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Strategic Business Analysis

Gordon Ellyson Abercrombie II, Coleman Lynwood Bramlett III, Jessica Mary Caro, Kevin Alexander Edelmann, William Timothy Robinson III

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Table of Contents

I. EXECUTIVE SUMMARY……………………………………………………………………..3

II. OVERVIEW OF THE FIRM…………………………………………………………………..4

III. FUNTIONAL COMPETITIVE ANALYSIS…………………………………………………5

a. Financial History and Status………………………………………………………......…5 b. Strategic Marketing Analysis………………………………………………………......13 c. Strategic Assessment of Operations, Supply Chain, Technology, and Infrastructure….31 d. Managerial Accounting Analysis……………………………………………………....47

IV. SWOT ANALYSIS, SUMMARY, & RECOMMENDATION……………..…...………….53

V. REFERENCES……………………………………………………………….…...……….…58

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I. EXECUTIVE SUMMARY

Delta Airlines is a firm that operates over an array of different channels of the airline industry covering anything from passenger and cargo transport to even producing its own jet fuel. Delta demonstrates strengths within this realm as a result of its emphasis on customer satisfaction, diversification, vertical integration, and involvement with the SkyTeam Alliance. However, its overdependence on the domestic market, pension obligations, and lack of liquidity may cause some limitations in the future.

Given the volatile nature of the airline industry, it is difficult to predict how future oil prices or other macro-environmental factors will affect Delta's operations. Due to these risks, Delta has attempted to vertically integrate various aspects of its operations through the purchasing of the Trainer Oil Refinery and through Delta TechOps. However, through the process of vertically integrating over different market segments to give them more control over its business, Delta has found a way to slightly discern themselves from the competition in an industry that lacks differentiation as a whole. Delta's main competitors, United Airlines and American Airlines, both provide similar advantages and target markets, which has caused Delta to place more emphasis on the specific competitive advantages that set them apart from the competition.

Delta's management of customer relationships has proven extremely successful in recent years and continues to be an extremely significant aspect of the underlying core values within the company. The emphasis on customer satisfaction is an ideology that ultimately effects the operations as whole, which is one specific facet that sets them apart from the competition.

In the future, it would be beneficial for Delta to improve upon its utilization of vertical integration through incorporating even more communication and involvement within the supply chain as well as expanding its promotional offerings, such as the SkyMiles program. Both of these improvements would be feasible and valuable for the company given its historical emphasis on customer satisfaction. From a financial standpoint, the current pension obligations are a growing concern as these requirements create liabilities, which ultimately decrease Delta’s profitability.

Provided that Delta has maintained a relatively stable position in the market relative to the competition. Given the dramatic turn around that the company has made since filing for bankruptcy in 2005 and its merger with Northwest Airlines in 2009, Delta has seen its stock price triple from the years 2012 to 2015. Although profits in the airline industry are at an all-time high, we believe that certain macro-environmental forces such as unpredictability of oil prices and the threats of terrorism as well as internal issues such as its overwhelming pension obligations and its overdependence on the domestic market will hinder the firm’s growth, thus its stock price should be considered a hold at this time.

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II. OVERVIEW OF THE FIRM

Delta Air Lines Inc. is a U.S. based airline headquartered in Atlanta, Georgia that operates both domestically and internationally. It began as the first commercial agricultural flying company and have expanded rapidly over the 92 years since then. Deltas passenger operations began in 1930 in Atlanta where the company was renamed from The Huff Daland Dusters Crop-Dusting Corporation to Delta Air Corporation. During the 1940’s, stewardesses were added, the headquarters was moved from Monroe to Atlanta, and the official corporate name becomes Delta Air Lines, Inc. Since then, Delta has expanded and become innovative in the way in which it operates. While its main operating segment is passenger transportation, the firm also runs Delta TechOps, a maintenance and repair arm owned by Delta Air Lines and located at the Hartsfield-Jackson Atlanta International Airport. Delta TechOps is the largest engine shop in North America. Furthermore, Delta recently purchased the Trainer Oil Refinery though one of its wholly owned subsidiary Monroe Energy LLC to help produce fuel products support 80% fuel needs in the domestic market.

With close to 80,000 employees and a fleet size of over 800 aircrafts, the airline schedules above 15,000 flights per day. Its global route network serves 328 destinations in 57 countries. To provide international service in such a large scale Delta has joined ventures with multiple foreign airlines some of which are Air France-KLM, Virgin Atlantic, Virgin Australia, and Alitalia. Additionally, Delta is a founding member of the SkyTeam Alliance, which includes various airlines from different countries, giving not only Delta but also its partners access to more passengers as well as more destination options as well.

Especially in domestic air travel, Delta competes with companies such as United Airlines, American Airlines, Southwest Airlines, Jet Blue Airways, and Virgin America. These are certainly not the only competing airlines in the industry, but the most comparable competitors to Delta. Similar to Delta, American, and United Airlines reached its current size over the years through series of mergers and acquisitions.

Delta’s offering ranges across four different classes. In addition to the common economy, business, and first class, Delta introduced the Delta Comfort+. Among other small extras, this class offers larger seats with more legroom. Furthermore, Delta offers other amenities such as the Delta SkyClub and the SkyMiles rewards program in order to accommodate the more frequent passengers and its target market, the corporate business traveler.

In 2015, Delta's revenues totaled at $40.7 billion, which is the highest for US Carriers. 87.5% of Delta’s revenue is coming from passenger traffic. The remainder is comprised of revenue from Delta TechOps, the Trainer Refinery, and Delta Cargo service.

Delta explains its business philosophy in the code of conduct called “Rules of the Road”. In this document, Delta presents the key to its values of honesty, integrity, and respect. Every employee is held to these standards which Delta hopes will ensure top notch service and sustainability for the corporation.

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III. FUNCTIONAL COMPETITIVE ANALYSIS

a. Financial History and Status

Introduction

This financial analysis will examine Delta Airline’s financial status during the time period from the start of the fiscal year 2012 to the end of 2014. For the purpose of comparison to an industry average, five of Delta’s competitors were identified and analyzed as well in order to set benchmarks for acceptable ratio values in this particular industry. Furthermore, macro environmental factors, more often than not, affect the airline industry as a whole rather than only one firm, this allows us to differentiate between behavior of financial ratios, which may be caused by Delta’s decision making as well as variation in the ratios that is endured by most competitors.

The five competitor firms that were selected are American Airlines, United Airlines, Southwest Airlines, Jet Blue, and Virgin America. United and American Airlines are the most similar competitors to Delta in terms of sales volume and general size of the firm. When looking at the other competitors who are all known as low cost carriers, it can be seen that Southwest is the largest of the remaining three as its size and income are substantially higher than the other market competitors JetBlue and Virgin America. This lead the exclusion of some competitors in particular industry averages in order to allow for an effective analysis. The difference in size of the airlines has to be carefully considered when comparing the ratios.

First and foremost, through utilizing the ratios created for Delta and its competitors, we can determine Delta’s financial health and performance in the analyzed time period which will be discussed in the past performance section. However, we are also able to make predictions for the firm’s future which is the essence of the future performance section and is the centerpiece of the stock recommendation.

The analyzed ratios can be broken into four categories: liquidity, asset management, debt management, and profitability ratios. These financial indicators were calculated by collecting the appropriate data from Bloomberg using financial statements submitted in accordance with GAAP. For analysis purposes, the company’s 10-K filings were then reviewed for information including MD&A that would explain the anomalies that were observed in the comparison of the ratios. The data therefore stems from Delta's financial statements and 10-K unless otherwise stated.

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Ratio Analysis

When examining Delta, the liquidity ratios do not show extreme variation over the analyzed period. Generally, a current ratio lower than 1 is considered to be an alarm signal as the ratio compares how short term liabilities are offset by current assets. A ratio lower than 1 indicates that the firm could struggle to pay off its current liabilities, as liquid assets do not properly cover them. However, the industry averages for current ratio illustrates that low current ratios appear to be the norm in the airline industry. Yet, the comparison of the industry and Delta poses the question of why Delta’s current ratio is constantly more than 18% lower and at a point drops to 33% below the Industry’s current

ratio. The drop in 2014 correlates to an unfavorable adjustment on fuel hedging of $2.3 billion, which Delta financed through short-term debt and marks the lowest amount of cash and cash equivalents reported. The fact that Delta’s quick ratio differs more from the industry average than the already substantially low current ratio, emphasizes once again that Delta has an issue with liquidity, as the firm’s lesser current assets include more inventory than the industry average. The impact of

the increase in current liability will be discussed later on. The impact of the high inventory levels is significant as well, since inventory is a relatively illiquid asset due to the fact that it can have a long time period before it can be turned into cash. In addition to this, the sale of inventory is

often only possible when sold under a significant loss of value.

