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This article is about the airline. For other uses, see Delta (disambiguation).

Delta Air Lines (NYSE: DAL) is the 2nd largest passenger airline in the world by available seat miles and one of the most prominent legacy carriers. In recent years, the company has faced financial difficulties as price competition from discount airlines like JetBlue and Southwest has intensified. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005.^[1] During the following few years, Delta decreased its number of aircraft types in an effort to reduce maintenance costs and cut its number of unionized workers so that it now has the lowest percentage among legacy airlines.^[2] Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings.

Despite operational improvements, Delta continues to face threats to its profitability, the most prominent among these being the price of oil. Increasing worldwide demand compounded by investor speculation led oil prices to peak at over $145 per barrel in July 2008,^[3] costing the company billions of dollars during the first half of the year. By January 2009, however, oil prices had slid to below $45 per barrel,^[3] and the company lost $507 million on oil hedging contracts in 2008 Q4 alone.^[4]

Delta is vulnerable to deterioration in broader U.S. economic conditions. With less discretionary income, consumers and businesses will tend to cut back on air travel. Less leisure travel and business travel were both major factors in Delta's enormous Q4 losses - not only are consumers traveling less but business travelers flying first class less frequently.^[5]

In October 2008, Delta and Northwest merged to form a new joint airline called "Delta," which is the largest airline in the world by both enterprise value and available seat miles.^[6] The deal led Delta to pay a one-time charge of over $791 million in employee equity awards during 2008 Q4, as well as one-time cash costs of about $500 from 2009 to 2012 to integrate the airlines.^[7] Delta expects that Northwest will be fully integrated by 2010.^[8]

Business Overview

With a fleet of 684 owned and 339 leased planes and an average age of 13.2 years^[9], Delta has carrier service to 378 destinations in 66 countries^[10]. Delta has the 2nd largest^[11] and 3rd oldest^[12] fleet in the American airline industry. The airline operates on a hub-and-spoke system , centered at airports in Atlanta, Cincinnati, New York JFK, and Salt Lake City ^[13]. Delta is attempting to offset weak U.S. consumer demand by expanding heavily in international flights. The company is now offering non-stop flights from Atlanta to Shanghai.^[14]

Financial Analysis

Revenue for Delta Air Lines has increased approximately 6% each year going forward from 2006. These gains are largely attributable to increases in passenger revenue, particularly on international routings. International passenger revenue grew 17% from 2004 to 2005 and 24% from 2005 to 2006^[15]. As a result of expanded capacity of 27% and the Northwest merger (which alone increased ASMs by 10%), the company has been able to diversify its revenue through an increase in international passenger revenue by 38% in 2008.^[16] Overall, Delta's operating revenue increased by 18% in 2008, from $19.2 billion to $22.7 billion, of which over $2 billion was due to the inclusion of Northwest's operations.^[17] The benefits of the increased capacity and the Northwest merger continued in 1Q09, as operating revenue of $6.684 billion was 40% greater than it was in 1Q08. ^[18]

The merger also had a significant impact on operating expenses, and of the $2.1 in expenses related to Northwest, $1.1 billion was directly due to cost related to the merger and restructuring. ^[19] Moreover, despite efforts to increase employee efficiency, employees per aircraft rose by 28% to 139.5 in 2008.^[20] Rising fuel costs also contributed to a 72% overall burgeoning of operating expenses, from $18.1 to $31.0 billion in 2008, as during the most recent fiscal year, Delta paid $3.18 per gallon of fuel, as opposed to $2.24 in 2007.^[19] In recent years, Delta has benefited from fuel hedges to offset the risk of fuel price volatility, and had gains of $134 million and $51 million in 2008 and 2007, respectively ^[19]. However, with the fall in crude oil prices during 4Q08 and 16% of its expected fuel consumption for 2009 already hedged, the company will pay greater than market price for fuel unless oil prices rise.^[21] This is reflected by a 33% increase in fuel related expenses in 1Q09. However, overall, operating expenses fell in 1Q09 by 35%; yet, this was due primarily to the merger related expenses from 1Q08.^[18]

The revenue growth and benefits of the Northwest merger were not enough to overcome rising fuel prices and decreased demand, and for 2008, Delta reported a $8.922 billion loss.^[22] This follows two years of profitability from 2006-2007. Moreover, while Delta reported a net loss of $794 million in 1Q09, compared to $6,390 million in 1Q08, 55% of operating expenses from 1Q08 were due to the merger, so the improvement in net loss is overstated.^[18]

