Delta Air Lines Inc. (DAL)/Trends and Forces

DAL is renegotiating its 30-year-old leases with the Hartsfield-Jackson Airport - the company's home base airport.^[1] Delta wants to rework the lease deal so that it can operate at more competitive costs;^[1] the city-run airport, however, has not budged for DAL even though the airline accounts for more than 70% of the airport's activity.^[1] Delta's demands for the airport - the world's busiest,^[1] with 90 million passengers handled in 2008^[2] - involves changes ranging from lowered gate fees to the construction of the new Maynard Holbrook Jackson Jr. International Terminal.^[1] DAL has threatened that, if Hartsfield-Jackson Airport does not make the desired changes soon, its traffic is to be rerouted to Memphis, where the company can operate more cheaply.^[1] The largest concession that the airport has made is cutting $300 million from its new terminal construction budget; DAL requested a $400 million cut and an overall agreement has not been reached.^[1]

Oil prices significantly impact DAL's bottom line

Fuel expenses represent one of the largest single costs faced by airliners; in 2008, fuel expenses and related taxes represented 23.7% of DAL's total operating expenses.^[3] Oil price increases in the first half of 2008 were a pressure Delta’s profitability but decreasing prices later in the year caused the company to lose even more on its oil hedging contracts,^[4] which were written so that the company would break even when oil was priced at $130 per barrel.^[5] As oil prices slid to below $45 per barrel in January 2009 after peaking at $145 per barrel in July 2008,^[6] the company lost $507 million during 2008 Q4 on fuel hedges.^[4] Moreover, the increasing focus on low prices in the airline industry prevents Delta from immediately passing on price increases to its customers,^[7] so DAL's expenses are heavily impacted by fuel prices and their volatility.

Domestic Governmental Regulations

Public outcry against airline delays has led to demand for a government response. In November 2007, President Bush voiced support for higher penalties for airlines that severely delay passengers ^[8]. Even more troubling for Delta are suggestions that the government might limit the number of landing slots at busy airports including several Delta hubs^[9]. This could result in significant scheduling difficulties for the airline.

Open Skies

Delta’s post-bankruptcy business plan is focused on shifting more of its aircraft towards international routes. The majority of the airline's international flights, and 18% of its total flights, are between destinations on opposite sides of the Atlantic Ocean^[10]. This could become problematic given the recent U.S.-E.U. Open Skies agreement, which will allow for increased competition in transatlantic flights. The agreement is expected to begin in March 2008, and will among other things, allow for European airlines to operate with more freedom in the U.S. market^[11].

Labor Costs

As part of the airline’s reorganization plan post-Chapter 11 bankruptcy, Delta negotiated temporarily lower wages for its employees. Most notably, the company entered into an agreement with the Air Line Pilots Association to lower average annual pilot labor costs by $280 million for the period between June 1, 2006 and December 31, 2009^[12]. Reduced wage costs for other airline employees will provide an additional temporary per year cost savings of $600 million^[13]. In exchange for these wage reductions, Delta agreed to provide its employees with a greater share of future company profitability^[14]. As a result, labor costs are expected to increase.

DAL and NWA Merger Creates World's Largest Airline by Passenger Traffic

After months of speculation and debate, DAL completed its acquisition of Northwest Airlines on October 29, 2008 for about $2.6 billion.^[15] The new combined airline will retain the Delta name and will be based in Atlanta.^[16] The new Delta will have about 75,000 total employees.^[16]

The Delta brand will not start spreading into Northwest until 2009, when it will integrate websites and scheduling, paint Northwest planes in Delta colors and logos, and so forth.^[17] The new airline will have a larger network than either airline previously, serving 375 destinations in 66 countries.^[17]

Increased Competition from Low-Cost Airlines Erodes Average Fare

Northwest is facing increased competition with some of its flagship routes, particularly from Southwest with regard to flights between Minneapolis-St. Paul and Chicago Midway Airport, which has eroded its average fare per passenger.^[18] Minneapolis has long been a "fortress hub" or main service airport for Northwest airlines.^[19] Southwest's move into Minneapolis is an attempt to use its low fares to take market share away from the Delta/Northwest airline, although Northwest has followed through an announcement that it would match Southwest's prices when Southwest's service starts on March 9, 2009.^[19] Before Southwest's entrance in the market, fares were between $270 and $436.50 one-way^[18], and in 1Q09, both airlines charged between $48 and $102 for one-way, coach tickets.^[20] (Read more on Delta's Competition and Market Share...)

Introduction and Overview | Trends and Forces | Competition and Market Share

References

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