Delta Airline Analysis and Agency Theory - Case Study Example

Table of Content Background Information 2 Mission Statement 3 Agency Theory 3 Corporate Social Responsibility 4 Sarbanes Oxley Act 6 External Environmental Analysis 7 Contending Forces: Porter Five Force Model 10 Global Environment 11 Internal Analysis 12 Conclusion 14 References 15 Background Information Delta Airlines is an airline company as the name suggest and is based in United States. The company started in 1924 and started airline services from 1929. Delta Airlines is one of the largest fleet of airlines and operates over 64 countries across 6 continents. The wide spread business of the airlines has enabled it to project itself as the largest operator under a single banner. (Delta Airlines Website, 2011) The stock of the company is traded in the United States and has shares in tune of 834.8 million. (Bloomberg, 2011) The company has also ensured a high return on equity to be around 103 but haven’t declared dividends for the past year. (Bloomberg, 2011) A look at the number of employees suggests it to be more than 70,000 who look after the 800 fleets which they operate. (Delta, 2011) The customer travelling via Delta Airlines have been very satisfied and the different programs launched by the company have ensured that customers are loyal and provide maximum satisfaction to the travellers. (Delta, 2011) The company has also witnessed some accidents over the years but has been able to ensure that the services don’t get affected due to these incidents. (Fatal Events, 2011) Delta Airlines has its headquarters in Atlanta and looks towards maintaining corporate governance in their working environment. (Delta Airlines Website, 2011) Having a code of conduct has ensured that different aspects of the business are looked after and has ensured that the customers boarding the flights have the best services available both in and out flight. Mission Statement Delta air lines have identified a mission statement and looks towards achieving those by taking the necessary steps. The company is looking to create value for its customer, employees and community by integrating culture and ensuring quality in their work. (Delta Air Lines Foundation, 2011) The company thus looks to use the traditional ways but ensure changes in services so that the customer requirements can be matched. The company looks towards integrating the different forces which will thereby help to improve the condition of living. (Delta Air Lines Mission, 2011) Agency Theory This theory puts a new perspective and deviates from the old philosophy of profit maximization. This theory says that corporations need to have agents who will work on behalf of the principal owner i.e. the shareholders and will be given certain incentive for it. (Nicholson, 1998) For this to happen and ensure that corporate governance follows it is essential to differentiate the role of board of directors and the executive management. This will define the path each has to follow and will strengthen the core values of the unit. This will increase the problem for Delta Air Lines as deciding on the area the company looks towards working will bring additional pressure. Differentiating the role and looking for the well being of the shareholders will complicate the matter for Delta Air Lines. The difficult part for Delta Air Lines is to ensure that whether the agent was able to achieve the objective with which he has been created. This makes it difficult for Delta Air Lines to identify whether the agent has acted fair. Delta Air Lines is in no position to identify the outcome which makes the agent take decision which favours him. Delta Air Lines therefore needs that the agent and the board are different and they work individually. Despite the efforts to have a manager who monitors all the functions still the manager might act “in his own self interest “. (Fama, Eugene & Jensen, 1983) The objective of both the manager and the shareholder might clash which might result in the manager to act in his own advantage as there is asymmetry of information and uncertainty which will make the shareholders unclear as to what needs to be done. (Fama, Eugene & Jensen, 1983) This will render the stakeholder useless and will give futile results. To ensure that Delta Air Lines get proper governance shareholders need to incur agency cost where they hire someone from outside the organisation who audits the performances, communicates with the shareholders regarding the changes and brings forward issues which might harm the shareholders. (Akdere & Ross, 2005) This cost will help to bring a check and ensure that there is proper corporate governance and shareholders get their dues as well as the society is looked after. Corporate Social Responsibility Delta Airlines has committed itself to Corporate Social Responsibility by looking into certain important factors like the community, environment, suppliers, customers, employees and government agencies. (Delta Airlines Website, 2011) The employees are happy with the working environment. This shows the concern from the management for the employees. To do so Delta Airlines has included many benefits like healthcare facilities, stock option and accounts in the bank when they retire. (Delta Airlines Website, 2011) Delta Airlines to ensure that they adhere to the social responsibility has provided “a disclosure in the financial statements” (Smith, 2010, p 59) which takes care of “ethical, social and environmental risks”. This also portrays the importance of social responsibility the company looks forward to. Delta Air Lines has a high rating for business ethics. To ensure that the company remains ethical and practices it an Ethics and Compliance Code and a Business Conduct Code has been set. Delta Airlines has ensured that people associated with the company adhere to the requirements of the code. This will make the company to follow the code of principle. This is evident from the different media releases and steps taken by Delta Airlines on this front. (CSR Profile, 2011) Delta Air Lines have also received an award for corporate excellence. The company have received Green Cross for Safety Medal as they were able to ensure that safety was one of their priorities. The different steps taken by Delta Air Lines on this front helped