netrashetty
Netra Shetty
Delta Air Lines, Inc. (NYSE: DAL) is a major airline based in the United States[9] headquartered in Atlanta. Delta is the world's largest airline operating under a single certificate. Delta operates an extensive domestic and international network, spanning North America, South America, Europe, Asia, Africa, the Middle East, the Caribbean and Australia. Delta and the Delta Connection carriers fly to 348 destinations in 64 countries (excluding codeshare), across six continents.[8] Delta operates the world's largest hub at Hartsfield-Jackson Atlanta International Airport. Delta is a founding member of the SkyTeam alliance.
On October 29, 2008, Delta completed its merger with Northwest Airlines to form the world's largest commercial carrier. In February 2009, the airline began consolidating gates and ticket counters at airports where both Delta and Northwest operate. The consolidation was completed February 2010.[10] On December 31, 2009, the Federal Aviation Administration granted Delta's request to allow Delta and Northwest to operate under a single operating certificate
Delta Air Lines (NYSE: DAL) is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. 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. To reduce fleet costs, Delta removed 18 mainline passenger aircraft from the fleet during 2009, retired its entire fleet of B-747-200F freighter aircraft during 2009 and plan to remove over 30 regional jets from its network beginning in mid-2009 and continuing through early 2011. The company has reduced staffing as well - at December 31, 2009, total workforce was 4% lower than that of December 31, 2008.[2]
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]
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.1.6 Revenue Segments
2 Key Trends and Forces
2.1 Airline industries are more sensitive to the economy than other industries
2.2 Recession has resulted in weaker demand for air travel
2.3 Delta is demanding big changes at its home base airport
2.4 Oil prices significantly impact DAL's bottom line
2.5 Increased Competition from Low-Cost Airlines Erodes Average Fare
3 Competition
4 Market Share
5 References
Delta is vulnerable to deterioration in broader U.S. economic conditions. With less discretionary income, consumers and businesses tended to cut back on air travel in 2009. Less leisure travel and business travel were both major factors in Delta's enormous losses - not only are consumers traveling less but business travelers are 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]
Company Overview
With a fleet of 677 owned and 306 leased planes and an average age of 13.6 years.[9], Delta has carrier service to 367 destinations in 66 countries[10] Delta has the 2nd largest and 3rd oldest fleet in the American airline industry.[11][12] The airline operates on a hub-and-spoke system , centered at airports in Atlanta, Cincinnati, New York JFK, and Salt Lake City[2]. Delta is attempting to offset weak U.S. consumer demand by expanding heavily in international flights. The company started to offer non-stop flights from Atlanta to Shanghai in 2009.
Business and Financial Metrics
2010 Fourth Quarter Overview
For the fourth quarter of 2010, DAL recorded total operating revenues of $7.8 billion, an increase of $1.0 billion or 14% compared to fourth quarter 2009.[13] Excluding special items, Delta's net income for the December 2010 quarter was $158 million.[13] This is a $383 million improvement year over year.[13] The special items were attributed to merger and integration costs with respect to Delta's merger with Northwest Airlines. This figure also includes a $38 million profit sharing program in the fourth quarter.[13]
Passenger revenue increased 15%, or $889 million, compared to the prior year period on 7% higher capacity.[13] Passenger unit revenue (PRASM) increased 8%, driven by a 9% improvement in yield.[13] Cargo revenue decreased 7%, or $17 million, due to the elimination of freighter operations, partially offset by higher volume and yield.[13]
Operating expense increased $644 million year over year mostly due to higher fuel prices and the profit sharing program.[13] Consolidated unit cost, excluding fuel and profit sharing, decreased 2% in the December 2010 quarter on a year-over-year basis, on 7% higher capacity.[13] Consolidated CASM including these special items increased 2%.[13]
The fourth quarter of 2010 was one of Delta's best quarters in terms of net income growth. Costs per mile excluding special items also decreased while revenues increased - showing DAL's commitment to reducing costs and improving efficiency. Despite a substantial increase in fuel prices, the industry-wide demand for flight travel improved Delta's bottom line.
2010 Third Quarter Overview
For the three months ended September 30th 2010, DAL recorded total operating revenues of $8.95 billion in comparison to year ago 3rd quarter's $7.57 billion.[14] The largest contributor to this increase in revenue is total passenger revenue - increasing 19% to $7.78 billion, with the largest increase associated with domestic U.S passenger revenues.[14] This is in reflection to the nationwide sentiment that the economy is improving since its 2008 and 2009 lows.
