deficit. Further its current ratio is less than 1 which indicates that either there are some internal financial problems or the company is unable to payoff its current liabilities. Debt to Asset Ratio The ratio of the total liabilities to its total assets is called the debt to asset ratio. This ratio highlights the possible financial risks to an organization. Debit to assets ratio = (Total liabilities) / (Total assets) Income/Year 2012 2011 2010 2009 2008 Total current liabilities 49.59 48.85 47.38 44.9 46.68 Total current assets 50.46 49.1 48.28 43.5 44.55 Working capital 0.98% 0.99% 0.98% 0.1% 0.1% (Market Watch) Dividend Yield on Common Stock This is a financial ratio that pays out the annually based dividends with respect to its share price. Its formula is given as Dividend yield on common stock = (Annual dividends per share) / Price per share. On 7th May, 2013 the current price is of a share of DAL is $18.08. Therefore, dividend yield on common stock is calculated as: Dividend yield on common stock = (1.19) / (18.08) x 100 = 6.58% References Centre for Aviation. Retrieved on 06 May 2013 from Corridore, J. (2003). Standard and poor’s industry surveys: Transportation, Commercial. Vol. 171: 25(2). Datamonitor website. (2009). http://www.datamonitor.com Delta Airlines Annual Report, (2011). Retrieved on 07 May, 2013 available at Delta Stats and Facts. Retrieved on 07 May, 2013 available at Hunt, D.S. (2010). Marketing Theory: Foundations, Controversy, Strategy, and Resource - Advantage Theory. M.E. Sharpe iStockAnalyst. (2010). Delta Air Lines, Inc. (NYSE: DAL) – Q3 2010 Earnings Preview. Retrieved from: http://www.istockanalyst.com/article/viewarticle/articleid/4575447 PR Newswire. Retrieved on 07 May, 2013 from Source Market Watch. Retrieved on 06th May 2013, available at Standard and Poor’s. (2011). Delta Air Lines Business Summary. Retrieved from: Wilson, R.M.S., and Gilligan, C. (1998). Strategic Marketing Management, 2nd edition, Butterwoth Heinemann, Oxford YCHARTS. Retrieved on 06 May 2013 available at Read More