Understandably, for a service provider and specifically an airline, the absolute number of inventories is relatively low which causes the inventory turnover rate (ITR) to be relatively high. This being said, it should be expected that Delta’s ITR is very similar to the industry. However, this value is 1000% higher than its competitors. This is because 3 of Delta’s competitors do not hold any inventory and are therefore excluded

Year

Total Current Assets

Total Current

Liabilities 2012 8,272 13,270 2013 9,651 14,152 2014 9,158 16,879

0

0.5

1

2012 2013 2014

0.623 0.6820.544

0.808 0.841 0.812

Delta Current vs. Industry Current

Delta Current Ratio Industry Current Ratio

01020304050

2012 2013 2014Delta ITR 35.8455523 35.53433678 47.37323944Industry ITR 3.246169104 3.267392274 3.015380119

Delta ITR vs. Industry ITR

Figure 1-2: Delta VS Industry Current Ratio Comparisons

Figure 1-3: Delta VS Industry Inventory Turnover Rates

Figure 1-1: Delta’s Current Assets & Liabilities

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from the industry average for mathematical reasons. Among these are also the competitors most similar to Delta in size, American and United Airlines. Included in the industry average are now only competitors such as Jet Blue, with much lower sales numbers, which makes for a much lower ITR. These different businesses are hard to compare as a big global player in the market can cause a firm to have a much different asset structure as a result. Thus, the comparison to the industry average is not extremely insightful. However, this leaves the question of why Delta holds inventory in the first place if this is uncommon in the industry. Some of this inventory is due to Delta’s efforts in autonomous supply of airplane fuel, which does not apply to any of the competitors. In 2012, Delta purchased the Trainer Oil Refinery to attempt to vertically integrate its supply chain. Furthermore, Delta’s subdivision, called Delta TechOps, focuses on the maintenance and repair operations of the Delta fleet but also provides its services to outside customers. Delta TechOps is the largest maintenance and repair shop in North America. With all of this in mind, Delta’s inventories can be broken into two large groups, one being the inventory parts that the MRO department uses to maintain its aircraft. The latter is almost entirely finished goods and includes refined product, feedstock, and blend stock. The TechOps department has to hold spare parts and repair materials in stock for everyday operations. The 33% increase in ITR that can be observed in Figure 1-3 is partially due to an increase in sales but is mainly caused by an about 18% decrease in inventories. This decrease is intentional as Delta decreased fuel inventories to limit the amount of risk that the company is exposed to in case fuel prices fluctuate, which is a reasonable concern for fuel products.

When observing the Fixed Asset Turnover (FAT) and Total Asset Turnover (TAT) ratio in relative terms to the industry average, it is apparent that Delta’s ratios are substantially lower. More precisely, the FAT ratio hovers at about 46% under the industry average and TAT approximately 33% in 2012 and 2013. However, this is related to the discussion above, as Delta’s large asset base is owed to its various efforts to vertically integrate different

areas of its supply chain, which do not necessarily generate sales or do so only to a limited extend. This is not a negative sign, as it in many ways increases independence and makes Delta less susceptible to risks associated with dependence on outside business partners. A worrisome observation, however, is the decline of the TAT ratio in relative terms to the change of the FAT ratio in 2013. As seen in Figure 1-4, both the FAT and TAT ratios drop. However, the TAT ratio declines 12% while the FAT ratio only decreases by about 2.4%. Similarly, FAT increases more rapidly than TAT in 2014. The variance in these two ratios is alarming because there are only two line items on the balance sheet, which can be responsible for this: an increase in long-term assets other than PPE or the decrease in current assets. It can be seen that Delta’s ratios show

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-10

-5

0

5

10

2012/13 2013/14Change in TAT -12.17556614 3.385622532Change in FAT -2.370147062 6.488647366

Delta Change in FAT vs TAT

Figure 1-4: Delta’s Change in Fixed & Total Asset Turnover

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both of these changes. The current assets decreased while deferred tax assets were added. This decrease in current assets is critical, as this means the firm has less liquid assets on hand to pay for liabilities. Along with this issue goes the 33% increase in DSO in 2014. The days it takes Delta on average to collect accounts receivable increased from 15 to 20 days. This could magnify already existing liquidity issues and further inhibit Delta’s ability to pay its accounts payable. Delta’s general sales paid for with credit cards and agreements with American express on rewards programs such as SkyMiles are the reason for the increase that can be seen in 2014.

The equity multiplier (EM) indicator of the level of debt a company is undertaking in order to funding its assets. The higher the EM the less assets of the firm are funded by equity but rather high amounts of debt. With a higher equity multiplier, it can be seen that the firm is financing its operations more through equity rather than debt. Delta’s average in 2013 falls 30% below the industry in 2014 even though Delta increased the EM by 36%. This is partially the case due to an overall increase of the competitors’ equity multipliers. However, the striking increase in American Airlines’ EM has the most prevalent effect on the increasing industry average. As a whole, the industry, including Delta, have increased its funding through debt, which exposes them to higher risk levels, but is an indication for its expectation of profits in the near future. Delta specifically increases its EM by decreasing equity at the same as it increases total debt. This means that Delta should want to take advantage of low interest rates while increasing EM. However, the liabilities driving this must be short-term debt as the long-term debt ratio continuously decreases, by 24% in 2013 and by 16% in 2014.

The changes in the times interest earned (TIE) ratio support this claim as it is rising by about 59% in both 2013 and 2014. Figure 1-6 illustrates this increase. As can be seen in Figure 1-5 this is due to both an increase in EBIT and a continued decline in interest expense. If the firm were taking on long term rather than short-term debt, interest expense would be considerably higher. The TIE ratio measures the ability of a firm to decrease its interest expense. Thus, the rise observed in Delta’s TIE is a testimonial for positive debt management as it decreases default risk and is an indicator for positive financial health.

Reduced levels of debt, lower interest rates and financing through short-term rather than long-term debt are the important drivers for the decreasing interest expense. The debt ratio tells a similar story. As seen in Figure 1-7 (next page), the debt ratio of both Delta and the industry strongly decreases in 2013. In 2014 the industry’s ratio continues to decrease while Delta’s ratio increases. Even though Delta increases the asset base, this is offset by an 11% rise in Delta’s total debt. This can be partially

Year EBIT Interest Expense

2012 2600 812 2013 3548 698 2014 5268 650

02468

10

2012 2013 2014

Delta TIE vs Industry TIE

Delta TIE Ratio Industry TIE Ratio

Figure 1-6: Delta VS Industry Times Interest Earned

Figure 1-5: TIE Inputs

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tied back to the losses through hedging activity. As for Delta’s current preference for short-term debt, it has to be noted that this is an easy way to quickly decrease interest expense. However, Delta gives up the opportunity to lock in the currently low interest rates for years to come, leaving them to deal with the higher interest rates in the future.

Furthermore, Delta decreased its accumulated other comprehensive loss

by about $3 billion. This line item is largely influenced by Delta’s overwhelming pension obligations. In 2012, Delta’s pension obligations were about $16 billion. When compared to the closest competitor, American Airlines with $6.78 billion in pension obligations, the magnitude of Delta’s obligation becomes obvious. Pension obligations were decreased to about $12.4 billion in 2013. While, Delta’s pension fund is underfunded with $8.9 billion in assets, Delta also assumes the return on the fund to be around 8.94%, which is about 1% higher than its closest competitor’s estimate. In reality, the plan gained only 6.2%, thus underperforming expected return by about 2.5%. (Is Delta Air Lines, Inc. Fudging, 2016) This has caused liabilities, which have continuously cut profits by millions.

The profitability ratios also all show the same pattern of a rapid increases in 2013 and a significant, yet smaller, decline in 2014. As all these ratios have net income as a common variable, it is fair to assume that the explanation for the fluctuation will be found here. The spike in the profitability ratios is owed to $10.5 billion in net income in 2013 as compared to about $1 billion in 2012. However, this includes $8 billion of income tax benefit. The pre-tax net operating loss carryforwards of $15.3 billion qualified Delta to receive this lucrative tax benefit.

Figure 1-8 illustrates the breakdown of net income in 2013. It is easy to see that actual growth in income only accounts for 14% of net income. Thus, 76% of total net income is actually attributable to the tax benefit. While this is a legitimate practice, one cannot expect this to be the case for years to come, thus making the analysis of any ratio regarding profitability in 2013 suspect. To more accurately reflect Delta’s business, we exclude the tax benefit, which is the grey portion of the pie chart, from the analysis, and only use income before income tax, which is the grey and the yellow portion of the pie chart. In doing so it becomes clear that actual growth

76%

10%14%

Net Income 2013

Income Tax Benefits

Income Before Income Taxes In 2012

Income Before Income Taxes Growth In 2013

0

0.5

1

1.5

2012 2013 2014

Delta Debt vs. Industry Debt

Delta Debt Industry Debt

Figure 1-7: Debt Comparisons

Figure 1-8: Breakdown of Delta’s Net Income 2013

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in net income for 2013 is still more than 100%. All profitability ratios reflect this, as the values more than double in the first year even though Income tax benefits are excluded. The decrease in 2014 is explained through the decrease in pre-tax income of $1.5 billion as a result of $3.5 billion in special items. These special items include about 2.3 billion in unfavorable adjustments to fuel hedges and costs associated with the restructuring of the fleet. Additionally, a relatively large sales increase does its part to decrease PM and with it ROA, ROE, and EPS. These three measures show the same behavior as PM, which again underlines the significance in the Net income change. Without inclusion of special items, the firm achieved a $1.9 billion increase.