Similarly, net income swung to a profit from a $161 million dollar loss to a $363 million dollar gain.[14] This is recognition of an improvement of net profit margin from -4.8% to 1.80%.[14] Compared to this, expenses have only risen up 2%, showing that DAL has improved its cost efficiency since a year ago.[14] Passenger mile yield - the measure that shows revenue per mile per passenger - jumped 16.3% this quarter.[14] Despite all of these improvements, there is no indication that DAL is seeing an increase in the number of passengers since year ago 3rd quarter. Passenger load factor is 89.9% this quarter, representing only a 10 basis point increase since year ago 3rd quarter's 89.8%.[14] The company has not released any measurable guidance for the upcoming quarter or the year end.
2010 Second Quarter Overview
Delta's net income for the second quarter was $549 million, a $748 million improvement since last year and the largest quarterly profit in 10 years[15]. Of this, $90 million was provided as dividend to Delta employees for their efforts to meet Delta's financial goals.[15] Operating revenue grew by 17% or $1.2 billion. $1.1 billion of this growth came from growth in passenger revenue, and the remaining came from baggage fees and cargo revenues.[15]
This growth in passenger revenues illustrates Delta's success in capturing a significant portion of the post-recession airline demand.[15] Delta has also accurately forecasted price demand. PRASM increased 19.4%, showing that the economy is allowing for increases in airline prices.[15] Costs increased by $317 million due to the fuel expenses and the $90 million profit sharing special expense.[15] Delta had hedged 51% of its fuel consumption for this quarter, offsetting some of the increases in fuel prices.[15] For the remaining quarters of the year, 50% of forecasted fuel expenses are hedged.[15]
2010 First Quarter Overview
Delta's operating revenue grew $164 million or 2% compared to last year's first quarter.[16] Despite a decrease in capacity by 4% to accommodate for recessionary times, passenger revenue increased by 4% or $205 million compared to the prior year. However, severe weather in February, lower cargo revenue, and prolonged lower airline demand with respect to pre-recessionary levels, Delta reported a net loss of $256 million in the first quarter.[16]
This loss is in fact $501 million better than last year's first quarter. Delta has reduced capacity levels, hedged fuels properly, and added baggage handling fees to decrease costs by $387 million on a year-over-year basis.[16] Delta has taken steps to accommodate for the reduced demand and cut costs significantly. Unfortunately, due to the unforeseen volcanic ash activity in Europe, Delta must expect even higher losses than this quarter in the next quarter.
2009 Overview
Revenue for Delta Air Lines in 2009 increased approximately 24% since 2008.[17] This gain is largely attributed to an increase in cargo transportation and baggage handling fees. The total passenger revenue fell 20% since 2008 due to the decreased demand for air travel from the global recession and the effects of the H1N1 virus on passenger travel.[18]
In addition to a global recession and fears of H1N1 influenza, Delta's earnings were negatively impacted by its 2008 merger with Northwest, which resulted in a $58 million loss, albeit it was a one-time charge. [19] Overall, Delta had a $257 million net loss in 2Q09, up from a $1.163 billion loss in 2Q08.[19] Although cost per gallon of fuel fell by 39%, Delta had fuel hedge losses of $390 million in 2Q09.[19] 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.[19]
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.[20] 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.[20] In fact, fuel expense increased slightly, from $1.952 billion in 3Q08 to $1.973 billion in 3Q09.[20] This was in part due to a $226 million loss related to fuel hedges.[20] 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.[20]
These numbers above show that Delta has been effectively lowering costs these past quarters. In the overall, Delta reduced costs by 8.4% between 2008 and 2009.[21] 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.
Revenue Segments
Domestic (68% of Revenue): Delta had an increase of 27% in domestic revenue since 2008.[22] This is due to increased cargo and baggage handling fees due to new policy implementation. [18]
International (32% of Revenue): Delta increased its international revenue by 16.5% since 2008.[22] This is mostly due to an increased focus in the international arena due to the lower demand and higher competition from discount airliners in the U.S.
Key Trends and Forces
Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[23] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.
Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[23] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[23] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.
Recession has resulted in weaker demand for air travel
DAL and other competitiors have experienced significantly weaker demand for air travel. Global demand began to slow during the December 2008 quarter and global economic conditions in 2009 substantially reduced U.S. airline industry revenues in 2009 compared to 2008. As a result, the company reduced our consolidated capacity by 6% in 2009 compared to the combined capacity of Delta and Northwest during 2008.[24] Demand for air travel could remain weak if an economic recovery is slow or even fall further if a recession returns, and overall demand could fall lower than we are able prudently to reduce capacity. The weakness in the United States and international economies is having a significant negative impact on DAL's results of operations and could continue to have a significant negative impact on its future results of operations.