In addition to a global recession and fears of H1N1 influenza, Delta's 2Q09 earnings were negatively impacted by its 2008 merger with Northwest, which resulted in a $58 million loss, albeit it was a one-time charge.^[23] Revenue increased by 32.4% to $7.574 billion; however, Delta was one of the few companies in the industry that did not significantly decrease its aircraft fuel expense in 3Q09.^[24] In fact, fuel expense increased slightly, from $1.952 billion in 3Q08 to $1.973 billion in 3Q09.^[24] This was in part due to a $226 million loss related to fuel hedges.^[24] Passenger revenue fell throughout each of DAL's geographic segments, though the Atlantic region was particularly affected, as PRASM fell by 22% in the quarter.^[24]

These numbers above show that Delta has been effectively lowering costs these past four years. Additionally, rising oil's impact on Delta is illustrated by the upward march of fuel costs per Available Seat Miles. However, as fuel becomes a bigger share of total expenses each year management will have less control over costs. This does not bode well for the future of the airline industry, and more mergers may come out of the current oil price environment.

Delta has increasingly diversified its revenue with international air travel.^[26]

Operational terminology unique to the airline industry includes available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows:

(Read more about Delta's Key Trends and Forces...)

References

1. ↑ Marketwatch
2. ↑ Delta 2006 10K, Item 7, pg. 22-23
3. ↑ ^{3.0 3.1} Financial Times. NYMEX Crude Oil
4. ↑ DAL 2008 10-K, pg. 30
5. ↑ You must specify title = and url = when using {{cite web}}.Harry R. Weber (January 27, 2009). .
6. ↑ Reuters
7. ↑ DAL 2008 10-K, pg. 30
8. ↑ DAL 2008 10-K, pg. 2
9. ↑ DAL 2008 10-K, pg. 22
10. ↑ DAL 2008 10-K, pg. 30
11. ↑ http://en.wikipedia.org/wiki/Largest_airline#Passenger_airlines
12. ↑ http://www.ajc.com/business/content/business/delta/stories/2008/04/18/fleet_0419.html
13. ↑ Delta 2006 10K, Item 1, pg. 2
14. ↑ [1]
15. ↑ Delta 2006 10K, Item 7, pgs. 26 and 30
16. ↑ DAL 2008 10-K, pg. 33
17. ↑ DAL 2008 10-K, pg. 33
18. ↑ ^{18.0 18.1 18.2} DAL 1Q09 10-Q, pg. 3
19. ↑ ^{19.0 19.1 19.2} DAL 2008 10-K, pg. 34-35
20. ↑ MIT Airline Data Project. Delta Airlines Employee Data and Analysis
21. ↑ DAL 2008 10-K, pg. 31
22. ↑ DAL 2008 10-K, pg. F-4
23. ↑ DAL 2Q09 10-Q<ref></ref> Overall, Delta had a $257 million net loss in 2Q09, up from a $1.163 billion loss in 2Q08.<ref></ref> Although cost per gallon of fuel fell by 39%, Delta had fuel hedge losses of $390 million in 2Q09.<ref></ref> ASMs grew by 52%; yet, all of this gain was due to the Northwest merger, as without Northwest, ASMs fell by 2,477 million miles. The spread between Passenger Revenue per Available Seat Mile (PRASM) and Cost per Available Seat Mile (CASM) was negative in 2Q09, at 10.00 and 11.86 cents, respectively. The Northwest spread; however, was positive, as a PRASM of 12.01 cents outpaced CASM by 2.07 cents.<ref></ref> Although Delta's operating income grew by 55.7% between 3Q08 and 3Q09 to $204 million, the company reported a $383 million net loss, which is $202 million more than the loss reported in 3Q08.<ref>[http://www.sec.gov/Archives/edgar/data/27904/000095012309053249/g20908e10vq.htm#001 DAL 2009 3Q 10-Q]</li> <li id="_note-3q09">↑ ^{[[#_ref-3q09_0|24.0]]} ^{[[#_ref-3q09_1|24.1]]} ^{[[#_ref-3q09_2|24.2]]} ^{[[#_ref-3q09_3|24.3]]} </li> <li id="_note-jan8k-12">↑ ^{[[#_ref-jan8k-12_0|25.0]]} ^{[[#_ref-jan8k-12_1|25.1]]} {{cite 10k|ticker=DAL|year=January 2009|form=8-K|link=http://phx.corporate-ir.net/phoenix.zhtml?c=71481&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9NjA4ODkwMiZhdHRhY2g9T04mc1hCUkw9MQ%3d%3d|pg=12}}</li> <li id="_note-17">[[#_ref-17|↑]] [http://www.sec.gov/Archives/edgar/data/27904/000119312509042726/d10k.htm Delta 2008 10-K, pg. F-61] </li></ol></ref>