Delta’s Price to Earnings (P/E) ratio is also largely affected by the $8 billion net income boost through tax benefits. As it can be seen in Figure 1-7, the increase in stock price in combination with the more than 1000% increase in net income causes Delta’s P/E ratio to decrease by 80% to 2.3 in 2013. Through a rapid decrease in net income and another stock price increase to about $48 at the end of 2014, the P/E ratio rises to 60.8. It can also be seen that this P/E ratio behavior is inconsistent with the industry average. More interesting than the

unusual fluctuations that Delta’s P/E ratio shows, is the fact that after starting 32% below and falling to under 89% below the industry average in 2013, Delta’s P/E ratio increases to 87% above the industry. Mathematically, Delta’s fluctuation is caused by three variables, with the main cause being undoubtedly the 93% decrease in net profits caused by the tax benefit in 2013, which is illustrated in Figure 1-8. However, Delta's stock price increases by almost 70%, which Delta reinforced by repurchasing shares in 2014.

Past Performance

The analysis of the financial ratios illustrates a clear picture of Delta Airlines. The initial increase in net profits, apart from the generous income tax benefit, is owed to many factors already mentioned above. The reduction in interest expense primarily realized through the closing of debt accounts and increased revenue through growth in passenger air travel. More importantly, the positive market response to upper-class air travel has had substantial effects on

2012 2013 2014Price of

Common Stock 12.64 28.62398 48.55456

Delta NetIncome inBillions

1.009 10.54 0.659

P/E Ratio 10.67 2.312 60.804

010203040506070

Delta P/E Analysis

0

20

40

60

80

2012 2013 2014

10.672.312

60.8

15.738 21.3132.51

Delta P/E vs. Industry P/E

Delta P/E Industry P/E

Figure 1-9: P/E Comparisons

Figure 1-10: Delta’s P/E Analysis

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net profits. However, interest expense is still an issue as Delta faces $650 Million in 2014. The variation and fluctuation illustrated by all ratios, exemplifies the volatility of the airline industry and the risk profile airlines are exposed to. Thus, Delta has made individual efforts to diminish dependence and increase diversification through vertical integration with Monroe Energy and Delta TechOps. This is illustrated in the asset management ratios.

Nevertheless, Delta is still exposed to interest rate risks, which applies first and foremost to its pension funds. Delta estimates its underfunded pension program to earn an 8% return, which is ambitious to say the least. The overestimation of performance has repeatedly caused pension obligations, which diminish profits. Furthermore, foreign currency exchange risks are intrinsic to the airline industry as much as is the risk of fluctuation in fuel cost, which Delta partially mitigated through the purchase of Monroe Energy. Though Delta does not achieve invulnerability to rising oil prices, the partial control over its fuel supply chain gives them a competitive advantage over the competitors. Fuel hedging will be significantly diminished due to the fact that Delta will receive the majority of its fuel needs through Monroe Energy, which decreases the risks of fuel hedging exemplified by the loss of $2.3 billion cause by fuel hedging in 2014.

Delta now faces inventory risk as the stored inventory consists partially of fuel reserves, which are subject to fluctuating prices. This risk is much easier to manage than the risks associated with hedging and should give Delta more stability when competitors struggle with fluctuating fuel costs. The relative decrease in current assets, which both current ratio and the comparison of Delta’s FAT and TAT ratios show, is a concern, as the lack of liquidity beyond a certain level is highly unfavorable. The increase in DSO is also problematic because it takes longer to collect liquid assets. Delta, as well as the majority of the airline industry, made a decision to fund themselves through liabilities rather than equity. Both the economy and industry appear to be on an upswing, but this decision bears risk as Delta exposes itself more to market shocks. Additionally, Delta’s move away from long-term to current debt is driven by efforts to reduce interest expense, even though it would be more sustainable and recommendable to lock in current interest rates with long-term debt.

The introduction of dividends in 2013, combined with frequent and large increases, makes Delta an attractive investment because expected return for investors will be much higher. Dividends per-share are steadily increasing since Delta initiated the issuance of dividends in the September quarter of 2013. In addition to this, Delta repurchased stock in 2014. Both of these measures are aiming to increase stock price, which goes hand in hand with what we observe in the P/E ratio. Stock prices increased rapidly but net income decreased significantly, causing P/E to be almost twice as great as the industry.

Future Performance

Judging by the past performance of both Delta and the airline industry, it is safe to say that the airline industry is among the most volatile markets to potentially invest in. From 2012 to 2014, we observe various favorable as well as unfavorable changes in financials. First, an increase in

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sales is due to especially higher demand in higher-class seating and the fact that Delta has achieved a diversification through vertical integration of its supply chain. The Trainer Oil Refinery as well as the TechOps division have reduced Delta’s risk exposure to single events affecting only airfare businesses. While this is far from perfect diversification in the sense of creating a perfectly negative relationship, it is better than the non-existent diversification of single industry competitors. Furthermore, this idea makes the company more independent in its operations giving a competitive advantage to Delta. Looking into the future, the termination of high interest rate debt and therefore decreasing interest cost is a crucial step. Delta does in fact do this in all three analyzed periods, which in combination with the increase in revenue makes for a financially sound situation. Including the growth in dividend per share, these are the financial bright spots looking into Delta’s future. Likewise, Delta will most likely remain with its current dividend payment, in order to not cause a drop in stock price, which is attractive for investors. However, it is doubtful that the DPS can maintain its current growth rate.

In examining from the polar perspective, one must also take in to account the issues that the firm will still be facing in the future. Delta urgently needs to resolve its pension obligation issue through better funding and a more realistic projection for returns. Decreasing the level of pension obligations in the short term is not possible, which means that Delta should at least plan to decrease the level of underfunding in the pension plan over the long term in order to prevent the negative financial impact that could be observed in the future. If crude oil and therefore fuel cost, increase, Delta’s profits will suffer despite the company’s engagement in the refinery business. Rarely have oil prices ever been as low as they are currently, and the next price spike is bound to come in the future. Connected to this is the increased risk Delta and its competitors are exposed to because of increased equity multipliers. Furthermore, Delta needs to resolve it’s issue with generating liquid assets. In the case that the economy begins to struggle and cash flows slow, Delta will not have enough current assets to cover the liabilities. With more and more political conflicts that arise in the world and a weakened global economy, the affect that foreign currency exchange risk will have on Delta is also not to be underestimated. Lastly, while Delta’s increase in stock price has been remarkable in the past 3 years, however, it has to be questioned for how long this growth can be sustained as the stock prices in 2014 mark an all-time high.

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b. Strategic Marketing Analysis

Delta's Business Model

The airline industry is one that is unique and cannot be compared to others, being that it is an industry that does not have dozens of product segments and categories due to the fact that the only products are flights. With a limited service mix, this creates little variance within the market between competitors. However, there are differing market segments in which Delta competes, passenger flights, cargo flights and the newly created refinery segment. The refinery segment has already been claimed by Delta—at least for the time being—because it is the only company that produces its own fuel for its services. Delta has seen huge revenue and profit increases in the passenger airline segment over the past few years but the cargo segment is one that has gone in the complete opposite direction in recent years. Delta reported a 19.7% drop in cargo related revenue from 2014 to 2015. This is a huge percentage drop in a year, but Delta is not particularly worried seeing as the cargo segment makes up only 2% of the annual revenue (Ball, 2015). Delta airlines operates in all these segments, but by far its largest revenue stream is the passenger airline side of the industry.

As mentioned Delta's largest revenue stream comes solely from passenger segment of the market, which is the reason why Delta model's its business model accordingly. Focuses on attracting corporate travelers, Delta’s strategy is concentrated on a segment that is characterized by high margins and low price sensitivity (C, 2015). Delta’s attempts to target this particular type of consumer have proven to be successful as corporate business travelers have rated Delta as the leading U.S. airline for the third consecutive year in the BTN Annual Airline survey. Delta has the highest overall score, 3.93 out of 5, leading in all categories except overall price value, in which as expected Southwest Airlines had surpassed Delta (Cederholm, 2014). This appeal of business travelers coupled with the sheer size of the company is why Delta is positioned at the top for business travelers overall. Delta is also on top in comparison with the other large airlines across the full spectrum of analysis. According to Forbes, Delta has consistently been atop of the

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airline industry. Delta is not a market leader in price nor customer satisfaction; however, the airline has stayed true to its model and target market, reaping the benefits of doing so.

Delta airlines is currently operating joint ventures with foreign carriers, Airfrance-KLM, Alitalia, Virgin Australia and Virgin Atlantic. These arrangements provide for joint commercial cooperation with its partners, including sharing revenues, profits and losses generated by the parties along the joint venture routes. These joint ventures allow Delta to extend its reach to 612 destinations in 119 countries (Delta Airlines Inc., 2015). The largest and arguably the most important of Delta's ventures to expand Delta's reach as far globally as possible is the creation and membership in the SkyTeam alliance. The 20-member alliance allows for furthering the interconnection in the airline industry. Delta has done well in understanding

that expanding internationally is more about how many connections and agreements one can make with foreign carriers. Delta does not solely have the capacity to reach the number of destinations it has access to alone, but through the numerous agreements, Delta's hand reaches immensely far, giving them a hand in the international market. Along with joint ventures and membership in the SkyTeam alliance, Delta has several code sharing agreements with domestic regional carriers that feed air traffic to the airlines route system by serving primarily the smaller

Figure 2-1: Corporate Reputation

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and medium-sized cities. Regional air carriers such as SkyWest, ExpressJet, Compass Airlines and GoJet are a few of the regional low cost carriers that Delta has charge of pricing, scheduling and flight connectivity for. These regional carriers accounted for approximately 17% of its passenger revenue in 2015 (Delta Airlines Inc., 2015). Through the regional carrier programs, Delta has solidified themselves in the low-cost carrier market, a segment it does not directly target due to the pricing. Also as noted earlier, the numerous partnerships with air carriers across the globe have allowed Delta to provide its customers with access to a large variety of destinations worldwide.