Delta is demanding big changes at its home base airport
DAL is renegotiating its 30-year-old leases with the Hartsfield-Jackson Airport - the company's home base airport.[25] Delta wants to rework the lease deal so that it can operate at more competitive costs;[25] the city-run airport, however, has not budged for DAL even though the airline accounts for more than 70% of the airport's activity.[25] Delta's demands for the airport - the world's busiest,[25] with 90 million passengers handled in 2008[26] - involves changes ranging from lowered gate fees to the construction of the new Maynard Holbrook Jackson Jr. International Terminal.[25] 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.[25] 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.[25] In 4Q 2009, the lease price has been quoted at $1.4 billion. [27]
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.[28] Oil price increases in the first half of 2008 were a downward pressure on Delta’s profitability but decreasing prices later in the year caused the company to lose even more on its oil hedging contracts,[29] which were written so that the company would break even when oil was priced at $130 per barrel.[30] As oil prices slid to below $45 per barrel in January 2009 after peaking at $145 per barrel in July 2008,[3] the company lost $507 million during 2008 Q4 on fuel hedges.[29] Moreover, the increasing focus on low prices in the airline industry prevents Delta from immediately passing on price increases to its customers,[31] so DAL's expenses are heavily impacted by fuel prices and their volatility.
Increased Competition from Low-Cost Airlines Erodes Average Fare
Delta 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.[32] Minneapolis has long been a "fortress hub" or main service airport for Northwest airlines.[33] Southwest's move into Minneapolis is an attempt to use its low fares to take market share away from the Delta airlines, although Delta has followed through an announcement that it would match Southwest's prices when Southwest's service started on March 9, 2009.[33] Before Southwest's entrance in the market, fares were between $270 and $436.50 one-way[32], and in 1Q09, both airlines charged between $48 and $102 for one-way, coach tickets.[34] (Read more on Delta's Competition and Market Share...)
Competition
While Delta has embarked on a shift towards increased international routings, domestic airliners remain the most significant competition. DAL competes with other legacy airlines, like Delta, as well as with newer discount airliners like Southwest. The company did not file for bankruptcy after the September 11, 2001 terrorist attacks and consequently did not restructure its business model to cut costs as did its legacy airline competitors. DAL's discount airline competitors have been able to keep costs low because of their emergence after airline deregulation.
AirTran Holdings (AAI): AirTran Holdings is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[35]
Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[36]
Continental Airlines (CAL): Continental Airlines is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.[37]
American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. [38]
JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other Airline Travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.[39]
United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[40]
US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[41]
On October 29, 2008, Delta completed its merger with Northwest Airlines to form the world's largest commercial carrier. In February 2009, the airline began consolidating gates and ticket counters at airports where both Delta and Northwest operate. The consolidation was completed February 2010.[10] On December 31, 2009, the Federal Aviation Administration granted Delta's request to allow Delta and Northwest to operate under a single operating certificate
Delta Air Lines (NYSE: DAL) is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. 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. To reduce fleet costs, Delta removed 18 mainline passenger aircraft from the fleet during 2009, retired its entire fleet of B-747-200F freighter aircraft during 2009 and plan to remove over 30 regional jets from its network beginning in mid-2009 and continuing through early 2011. The company has reduced staffing as well - at December 31, 2009, total workforce was 4% lower than that of December 31, 2008.[2]
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]
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.1.6 Revenue Segments
2 Key Trends and Forces
2.1 Airline industries are more sensitive to the economy than other industries
2.2 Recession has resulted in weaker demand for air travel
2.3 Delta is demanding big changes at its home base airport
2.4 Oil prices significantly impact DAL's bottom line
2.5 Increased Competition from Low-Cost Airlines Erodes Average Fare
3 Competition
4 Market Share
5 References
Delta is vulnerable to deterioration in broader U.S. economic conditions. With less discretionary income, consumers and businesses tended to cut back on air travel in 2009. Less leisure travel and business travel were both major factors in Delta's enormous losses - not only are consumers traveling less but business travelers are 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]
Company Overview
With a fleet of 677 owned and 306 leased planes and an average age of 13.6 years.[9], Delta has carrier service to 367 destinations in 66 countries[10] Delta has the 2nd largest and 3rd oldest fleet in the American airline industry.[11][12] The airline operates on a hub-and-spoke system , centered at airports in Atlanta, Cincinnati, New York JFK, and Salt Lake City[2]. Delta is attempting to offset weak U.S. consumer demand by expanding heavily in international flights. The company started to offer non-stop flights from Atlanta to Shanghai in 2009.