them make the necessary changes and ensure safety of passengers. This helped Delta Air Lines build a good and strong corporate structure which delivers it. (Morris, 2007) Delta Air Lines needs to continue to look into it and develop further strategies for the future where they look into the social aspect and makes it a priority. Sarbanes Oxley Act The financial debacle in the 2000’s forced the US government to pass a regulation which ensures that the books of companies are audited properly and accountability is held. The Sarbanes Oxley Act is a tool in that direction which states that any company big or small will have to adhere to the compliances of the Act so that investors are protected from fraudulent accounting practices and accountability is created for the person who misuses it. (Bob, 2009) Delta Air Lines has been adhering to the Sarbanes Oxley Act as seen from their financial data. The company has also given a certification that they are adhering to the compliance of the Act and Section 302 and 906 has been adopted. (Annual Report, 2010) Declaration in such a statement highlights the fact that Delta Air Lines has adhered to the financial disclosure and their accounting information is free from biasness. Signing and adhering to Section 302 specifies that the signing authority holds responsible for any frauds and the corporate responsibility related to financial reports have been compiled with. (Sarbanes Oxley Act, 2006) Also section 906 pertains to be held accountable and all statements are true in nature. This will thus create a positive impact and will help Delta Air Lines to grow at the same time help the society by delivering on the promises made by adhering to ethical requirements. External Environment Analysis This analysis will help to identify the potential the market has for Delta Air Lines. Since, these are factors beyond control so it influences all other companies in similar business similarly. This will thus act as a tool to decide the strategy to enter the Indian market. Political Political situation plays a very important role for any industry and more for a developed country. United States has a very high influence of political factors and any changes in decision affect the overall bearing in the sector. (OPpapers, 2010) The airline industry is heavily influenced by the political scenario and the commuters travelling via airlines get affected due to change in policies or unstable government. (OPpapers, 2010) This calls for an understanding of the scenario. Delta Air Lines has built a good rapport with different economies which has enabled them to have good trade relations. Economic The economic situation affects the number of commuters. The airline industry for a developed country like United States gets affected by the growth rate and the business cycle as during recession people consider it a luxury but during boom a necessity. (Justin, 2008) This is also affected by the price of oil. An increase in price reduces commuters as flights become expensive. United States, slowly coming out of recession provides an opportunity for Delta Air Lines. The number of commuters has increased due to this. The income level and the growth rate also affect people flying. Social The United States culture is strongly influenced by culture prevalent is social environment. United States being a diverse country this plays a prominent role. With different people from different backgrounds, religion, income level, and habits affect the way a person stays and brings a change in a social outlook. (Justin, 2008) The social culture affects the way a client can be satisfied. This makes companies use a mix of different culture and ways to satisfy people especially while operating in service industry. Service industry ensures that such an environment is created. This helps to ensure that customers are high on satisfaction and remain loyal. Technological United States has moved ahead in technological advancement. The increased use of internet and the penetration level has acted as a boost for airlines to get even the far of customers. (Justin, 2008) This is allowing people to book tickets themselves. This has increased as the literacy level has raised giving rise to more people using it as a medium to book tickets. This can also be supported by the fact that US trade & development association conducted a feasibility which states that aviation sector has been able to take huge advantage and this has been due to the modernization of communication, air traffic management, surveillance, and cargo services being on a rise due to it. (Justin, 2008) The use of technology in United States has also upgraded the airports and infrastructure which is helping the service providers to capitalize on it. This is a great opportunity for the providers as they can use the advancement and capture the vast market. Environment The United States government has also framed laws for the environment. A cap has been put and steps taken to keep it within limits. The aviation sector has also contributed to it by domestic players taking steps to reduce emission. This is a step in the right direction and the aviation sector can bank on it. The airlines which ensure that steps are taken to ensure that emission is low fall high on the government list. Those companies are favoured and are a boom for the service providers. Legal The United States government has rules in place regarding the entry and exit of players. The government has put a cap on foreign investment in domestic players for the aviation sector. (Justin, 2008) This is ensuring that airlines which comply with those are allowed a stake. The government has also framed laws regarding the permission to fly on United States soil and service providers need to get approval from the government and needs to ensure that also during their journey they comply with the norms like security check, parking and so on. (Justin, 2009) Companies accompanying with the norms and ensuring that all the legal formalities are met has an edge. It ensures backing from the government and companies find it easy to comply with the regulations and perform. Contending Forces: Porter Five Force Model The analysis of this model for Delta Air Lines will help to explain how the different factors are exerting pressure on Delta Air Lines