Airline Market

Delta's reach has expanded globally, however, the rest of the industry is attempting to follow suit as well. The airline industry has increased its global outreach and will continue to do so through both foreign and domestic expansions. It will also continue to grow through the joint ventures, codeshare agreements, and alliances between airlines. This overall growth of the airline industry will affect growth of both segments within the larger market. The markets within the industry are defined two ways, domestically and internationally. Whichever way one examines the airline industry it is clear that the markets are continually growing. The domestic market in the United States has had steady growth upwards as can be seen by the below Figure 2.2. The increasing profitability and operational advancements by airlines does not seem to have foreseen braking to this market. If the airline industry is viewed from the international perspective, it will also see continuous growth. According to Lucintel, the international airline industry is expected to reach an estimated $832.8 billion in 2020 ("Global Airline Industry," 2013). The increasing integration of countries domestic markets into the international framework as a whole is providing potential for an already large market to continue to increase. This idea is supported by the fact that the international airline industry experienced revenues of $733 billion in 2014.

Figure 2-2: Airline Share Performance

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With the continuing increase of the international airline market, Delta has an opportunity to expand into foreign markets. "As Delta turns the page to 2016, the airline’s goals for next year include building on its growing momentum in Latin America and the Caribbean, a key market for leisure and business travelers." Delta has primed for this expansion through increasing code-sharing agreements with Latin American airlines such as Aerolíneas Argentinas. The Latin American market has had success stories such as the integration of Delta into the Brazilian market (Delta Airlines Inc., 2016). The integration into this market provides the combination of Delta and the Brazilian carrier GOL with access to 405 new destinations through the agreement. There is potential in this market, but the market pales in comparison to the growth opportunity in the Asian-pacific market. According to the International Air Transport Association, global air

transport is expected to more than double, and half of the growth will come directly from China and India. Figure 2-3 below presented by market realist displays the large discrepancy between the combined growth of China and India relative to the rest of the world.

This region is also expected to overtake the United States as the largest airline market by 2030. The market itself has grown much more significantly than any other market in recent years and will serve as a battleground for the airline industry in years to come. There is potential for immense growth and whoever takes advantage of this area will reap a massive benefit (Cederholm, 2014).

Figure 2-3: Growth of the International Markets

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There are several potential markets and huge growth has been made in the airline industry, but with this potential for growth comes increased competition. Though the emerging markets in the airline industry have facilitated the industry’s growth, however, with the increase in industry growth comes the increase in competition as well. The airline industry is highly competitive with respect to routes, fares, scheduling, services, products, customer service and frequent flyer programs. This competitiveness has caused the industry to transform through consolidation, both domestically and internationally, and changes in international alliances. Consolidation in the airline industry, the emergence of well-funded government sponsored international carriers, the aforementioned shifts in international alliances, and the increasing creation of joint ventures have altered the competitive landscape in the industry and will continue to reshape it. The results of this shift in the competitive landscape will be the formation of airlines and alliances with increased financial resources, more extensive global networks and competitive cost structures (Delta Airlines Inc., 2015). This competition has several competitors that Delta will have to face off with in hopes of obtaining the customers’ business. American Airlines & United Airways are the largest of the competitors that Delta will come up against and have consistently been direct competitors to Delta seeing as all three are legacy or traditional carriers. Legacy airlines are carriers that had established interstate routes prior to the time of the route liberalization, which was permitted by the Airline Deregulation Act of 1978. Another major competitor is the point-to-point carrier, Southwest. The point-to-point system simply allows the airline not to operate a central hub, having separate flights from one destination to another, no connecting. The last competitor is JetBlue Airways, another low cost carrier, operates in hopes of winning the business of the high price sensitivity oriented customer.

Competitor Overview

The airline industry can be categorized in several different ways, relative to market share, profitability or based on the actual number of flights. With respects to the number of flights, the three largest carriers are the legacy carriers Delta, American and United. The size of the three companies relative to size and market share are all in the same area. JetBlue is the sole competitor in question that fits in the low cost carrier category and is by far the smallest airline in all measures. The airline that has begun to bridge the historical gap between the low cost and legacy carriers is Southwest. Southwest is notably smaller than the legacy carriers in terms of fleet size, destinations and revenues. However, Southwest has grabbed the largest percentage of market share of any of the airlines. Southwest has captured the lead in market share, but Delta edges out the competition overall as being the largest airline, if all the measures mentioned before are combined. Yes, Delta is positioned at the top of the airline market, but as mentioned, this market have a minuscule amount of variance making its lead a small one.

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Airlines Market Share # of Flights Size of Fleet # of Destinations Southwest 18.2% 3800 683 97 JetBlue 5.3% 825 217 84 United 14.7% 5100 1,264 342 American 16.6% 6700 1,494 330 Delta 17% 5400 1,280 325

As mentioned before, United, Delta and American are all legacy carriers, these carriers are also similar relative to the size of fleet, number of destinations and even market share to a degree. These airlines are also similar because each one is vying for the business of the same customer, the corporate business traveler. This reasoning is why United and American are considered the two major competitors for Delta. United Airlines Inc. is an American carrier headquartered in Chicago, Illinois. United as well as fellow competitor American Airlines Inc. headquartered in Fort Worth, Texas are ranked second and third in terms of the large traditional air carriers. This order could be flipped depending on if the analyst looks at each in terms of revenues and profits where United generated $38 billion in revenue and profits of nearly $4.7 billion compared to American's $30 billion revenue and profits of S4.3 billion. However, American has a clear lead as far as market share on United ("RITA | BTS | Transtats," n.d.). While neither are on level of Delta at $41 billion in revenue and $5.4 in profits, each competitor still holds advantages over Delta Airlines in certain regards. For instance, United Airlines is the leading airline in China and that partnership was only strengthened by expanding on the firm’s long standing agreement with Air China to increase flight opportunities. United also has a very strong presence in JFK and LaGuardia airports because of the company’s New York basis making international flights out of these hubs very important ("United Airlines and Air China Strengthen and Extend Strategic Partnership - Mar 23, 2016," 2016). As far as American is concerned, "American Airlines has nine hubs in the continental U.S. and its capacity to scale upward is unmatched by the other airlines," Marketocracy analyst Jeff McDowell claimed. He also made mention to American’s lack of institutional investors. This lack of institutional ownership is keeping the price low compared to the industry (Kam, 2014).

The next competitor being mentioned is the low cost or discount carrier JetBlue. JetBlue Airways Corporation is headquartered in Long Island City, New York. JetBlue is the smallest by far of all the major competitors to Delta in every category covered, market share, profitability and revenue and fleet size or number of destinations. In 2015, JetBlue had a revenue stream of $6.3 billion dollars and profits of $1 billion. Yes, JetBlue is the smallest competitor, but that is the business model of the low-cost competitors. Delta is not attempting to beat the large legacy carriers at its own game, the low-cost carriers are targeting the price sensitive customer. This is JetBlue's advantage, as the firm enters the territory of the larger carriers and should come away with industry leading margins. The airline managed to expand its margins by approximately 14% in the first quarter of 2015 as opposed to the 7% margin expansion experienced by the industry

Figure 2-4: Competitor Overview of Key Statistics

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(Team, 2015). JetBlue has the cost advantage over its peers because of it being a domestically based carrier.

Delta's last competitor is Southwest Airlines Co. headquartered in Dallas, Texas. Southwest began as a low cost carrier, but as of recent times has begun to take on characteristics of a traditional airline. In a Bloomberg article, Southwest's description was this, "Southwest hangs up its low-cost jersey." Through Southwest’s acquisition of AirTran and the fact that they are no longer the lowest price option in many cities, Southwest has essentially become the bridge between the low-cost carriers and the traditional powerhouses. It can be seen here that Southwest has an advantage as it is entering the realm of the large airlines, but consistently beat the traditional carriers on price while attempting to offer the same number of options. Southwest is also nationally known for its customer service, it has a "dedication to the highest quality customer service ("About Southwest - Southwest Airlines," 2015)." Southwest has consistently ranked tops in the industry in numerous customer service ratings through the years. Every firm in the airlines industry has some sort of competitive advantage The question is whose competitive advantages have been executed the best to take advantage of the current market.

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Perceptual Maps

Figure 2-5: Comparison of Fleet Size to Number of Destinations

This perceptual map in Figure 2-5 compares Delta's fleet size to number of destinations relative to its competition. When examining this map, it can be seen that Delta is at the forefront of its market, along with its two other major competitors; United Airlines and American Airlines. This diagram illustrates the amount of control that these three firms have over the market through being each firm’s ability to maintain high flight numbers as well as being able to reach the largest number of target destinations.