Business and Financial Metrics
2010 Fourth Quarter Overview
For the fourth quarter of 2010, DAL recorded total operating revenues of $7.8 billion, an increase of $1.0 billion or 14% compared to fourth quarter 2009.[13] Excluding special items, Delta's net income for the December 2010 quarter was $158 million.[13] This is a $383 million improvement year over year.[13] The special items were attributed to merger and integration costs with respect to Delta's merger with Northwest Airlines. This figure also includes a $38 million profit sharing program in the fourth quarter.[13]
Passenger revenue increased 15%, or $889 million, compared to the prior year period on 7% higher capacity.[13] Passenger unit revenue (PRASM) increased 8%, driven by a 9% improvement in yield.[13] Cargo revenue decreased 7%, or $17 million, due to the elimination of freighter operations, partially offset by higher volume and yield.[13]
Operating expense increased $644 million year over year mostly due to higher fuel prices and the profit sharing program.[13] Consolidated unit cost, excluding fuel and profit sharing, decreased 2% in the December 2010 quarter on a year-over-year basis, on 7% higher capacity.[13] Consolidated CASM including these special items increased 2%.[13]
The fourth quarter of 2010 was one of Delta's best quarters in terms of net income growth. Costs per mile excluding special items also decreased while revenues increased - showing DAL's commitment to reducing costs and improving efficiency. Despite a substantial increase in fuel prices, the industry-wide demand for flight travel improved Delta's bottom line.
2010 Third Quarter Overview
For the three months ended September 30th 2010, DAL recorded total operating revenues of $8.95 billion in comparison to year ago 3rd quarter's $7.57 billion.[14] The largest contributor to this increase in revenue is total passenger revenue - increasing 19% to $7.78 billion, with the largest increase associated with domestic U.S passenger revenues.[14] This is in reflection to the nationwide sentiment that the economy is improving since its 2008 and 2009 lows.
Similarly, net income swung to a profit from a $161 million dollar loss to a $363 million dollar gain.[14] This is recognition of an improvement of net profit margin from -4.8% to 1.80%.[14] Compared to this, expenses have only risen up 2%, showing that DAL has improved its cost efficiency since a year ago.[14] Passenger mile yield - the measure that shows revenue per mile per passenger - jumped 16.3% this quarter.[14] Despite all of these improvements, there is no indication that DAL is seeing an increase in the number of passengers since year ago 3rd quarter. Passenger load factor is 89.9% this quarter, representing only a 10 basis point increase since year ago 3rd quarter's 89.8%.[14] The company has not released any measurable guidance for the upcoming quarter or the year end.
2010 Second Quarter Overview
Delta's net income for the second quarter was $549 million, a $748 million improvement since last year and the largest quarterly profit in 10 years[15]. Of this, $90 million was provided as dividend to Delta employees for their efforts to meet Delta's financial goals.[15] Operating revenue grew by 17% or $1.2 billion. $1.1 billion of this growth came from growth in passenger revenue, and the remaining came from baggage fees and cargo revenues.[15]
This growth in passenger revenues illustrates Delta's success in capturing a significant portion of the post-recession airline demand.[15] Delta has also accurately forecasted price demand. PRASM increased 19.4%, showing that the economy is allowing for increases in airline prices.[15] Costs increased by $317 million due to the fuel expenses and the $90 million profit sharing special expense.[15] Delta had hedged 51% of its fuel consumption for this quarter, offsetting some of the increases in fuel prices.[15] For the remaining quarters of the year, 50% of forecasted fuel expenses are hedged.[15]
2010 First Quarter Overview
Delta's operating revenue grew $164 million or 2% compared to last year's first quarter.[16] Despite a decrease in capacity by 4% to accommodate for recessionary times, passenger revenue increased by 4% or $205 million compared to the prior year. However, severe weather in February, lower cargo revenue, and prolonged lower airline demand with respect to pre-recessionary levels, Delta reported a net loss of $256 million in the first quarter.[16]
This loss is in fact $501 million better than last year's first quarter. Delta has reduced capacity levels, hedged fuels properly, and added baggage handling fees to decrease costs by $387 million on a year-over-year basis.[16] Delta has taken steps to accommodate for the reduced demand and cut costs significantly. Unfortunately, due to the unforeseen volcanic ash activity in Europe, Delta must expect even higher losses than this quarter in the next quarter.