and how the different marketing concept like the Porter Five Force Model is helping Delta Air Lines to understand the benefit this model is giving them. Threat of Potential Entrant Delta Air Lines faces threat from Jet, Air Asia, Lufthansa and others as the company provides similar business and works on the same business model New entrant from Far East who have similar business as Delta Air Lines is making it difficult to penetrate markets (Rowley, 2005) Bargaining power of buyers Delta Air Lines has seen a change in the taste and preference of buyer behaviour which has affected their bargaining powers especially for air tickets as people are switching to low cost airlines. (Rowley, 2005) There has been a growth in real purchasing power which is acting as a contributor towards their bargaining power Availability of Substitutes There has been a growth in the availability of flights with different providers and also the growth of railways which have increased their speed acts as a hindrance. Bargaining powers of Suppliers Delta Air Lines has high bargaining powers when there were few providers over various routes but the growth in providers’ especially low cost providers has increased the bargaining power of suppliers as they can tie up with other companies. Rivalry among firms The rivalry has increased as other airlines is offering more quality and features have hampered Delta Air Lines. The intensifying rivalry is making companies replicate other very quickly Global Environment Globalization today is gaining prominence as borders are disappearing and countries are entering into treaties with each other which favour free trade. This has made companies expand its reach. Companies are benefitting greatly from the global markets as it is giving them a wide market to cater to and at the same time helping to improve the bottom line. (Ellis, 2001) This is making more companies to get acclimatized to the local conditions. Today businesses which are global are a force for good. (Ellis, 2001) This is because it gives them ample opportunities to grow. The most important for Delta Air Lines is to understand the local conditions and get it transformed so that the local people start to favour the company. (Ellis, 2001) The reason for which Delta Air Lines is looking to get global is because it can buy and sell goods in market which are profitable, distribute those in the best countries which favour them, produce at the lowest cost, get a global outlook and achieve economies of scale. (Ellis, 2001) This motive has guided Delta Air Lines to become a multinational. Delta Air Lines if they want to be successful have to ensure that they have the appropriate structure and support system. (Aharoni, 1996) They along with it need flexibility so that they can grasp the strategic options which might arise due to environmental changes. (Aharoni, 1996) This is all possible when Delta Air Lines adapts to the local responsiveness. Internal Analysis The internal analysis will help to identify areas where Delta Air Lines can work on and also demonstrates the opportunities they have. Strengths Delta Air Lines has a strong brand name due to the number of years the company has been operating. (Ferrell, 2002) Delta Air Lines have many offerings aiming at different customers according to their wants Delta Air Lines has a strong distribution network which has ensured that the tickets can be booked from far off places. (Ferrell, 2002) Weakness The market is very price sensitive (Ferrell, 2002) which is making it difficult to retain customers as customers switch frequently Brand power require to market the product pushing the cost to rise (Ferrell, 2002) Opportunities Merging and acquiring the small airline carriers so that they get access to already a created market. (Ferrell, 2002) Developing new offerings which are cheap and catch the attention of the customers (Ferrell, 2002) thereby giving them a scope to grow Opportunity to move into other markets as the brand has a renowned name Threats Increasing prices of oil (Ferrell, 2002) is a worry and steps needs to be taken to reduce those Threats from other airline carriers like Air Asia, Lufthansa, Virgin and others (Ferrell, 2002) Conclusion The paper highlights the different areas which has a bearing on the performance of Delta Air Lines. The company needs to develop its strategies around these factors so that they are able to integrate the different factors which can have an effect on the performance. Developing strategies around it will help Delta Air Lines to develop their future action and will help to ensure that the changes which the business requires are done with. This will help to build and develop Delta Air Lines to face competition in the future and help it to grow. References Akdere, M., & Ross, A. (2005). Agency theory from the perspective of human resource development. International Journal of Human Resource Development & Management, 5 (3), 318-332 Annual Report. (2010). Delta Air Lines. Retrieved February 22, 2011 from http://www.delta.com/about_delta/investor_relations/index.jsp Aharoni. Y. (1996). The organisation of global service of MNC. International Studies of Management & Organisation, 26 Bob, S. (2009). Sarbanes Oxley Act. Retrieved February 22, 2011 from http://searchcio.techtarget.com/sDefinition/0,,sid182_gci920030,00.html Bloomberg. (2011). Delta Air Lines Inc. Retrieved February 22, 2011 from http://www.bloomberg.com/apps/quote?ticker=DAL:US CSR Profile. (2011). CSR Profile of Delta Airlines. CSR Wire. Retrieved February 22, 2011 from http://www.csrwire.com/members/9364-Delta-Air-Lines Delta. (2011). Profile. Retrieved February 22, 2011 from http://www.skyteam.com/about/carriers/delta.html Delta Air Lines Foundation. (2011). Mission. Retrieved February 22, 2011 from http://www.delta.com/about_delta/community_involvement/delta_foundation/index.jsp Delta Airlines Website. (2011). Delta. Retrieved February 22, 2011 from http://www.delta.com/ Delta Air Lines Mission. (2011). Delta Air Lines Mission Statement or Vision Statement. Retrieved February 22, 2011 from http://www.company-statements-slogans.info/list-of-companies-d/delta-air-lines.htm Ellis, V. (2001). Enterprise or exploitation: Can global business be a force for good. The New Statesman. Retrieved February 22, 2011 from Read More