In contrast to these high-achieving airlines, JetBlue and Virgin Airlines struggle to match the capacity of these three firms, which can be attributable to the low-cost pricing model each implements. These low-cost providers struggle to expand at the rates that Delta, United, and

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American have due to its choice to appeal to a different target market group. Southwest is unique from the other airlines because it is in the process of moving away from its current position as a low-cost airline, and trying to expand its number of destinations that it offers.

Given Delta’s position in the market, it has an opportunity with regard to international markets as well as strategic alliances and joint ventures. However, these international markets do come with the threat of competition with other airlines that are controlled by state subsidiaries, such as Qatar Airways and Etihad Airways. Another possible threat for Delta is Southwest's transition from a low-cost airline and the fact that Southwest has claimed the market share lead in the industry.

Figure 2-6: Comparison of Customer Satisfaction to # of Destinations

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The perceptual map shown in Figure 2-6 depicts and compares firms in the airline industry and differentiates them by the number of destinations and a general customer satisfaction rating. The number of destinations is used as an indicator for the respective firm’s market share. Customer satisfaction indicates the level of gratification an airline's customers feel regarding the service that the passengers have enjoyed on and around the company’s flights.

In differentiating airlines this way, we can infer what the positioning in the market is and how the offered products and services differ from one another. In this specific matrix, it is quite obvious that there is a correlation between size of the airline and the customer satisfaction of the airline. However, the correlation might at first seem counterintuitive as the smaller, traditionally low cost airlines have higher customer satisfaction than the larger, more established, and traditionally more service oriented carriers such as Delta. Nevertheless, using this data to come to the conclusion that Southwest and Jet Blue offer higher quality service would be false. When comparing customer satisfaction, especially in the airline industry it is important to know that the customer base of each airline is not necessarily similar. The customers of a low cost airline highly value the price factor of the flight and while other services may not be abysmal, the cheap packaging of the inflight snack does not bother the usual low cost flight customer. Airlines such as Delta, who are committed to high quality service have a customer base which values the experience of flying more. This allows Delta to charge higher prices than Southwest for example but it also means that the usual customer base is more pedantic. Thus, the comparison of low cost and high cost airlines in regards to the variables used in this conceptual map is not significant.

The difference in customer satisfaction between large carriers is minimal which shows the competitiveness inherent to the airline industry today. In our sample, Delta, American and United do not stray too much in the collective customer satisfaction ratings, but it is notable that the airline with the lowest number of destination, being Delta, has the highest customer satisfaction rating. American and United indicate the same negative correlation between number of destinations and customer satisfaction. This could be due to an intentional slowdown in expansion in order to focus on service. Furthermore, the argument that operations management becomes more difficult the more destinations are served could be made and implies that customer satisfaction drops due to difficulties in flight operations such as delays for example.

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BCG Matrix

Figure 2-7: Breakdown of BCG Matrix

The BCG Matrix pictured above is highlighting the various business sectors that generate a bulk of Delta's revenue. The airline industry is an interesting industry to have a BCG matrix on because there are several ways that it can be attacked. One could analyze the industry as a whole or in our case analyze Delta's specific business sectors.

The aspects of the BCG matrix that are illustrated are both the Cash Cow and the Question Mark. The Cash Cow for Delta is the domestic business as a whole, that Delta has a firm position in, holding around 16% of the airline market. This has a lot to do with the sheer size of Delta that is displayed by the first perceptual map, Delta along with American and United are the top three airlines in the industry. This is a very advantageous for Delta because the domestic market is a slow growing market. It is difficult to enter into this market strictly because of the financial commitment needed, in turn allowing for the companies that have been successful in the market to keep each firms respective positions. The more intriguing aspect of Delta's business sectors is the expansion into the international market, which is the firm’s question mark in this matrix. Delta has been a U.S. power as far as airlines and has neglected to a degree the international affairs, but with the international market continuing to grow because of the ever-increasing globalization of our world, Delta has a chance and almost an obligation to expand in this market. Delta has notoriously depended on the domestic market heavily. In 2013, the domestic market alone accounted for 65% of its revenue, compared to 57% for its top two competitors United and American (Cederholm, 2014). There is and will be continuing competition from both domestic

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and foreign carriers, but the market is wide open with no real front-runner. Delta has the capacity to become a global power in the airline industry; time will tell if the company is able to succeed.

As can be seen from the above picture, the entire matrix is not completed. The reason for Delta having neither a dog nor a star lies within the nature of the airline industry as a whole. The first issue is with having a star in an industry that is so standardized. There are only two major suppliers for airplanes; Airbus and Boeing who combined own over 80% of the market. Delta as well as the competition buy the same aircrafts from the same companies, so being able to have a product that is innovative and ahead of the curve is unmanageable. It is impossible because if Delta did get the newest designed airplane from Boeing or Airbus, so would United and American Airlines, which is why there is no star in Delta's business sectors. Delta also does not have a dog in the BCG matrix, as of right now. The airline business was often thought of as a service that is not exactly profitable, but as of lately this has not been the case as Delta has recorded record profits from the two quarters of 2015. If Delta wants to continue its record profits, then it cannot afford to experiment with new products. The airline industry has had many years to become as standardized as it has become and having a dog in a market as volatile as this could prove deadly.

Regression Analysis

Figure 2-8: Revenue Compared to GDP Regression

The regression analysis above describes the relationship between Delta Airlines revenue as changes in GDP occur. Analyzed is a period of 15 quarters from the 1st quarter of 2011 to the 3rdquarter of 2014. The R2 of 0.995 indicates that 99.5% of the variation in the data is correlated to and explained through the variation in X. Leaving only 0.5% of the variation unexplained and therefore giving the trend line much viability.

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As both the trend line and the equation show, the relation between the chosen variables is positive. This means that if GDP increases, one can also expect Delta's revenue to increases. This positive relationship is expected as a higher GDP implies more spendable income available to customers. The increase in revenue could therefore be due to customer’s willingness to pay higher prices for airfare or simply because money is not such a large constraint anymore making a flight, while it may be more expensive, a viable alternative to a road trip in order to save time and increase comfort.

Macro-Environmental Factors

The most significant macro-environmental forces that affect the airline industry as a whole include political, economic, demographic, weather-related, and technological factors. The political aspects that affect the airline industry typically consist of regulations and restrictions, as well as the effects of war and terrorism, all of which involve government intervention. The 9/11 event had a tremendous negative financial impact on the entire airline industry. Overall, the attacks discouraged air travel, which has consequentially caused a negative impact on the airline industry as a whole. “It took three years for the global airline industry to recover the 6% decline in revenue between 2000 and 2001. It reported its first profit of $5 billion in 2006 after four consecutive years of losses. Financially weak carriers even went into bankruptcy during the period.” (Delta Air Lines, Inc., 2015). The economic factors such as GDP and the overall situation of the economy have a large impact on the demand for the airline industry. For example, demand for air travel will generally be lower when the economy is doing poorly than when the economy is doing better.

The demographic factors do not have as much of an affect, but still play a large role in the determination of travel trends and customer preferences. Changing trends in the travel industry can be determined through the breakdown of the population into the baby boom generation, generation X, generation Y, and generation Z. Weather-related factors that influence the airline industry include the effects of severe weather and natural disasters as well as the effect of seasonality and demand for air travel. Lastly, technological factors play an important role, specifically in the most recent years, and continues to become more of a vital necessity given the increasingly competitive nature of the airline industry.

In terms of potential impact for Delta specifically, the two largest macro-environmental forces include the political and economic factors. While the weather-related and technological factors have less impact on the company as a whole, it is still important to acknowledge the influence of weather related factors in the operations of the company.

The effect of political forces on Delta, particularly potential terrorist attacks, geopolitical conflicts, or security events includes the possibility of a reduction in demand for air travel, which would in return cause increases in costs and declines in revenue. These political factors have a larger force in terms of potential impact given the extent that events like these have affected Delta in the past. Heightened terrorist activity may discourage people from flying and subsequently reduce ticket purchases, causing Delta to have a change in its operations. The lost

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revenue from the reduced number of ticket purchases would also cause more costs incurred from increased security and avoiding flight paths over areas in the world where conflict is occurring. Another aspect of the political macro environmental forces includes the impact of government regulations on Delta’s operations (Delta Air Lines, Inc., 2015).

In addition to political factors, some economic factors specifically affect the operational side of the company. Delta’s “business and results of operations are dependent on the price of aircraft fuel. High fuel costs or cost increases including in the cost of crude oil, could have a material adverse effect on (their) operating results” (Delta Air Lines, Inc., 2015). Historically, the fuel costs have represented a third of Delta’s operating expenses, respectively. The volatile nature of fuel prices in the past few years has caused complications when fuel prices increase rapidly. The issue arises when fuel prices change so quickly that the far charged does not cover the increase in fuel price because generally customers buy tickets far in advanced.

Delta has tried to minimize the negative effects of the changing costs of crude oil and jet fuel through a hedging program. Although the hedging program is intended to lessen the financial impact from the volatility of jet fuel prices, Delta has stated that, “the effects of rebalancing (the) hedge portfolio and mark-to-market adjustments may have a negative impact on (their) financial results” (Delta Air Lines, Inc.). Other macro-environmental factors that specifically affect the crude oil and fuel supply include weather-related events, natural disasters, wars involving oil-producing countries, changes in government policy concerning aircraft fuel production, transportation, taxes, environmental concerns, and unpredictable events.