2009 Overview
Revenue for Delta Air Lines in 2009 increased approximately 24% since 2008.[17] This gain is largely attributed to an increase in cargo transportation and baggage handling fees. The total passenger revenue fell 20% since 2008 due to the decreased demand for air travel from the global recession and the effects of the H1N1 virus on passenger travel.[18]
In addition to a global recession and fears of H1N1 influenza, Delta's earnings were negatively impacted by its 2008 merger with Northwest, which resulted in a $58 million loss, albeit it was a one-time charge. [19] Overall, Delta had a $257 million net loss in 2Q09, up from a $1.163 billion loss in 2Q08.[19] Although cost per gallon of fuel fell by 39%, Delta had fuel hedge losses of $390 million in 2Q09.[19] 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.[19]
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.[20] 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.[20] In fact, fuel expense increased slightly, from $1.952 billion in 3Q08 to $1.973 billion in 3Q09.[20] This was in part due to a $226 million loss related to fuel hedges.[20] 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.[20]
These numbers above show that Delta has been effectively lowering costs these past quarters. In the overall, Delta reduced costs by 8.4% between 2008 and 2009.[21] 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.
Revenue Segments
Domestic (68% of Revenue): Delta had an increase of 27% in domestic revenue since 2008.[22] This is due to increased cargo and baggage handling fees due to new policy implementation. [18]
International (32% of Revenue): Delta increased its international revenue by 16.5% since 2008.[22] This is mostly due to an increased focus in the international arena due to the lower demand and higher competition from discount airliners in the U.S.
Key Trends and Forces
Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[23] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.
Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[23] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[23] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.
Recession has resulted in weaker demand for air travel
DAL and other competitiors have experienced significantly weaker demand for air travel. Global demand began to slow during the December 2008 quarter and global economic conditions in 2009 substantially reduced U.S. airline industry revenues in 2009 compared to 2008. As a result, the company reduced our consolidated capacity by 6% in 2009 compared to the combined capacity of Delta and Northwest during 2008.[24] Demand for air travel could remain weak if an economic recovery is slow or even fall further if a recession returns, and overall demand could fall lower than we are able prudently to reduce capacity. The weakness in the United States and international economies is having a significant negative impact on DAL's results of operations and could continue to have a significant negative impact on its future results of operations.
Delta is demanding big changes at its home base airport
DAL is renegotiating its 30-year-old leases with the Hartsfield-Jackson Airport - the company's home base airport.[25] Delta wants to rework the lease deal so that it can operate at more competitive costs;[25] the city-run airport, however, has not budged for DAL even though the airline accounts for more than 70% of the airport's activity.[25] Delta's demands for the airport - the world's busiest,[25] with 90 million passengers handled in 2008[26] - involves changes ranging from lowered gate fees to the construction of the new Maynard Holbrook Jackson Jr. International Terminal.[25] 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.[25] 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.[25] In 4Q 2009, the lease price has been quoted at $1.4 billion. [27]
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.[28] Oil price increases in the first half of 2008 were a downward pressure on Delta’s profitability but decreasing prices later in the year caused the company to lose even more on its oil hedging contracts,[29] which were written so that the company would break even when oil was priced at $130 per barrel.[30] As oil prices slid to below $45 per barrel in January 2009 after peaking at $145 per barrel in July 2008,[3] the company lost $507 million during 2008 Q4 on fuel hedges.[29] Moreover, the increasing focus on low prices in the airline industry prevents Delta from immediately passing on price increases to its customers,[31] so DAL's expenses are heavily impacted by fuel prices and their volatility.
Increased Competition from Low-Cost Airlines Erodes Average Fare
Delta 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.[32] Minneapolis has long been a "fortress hub" or main service airport for Northwest airlines.[33] Southwest's move into Minneapolis is an attempt to use its low fares to take market share away from the Delta airlines, although Delta has followed through an announcement that it would match Southwest's prices when Southwest's service started on March 9, 2009.[33] Before Southwest's entrance in the market, fares were between $270 and $436.50 one-way[32], and in 1Q09, both airlines charged between $48 and $102 for one-way, coach tickets.[34] (Read more on Delta's Competition and Market Share...)
Competition
While Delta has embarked on a shift towards increased international routings, domestic airliners remain the most significant competition. DAL competes with other legacy airlines, like Delta, as well as with newer discount airliners like Southwest. The company did not file for bankruptcy after the September 11, 2001 terrorist attacks and consequently did not restructure its business model to cut costs as did its legacy airline competitors. DAL's discount airline competitors have been able to keep costs low because of their emergence after airline deregulation.
AirTran Holdings (AAI): AirTran Holdings is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[35]
Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[36]
Continental Airlines (CAL): Continental Airlines is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.[37]
American Airlines (AMR): AMR is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles On an average day, American Airlines flies approximately 3,400 flights between 250 countries. The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008. In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. [38]
JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other Airline Travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.[39]
United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[40]
US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[41]
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