The weather related effects, such as severe weather and natural disasters, can ultimately cause a decrease in revenue due to a disruption in services that creates air traffic control problems. Increased changes in global climate as well as duration of severe storms could cause increased delays in cancellations, which would affect revenue and increase costs. Another way in which weather can affect the operations of Delta is the change in demand due to seasonality. Typically, demand is higher in the June and September quarters, especially in the international markets. This fluctuation in demand causes the financial results to vary on a seasonal basis (Delta Air Lines, Inc.).

Delta relies on technology in order for its operations to function properly. Significant investments in delta.com, mobile device applications, check-in kiosks as a way to enhance customer service, reduce costs and increase operational effectiveness. Technological errors or failures could have large negative impacts in the overall operational system of the company. Vulnerability to natural disasters, terrorist attacks, computer viruses, hackers and other security issues can also impact Delta’s ability to maintain a strong technology system. Delta has continued to invest in initiatives to help prevent these disruptions and continues to do so in order to eliminate the possibility of future issues. In order for Delta to compete effectively within the market, it is crucial that technology is functioning properly.

Overall, the larger forces in terms of potential impact for Delta would be the political and economic forces given that historically have made the largest impact on the company financially. The demographic and technological forces a less significant overall impact in the operations of

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the company. Delta has established a framework that is designed specifically to address these types of risk factors that could hinder the company from achieving its company goals. This framework, called Enterprise Risk Management, is used to help identify these risks and then create strategies and ways in which Delta can help mitigate these risks. Delta’s Corporate Leadership Team is also involved in this process by reviewing the new strategies and helping to make improvements (Corporate Responsibility Report, 2014).

The Marketing Mix

Product

Delta’s airline segment is managed as a single business unit that provides scheduled transportation for passengers, cargo, and other ancillary airline services throughout the United States and around the world. This allows Delta to benefit from an integrated revenue pricing and route scheduling system. Delta’s global route network gives them a presence in every major domestic and international market. (Delta Air Lines, Inc. 2015).

Separate from the mainline passenger airline service, Delta has several other businesses arising from its airline operations, including aircraft maintenance, repair and overhaul (MRO), staffing and other services, vacation, wholesale operations and private jet operations. In addition to providing maintenance and engineering support for Delta’s own fleet of 900 aircraft, Delta TechOps serves aviation and airlines customers from around the world. Delta derives 87.2% of its revenue from the passenger segment, 2.5% from the cargo segment, and 10.3% from other sources. Revenue from other sources includes baggage fees, ticket change fees, aircraft maintenance, repair and overhaul, staffing services for third parties, vacation packages, and private jet operations (Cederholm 2014).

Within that 87.2% of revenue from the passenger segment, it can be broken down into the business market segment and the leisure market segment. The business market segment requires a wide route network with good interconnections and high flight frequency, thus the costs of these services are high. High seat accessibility is also necessary, but high prices are charged for this segment, due to the relative price elasticity of demand. Conversely, the leisure market competes based on prices and this results in price instability and very low yields, and leisure demand will only peak during a few select times of year. However, the services for the leisure market can be offered comparatively cheaply. The leisure market is potentially the largest segment of the total airline market, and its long-term prospects are better than that of the business segment. With the freight market, an all freight airline should concentrate on carrying large and bulky items that are too large to fit into the lower holds of even wide-bodied passenger aircraft (Hailey 2016). Delta is in the cargo industry, but only utilizes passenger aircraft so the focus of the freight segment is on specialized offerings such as animal transportation accompanied with the company’s operational excellence and customer satisfaction, which allows Delta to differentiate itself in this market segment.

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Delta Global Services provides services to Delta itself along with third parties, including staffing services, aviation solutions, professional security and training services (Delta Air Lines, Inc. 2015).

Delta’s vacation wholesale business, MLT Vacations, provides packages to third-party consumers (Delta Air Lines, Inc. 2015).

Delta also owns private jet operations, known as Delta Private Jets, provides aircraft charters, aircraft management and programs allowing members to purchase flight time by the hour (Delta Air Lines, Inc. 2015).

As far as Delta’s distribution and expanded product offerings, it’s tickets are sold through various distribution channels including digital; channels such as delta.com and mobile, telephone reservations and traditional “brick and mortar” and online travel agencies. An increasing number of Delta’s tickets are sold through Delta digital channels, which reduces the distribution cost and gives them improved and direct, personalized interaction with the consumer (Delta Air Lines, Inc. 2015).

Price

In order to improve customer satisfaction, convenience and counter competition, Delta has announced that it will introduce a new five-tiered seating plan, which began March 1, 2015. This will act as a replacement of the existing basic first class and coach seating that previously existed. Due to this modification, customers will get to choose from a broader set of options. Passengers will be able to choose from among Delta One, First Class and Delta Comfort+, which offer premium amenities. In addition, passengers will also be able purchase Main Cabin and Basic Economy tickets as well (Tuttle 2014). Delta One tickets, formerly Business Elite, will be the most expensive but will be able to enjoy personalized service and luxurious amenities on long haul international and most cross-country flights between New York-JFK and Los Angeles or San Francisco (Delta Air Lines, Inc. 2015).

The second most expensive category is First Class. Passengers in this tier will get most of the benefits available to Delta One travelers except for full flat-bed seats. This tier will be available on short-haul international and domestic flights of Delta (Delta Air Lines, Inc. 2015). The third in line is Comfort Plus, which is available on all two-cabin aircraft operated by Delta across the globe. Passengers in this tier will enjoy features such as priority boarding, after passengers of the above two tiers, quilted seat covers, beverage options for adult fliers and dedicated overhead bin space (Delta Air Lines, Inc. 2015). The two lesser-privileged tiers are Main Cabin and Basic Economy. Passengers buying Main Cabin tickets will have the freedom to select seats while purchasing tickets. Passengers buying Basic Economy, the cheapest under the new system tickets will enjoy the least amount of benefits (Tuttle 2014).

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While some customers believe this system gives them more options and more levels when purchasing a ticket based on the number of amenities, there has been some backlash. It has been seen as unnecessarily confusing and raises the bar for instituting an onboard “caste system.” Delta is also moving into the territory of low end pricing with the new Basic Economy category. This means that Delta will be directly competing with low cost airline providers, and some believe that the Basic Economy category is the least flexible and least comfortable out of any American based airline. With this new Basic Economy tier, neither advanced seat selection or itinerary changes are allowed, not even for an extra fee (Research 2014).

Low cost providers use the tactic of wooing the customer with a low upfront price, and then hopefully these customers can be upsold on more services at a later time. However, Delta’s new five-tiered model wants to get most of the upselling accomplished during the ticket purchase phase. Delta is counting on customers to be scared off by the absence of getting an advance seat, upgrade, or the option that if a flight is changed that the passenger will pay more upfront (Research 2014).

Figure 2-9: Branded Fares Itemization

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Promotion

Promotion for Delta Airlines is mostly done through its use of the frequent flyer program, known as the SkyMiles program. The SkyMiles frequent flier program is designed to retain and increase customer loyalty by offering incentives to customer to increase travel with Delta Airlines. The program allows members to earn mileage credit for travel awards by flying on Delta, its regional carriers, and other participating airlines. Mileage credit can also be earned by using certain services offered by program participants, such as credit card companies, hotels and car rental agencies. Also, individual and companies can purchase mileage credits. Miles for Delta’s frequent flyer program do not expire, but are subject to certain program rules. However, Delta reserves the right to cancel the program at any time as long as alert customers six months in advance. Delta also reserves the right to change the program’s terms and conditions at any time without notice (Delta Air Lines, Inc. 2015).

SkyMiles program mileage credits can be redeemed for air travel on Delta and participating airlines, for membership in Delta Sky Clubs and other program participant awards. Mileage credits are subject to certain transfer restrictions and travel awards are subject to capacity-controlled seating.

Delta has also changed the game when it comes to the frequent flyer program by requiring passengers to not only gain a specified number of miles, but also spend a certain threshold of money attaining those miles. Delta has chosen this strategy in order to dissuade a customer for always opting for the cheapest available ticket, while gaining mileage for a flight. This allows a customer who buys a cheap ticket but flies frequently to gain more miles than a customer who buys a first class ticket but only flies a few times. With this new strategy, Delta is incentivizing its more profitable first class customers to use the reward program. This new monetary threshold, known as Medallion Qualification Dollars, make the customer who regularly chooses the cheapest ticket to spend a predetermined amount of money with the airline in a given amount of time. This offsets the risk for the airline because the customer that is flying more regularly at a low price is less profitable and exposes the airline to all the unseen but costly steps of tacking luggage to paying the baggage handlers, cleaners, and reservation agents to fueling the plane. The customer paying less for the ticket but traveling more frequently also exposes the airline to more risks of something going wrong and having to put them up in a hotel, give them a meal and taxi vouchers, or with luggage mishaps have the bags hand delivered to passengers’ homes or hotels by a driver (Olmstead 2013).

Due to this problem, Delta has separated its SkyMiles program into four Medallion Qualification levels: Silver, Gold, Platinum, and Diamond. Each of these qualification levels has an increasing threshold of Medallion Qualification Miles (MQMs) and Medallion Qualification Dollars (MQDs). Silver has the lowest thresholds with 25,000 MQMs and $3,000 MQDs, while Diamond has the highest thresholds with 125,000 MQMs and $15,000 MQDs. Delta also has a MQD waiver that allows the MQD requirement to be waived if a customer makes $25,000 or more in eligible purchases in that year with the Delta SkyMiles Credit Card from American Express (SkyMiles Medallion® Benefits 2016).

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Place

Delta is joint venture partners with Air France-KLM, Alitalia, Virgin Australia, and Virgin Atlantic allowing for travel to 612 destinations in 119 countries. Delta has key hubs and markets in Atlanta, Boston, Cincinnati, Detroit, Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Salt Lake City, Seattle, Paris-Charles de Gaulle, Amsterdam and Tokyo-Narita. The largest hub is in Atlanta with nearly 1,000 daily departures to 220 destinations (Delta Air Lines, Inc. 2015).

Delta and its various competitors in the airline industry differ in geographic segmentation, with Delta having the highest domestic share at 65.8%. With the heavy dependence on the domestic market, Delta is attempting to expand globally, especially into Latin America and Europe. Delta has invested in the equity stakes of Aeoromexico and GOL, Brazil’s second largest carrier, in order to gain from the expected growth in two major countries, Brazil and Mexico, in the Latin America Region. One of Delta’s joint ventures, Virgin Atlantic, was acquired in order to expand operations between the United Kingdom and New York (Cederholm 2014).

c. Strategic Assessment of Operations, Supply Chain, Technology, and Infrastructure

In breaking down the airline industry of the United States, it is safe to say that it is one that is known for its low profit margins and intense competition, creating a sense of importance in all aspects of the business. Over the past 8 years, the world has watched Delta climb from bankruptcy back to competing with the other major airlines of the industry. Much of this credit has been given to its business strategy: attracting corporate travelers, a group characterized by high margins and low price sensitivity. Through the concentration on this segment, Delta has been able to shift its cost structure from a one centralized on fixed costs, to one based on variable costs that way the airline can scale its costs of operating to meet the overall demand of airfare. This shift in overall operating performance can be noted through the drastic increases in operating income over the past 5 years leading up to 2015:

This shift in cost direction has played though in many aspects of Delta’s operational strategy, specifically facilitating itself through the purchasing of used aircraft, and through vertical integration. Over the past three years, Delta has been continuously making deals with other airfare providers such as Boeing for the purchases of used aircraft. Along with these purchases, Delta has greatly expanded its maintenance sector, Delta TechOps, as well as purchased the Trainer Oil Refinery from ConocoPhillips. Through the purchasing of used aircraft, Delta lowered its acquisition Figure 3-1: Industry Operational Income 2009-2014

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costs of purchasing, in turn raising the overall maintenance costs which can be easily facilitated through the TechOps program without outsourcing. The Trainer Refinery has also created more flexibility in Delta’s operations and in its vertical integration strategy as it has allowed them to gain more control no only over the highest overall cost, but also over the entire supply chain as well, making the company less prone to overall risks in the market as well as providing lower cost resources. Order Winners and Qualifiers

Although Delta has been successful in applying this vertical integration strategy to its operations to reduce costs of flying the aircraft, the firm is still apart of service industry that must to concentrate on providing quality and reliability to travelers. This means that although Delta have differentiated themselves on a cost

basis, the firm must also provide competitive advantages that allow customers to choose Delta over other airlines. Qualifier: Safety

The fear accompanying airlines and transportation industries from a general perspective is that the customer is entrusting a company with the passenger’s most prized and valuable items: life. Safety is arguably the most important and most essential practices to an airline company. Customers trust an airline to get them from point A to point B safely. Unfortunately, the infancy stages of the airline business struggled through a trial and error period where far too many customers lost lives. In 1972 alone there were 41 fatal plane crashes claiming 2,347 lives. By 2015, this number was cut to three fatal crashes, claiming 428 lives ("Airplane Crash Statistics”, 2016). Delta has only had one fatal plane crash in 1996 ("Airplane Crash Statistics”, 2016). While the goal of the airline industry is to lose zero lives, there are unforeseen occurrences that happen in any industry. If an airline displays its inability to provide this service to the customer consistently, it is sure to impact it’s future negatively. Airlines cannot afford these types of mistakes and the airlines that are still in operation today have understood this is the bare minimum if the firm want to receive any business. In 2015 Delta along with United Airlines, American Airlines and Jet Blue Airways were given a rating of 7/7 according to airlineratings.com ("JetBlue Airways Review, 2016).

Order Qualifiers Order Winners 1. Safety 2. Cost 3. Timeliness 4. Customer

Satisfaction

1. Target Market Domination

2. Frequent Flyers Rewards Program

Figure 3-2: Overview of Order Winners and Qualifiers

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Qualifiers: Cost The airline industry is one where price rules all, and travelers are always looking for the lowest price. Therefore, charging a premium for tickets and expecting customers to buy is not recommendable. Price sensitivity is the reason why cost is often a winner of business because of the fact that many airline customers are price sensitive and are looking for the best ticket price regardless of what company it is. However, Delta is not trying to compete directly with the low cost providers such as JetBlue and Southwest on price. Delta is more focused on the quality of the service, the amenities in-flight and the rewards program because its target market is not one that is heavily concerned on price sensitivity. More so, Delta is targeting corporate business travelers who are willing to pay more for better in-flight services. Though as a whole Delta is not attempting to target the lowest cost customers, the firm is not able to charge any price that it wants because, to a degree, all travelers are price sensitive. The fact of the matter is the low-cost carriers only have a marginally lower cost compared to the legacy airlines in past years. The Airline Disclosures Handbook reveals that the cost gap between traditional and budget airlines has fallen by an average of 30% in six years, partly because legacy airlines have abandoned old differentiators like free baggage and in-flight catering on short-haul flights. Delta has found a nice balance of being able to compete to a degree on price, but still stay true to its objective of business travelers. Qualifier: Timeliness

There are endless horror stories of being in an airport and having a flight delayed for hours or showing up to board the flight just to have it canceled leaving the passenger scrambling to find another flight out as quickly as possible. The

reliability of an airline saying that a flight

will leave or arrive at a certain time is not a key factor in whether or not a customer chooses a particular airline, but it is an immediate way to lose customers. Delta along with its two primary competitors have settled in the high 70% to low 80% as far as percentage of on time flights over the past three years. Delta averaged around 82% while American and United hovered 76% and 80% respectively ("RITA | BTS | Transtats," 2016). Delta has proven to be a reliable airline, and Bureau of Transportation Statistics table below has ranked Delta airlines in the top 10 carriers in on time flights, delayed and cancelled flights such 2011.

Delta Airlines Domestic Flights, 2011-2016 % On Time

2011 2012 2013 2014 2015 2016 Rank

Departure 84% 87% 86% 85% 85% 85% 3 Arrival 82% 87% 85% 84% 86% 86% 3 Avg. Delay (min.) Departure 56.60 57.92 60.49 58.32 60.65 61.10 6 Arrival 54.05 55.34 58.63 56.87 61.26 61.80 9 % Cancelled Total 1.39% 0.51% 0.32% 0.81% 0.44% 0.47% 3

Figure 3-3: Delta Flight Data

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After keeping customers safe and not breaking their pockets with absurd ticket rates, being able to provide a dependable service that will get the customer to where he or she wants to go and when the customer wants to get there is a bare minimum requirement to even enter the race of vying for the business of a consumer. Qualifier: Customer Satisfaction Customer Satisfaction is as enormous a factor in choosing the business of a customer. Delta ranked 6th overall and 2nd among the traditional airline providers according to the J.D. Power 2015 North America Airline Satisfaction Study which measures satisfaction in seven categories. The categories include cost and fees, in-flight services, boarding/deplaning/baggage, flight crew, aircraft, check-in and reservations. The relativity of this study can be seen in the fact that Delta is second to only Alaska Airlines, whose analysis is skewed because this specific airline is almost exclusive to the state of Alaska. Delta’s 6th place ranking is also relative because the other four spots ahead of them, not including the aforementioned Alaska Airlines, are low-cost providers such as JetBlue and Southwest ("J.D. Power Study”, 2015.). Today, Delta is not number 1 in customer satisfaction, but is clearly the leader among the top three competitors in the airline industry Delta, American and United. Delta averaged a 7.6% and 14.6% higher rating then American and United from 2013 to the present based on satisfaction. Delta also averaged a 7.25% and 7.75% higher rating then American and United respectively because of experience in the same time period ("Temkin Ratings", 2016). These figures were taken from the average of the past year’s ratings based on evaluations submitted by consumer’s who had experiences with said companies. Delta compared to its top competitors is evidently doing the best on qualifying for customers through its top-flight customer service. Much of Delta’s push to enhance customer satisfaction ratings can be seen through its overall efforts to improve the overall customer experience. In recent years, Delta has made a huge much to remodel, enhance, and even add new state of the art “Sky Lounges” for customers. The newest of these locations can be seen in Seattle and Los Angeles, as well as through its $229 million investment in its newest 9,000 square foot location in San Francisco. These areas are meant to suit travelers of both work and relaxation in an effort by Delta to provide a world-class experience (“New Delta Sky Club”, 2015)

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Winner: Target Market Domination

Delta has been clear that its target market is the corporate business traveler, and the company has been able to secure and hold dominance over this segment of consumers since 2011. The competitors who have business models set up to target the exact same consumers as them, American and United have not been able to offset Delta’s supremacy. Delta Airlines was ranked first among corporate business travelers for the 5th straight year. Not only did Delta win this award for the 5th year in a row, of the 10 categories used to measure this award, Delta was first in every single one (Levine-Weinberg, 2014.). As mentioned success in an industry with so little variance in product lies solely on one’s ability to appeal to the firm’s target market. Delta has not only appealed, but have gained control over the market which is how it is able to stay out of the wars of the price sensitive customer and charge premium prices for its product. Winner: Frequent Flyer Rewards Program

The second factor in Delta Airlines winning customers is its frequent flyer rewards program, SkyMiles. This program, like several others, turns the money a customer spends on airlines tickets into redeemable miles to be used on future flights. Delta is rated the number one rewards program for average and light travelers by cardhub. This ranking system takes into account factors like airline coverage and the number of flights and destinations that can be offered on the card. Other criteria include partner airline coverage, seeing if the points can be redeemed on other carriers having an agreement with Delta, and the value in miles earned per one $100 spent with Delta. The SkyMiles club is very advantageous to travelers flying out of the south eastern U.S., Delta is headquartered in Atlanta. Delta airlines has hubs in Atlanta, New York, Detroit, Memphis, Cincinnati, Minneapolis and Salt Lake City, making it an excellent place to start

Figure 3-4: Business Traveler Industry Survey

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planning travel within, or outside of the United States. The SkyMiles program is more flexible in this regard then the rewards program that ranked number 1 for high frequency travelers, Southwest. Unlike Southwest, Delta’s reward points can be used for international as well as domestic flights (Comoreanu, 2016). This is made available by the alliance Delta has with foreign air carriers called the SkyTeam Alliance. With the number of flights increasing every year, the need for a perk program that will capture the attention of the customer to differentiate its brand from another is crucial. Delta recently made a change in the rewards program from being based on number of miles flown, to one based on the price of the ticket which is a windfall for the target market, business travelers (Ewoldt, 2015). These travelers pay top dollar for tickets at last minute basis allowing them to earn more points on a flight then someone who bought their tickets months even weeks in advance. Delta has recognized that the airline industry is one where there is little variability between themselves and the competition on the bases of technology and innovation. Airplanes are more or less all extremely similar and a company is not going to win because it has the fastest plane. An airline will always have to focus on exactly what type of customer it is looking to obtain a target them accordingly. Delta has made strides to portray themselves as a premium brand in the airline industry. Delta is not looking to scrap the bottom of the market to grasp the customer who is looking for the lowest cost. Through the concentration on many of the other influential factors such a, this has won many loyal customers. Delta dominate its intended market. It is one thing to say that the target market is the corporate business traveler, which Delta states, but it is another to go out and execute its plan. Process, Facilities, and Location Passenger Operations

Complementing the various advantages that Delta offers relative to its other airlines, it also

facilitates three different central processes that are the sources of its revenues. Beginning with its most lucrative and largest sector, Delta is an organization that is centralized around providing passenger airfare both domestically and internationally for its travelers. Through serving over 180 million customers each year and more than

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15,000 flights each day, Delta provides its services to 324 destinations around the world in 58 countries (“Corporate Stats”, 2016). With such a high number of destinations and flights, Delta is able to coordinate its operations through the use of a hub-and-spokes system, which is one where its services are facilitated through the use of a select number of specified destinations, that once arrived at, can take a passenger to a specified destination. Delta, just as other airlines, has its own set of key hubs that it feels best facilitates the movement of the passenger to the final destination. The following are Delta’s key hubs: Atlanta, Boston, Cincinnati, Detroit, Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York-JFI, Salt Lake City, Seattle, Paris-Charles de Gaulle, Amsterdam, and Tokyo-Narita (“Corporate Stats”, 2016). Being that Delta is headquartered in Atlanta, it should be no surprise that that is not only its largest hub with nearly 1,000 departures per day as well as also providing services to 220 of its 324 destinations from that hub (“Corporate Stats”, 2016). In order to facilitate the movement of passengers from one destination to another through these hubs, Delta has collaborated with many other regional and national airlines to help keep this continuous flow of customers. This process of partnering with other airlines in the industry is known as a codeshare, which creates a commercial agreement between two airlines that allows each other to operate on its partner’s routes to and from destinations, creating more services to more places for both parties. Delta’s major codeshare partners include: Alaska Airlines, GOL Airlines, Hawaiian Airlines, Virgin Atlantic, Virgin Australia International, and members of the SkyTeam Alliance, including an extensive list of regional and international carriers such as Air France, Aeromexico, Air Europa, Middle East Airways, Great Lakes Airlines, and WestJet (“Delta Flight Partners”, 2016). This alliance gives Delta access to over 800 destinations in an effort to make flying as quick and smooth as possible. Among these larger carriers that network Delta to other major cities around the globe, there are also regional carriers who play the role of transporting passengers from small airports to Delta’s major hubs for further travel. This list includes ExpressJet, Compass, GoJet Airlines, Endeavor Air, Shuttle America, and SkyWest (“Delta Flight Partners”, 2016). These regional carriers have become a major part of Delta’s business, and as of the end of fiscal year 2015, had accounted for 17% of Delta’s total passenger revenue (Delta Airlines Inc., 2015). Like the other major players in the airline industry, Delta’s passenger operations stem from a few invaluable resources: people, planes, and fuel. Beginning with the most important and underappreciated resource, people, Delta has over 80,000 employees worldwide throughout airports around the world. Being that its passenger airfare segment of its operations is its most extensive, it should be no surprise that Delta has roughly 64.9% of its employees are involved in the expediting of this process (“Job Statistics”, 2013). Although 13.8% of the employees are pilots and 24.1% are flight attendants, what is overwhelming is the amount of employees that deal strictly with customer service, which is 26.2%. This is 9.7% higher than its competitor United Airlines, showing Delta’s overall concentration on customer service (“Job Statistics”, 2013). In general, airlines are known for having unusually high unionization rates, averaging around 50%. When examining Delta however, of its roughly 80,000 employees the company’s

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unionization rate is only a mere 18% (“Delta Airlines: Flying High”, 2015). This low rate of unionization is crucial to overall operating strategy due to the fact that it allows Delta to keep its base wage rates lower. Even though the average employees’ base wage at Delta would be lower than going to work for American on United Airlines, Delta is able to hold this 18% rate because in order to compensate for its low wage rates the airline offers its employees industry leading profit sharing plans. In 2014 alone, this profit sharing plan yielded nearly one month’s salary to each employees (“Delta Airlines: Flying High”, 2015). With this strategy in play, Delta has been able to lower its fixed wages, raising its overall variable costs with the profit sharing plan, as it continues to enhance its operating strategy to be one based more on variable costs in an effort to lower the overall risk to the company (“Delta Airlines: Flying High”, 2015). Representing a total of 10.6% of Delta’s total employee base, the aircraft maintenance, repair, and overhaul department, also known as MRO, is also hugely important because it is the driving force behind yet another obvious important aspect of Delta’s operations, its aircraft fleet (“Job Statistics”, 2013). Currently with a fleet size totaling in 809 aircraft, Delta has massive assortment of both owned and leased planes that help complete over 15,000 total flights per day (“Aircraft Fleet”, 2016). With a total assortment of over 18 different types of planes, Delta is able to use various sizes and capacities to meet the varying demands at its hubs both domestically and around the world. Of these 809 total aircraft, Delta owns 618 of them, controlling 76% of its total fleet (“Aircraft Fleet”, 2016). The other 24% is represented by 191 leased planes that Delta also operates under its name (“Aircraft Fleet”, 2016). Even though this extensive fleet size is great because it allows Delta to be able to push more passengers to more destinations around the globe, one of the more concerning aspects about its fleet, one that is continuously becoming more of an issue, is its overall fleet age. Of the total 809 aircraft, Delta’s planes have an average age of 17.1 years, with the oldest utilized aircraft, the MD-88 having an

average age of over 25.2 years (“Aircraft Fleet”, 2016). To any major airline who holds the lives of passengers in its hands on a daily basis, this high average age should be of much concern. However, this factor is one that Delta is less concerned with not only due to the fact that it is a part of its operational strategy to fly older planes. It also holds to be less of a risk due to the MRO department, Delta TechOps, the largest domestic airline maintenance company in the US, is readily available to provide daily maintenance checks on its fleet. This is still a concerning factor as some of the other airlines, such as American, who have made one of the strategic operating goals to lower its average fleet age through the purchasing of these new expensive

Aircraft Purchase Commitments

2016 2017 2018 After 2018 Total

B-737-900ER 19 20 18 12 70 B-787-8 - - - 18 18 A321-200 15 15 15 - 45 A330-300 4 2 - - 6 A330-900neo - - - 25 25 A3590-900 - 6 9 10 25 E190-100 19 - - - 19 Total 57 43 42 66 208

Figure 3-5: Future Aircraft Purchase Commitments

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aircraft. To think that Delta is only going to continuously purchase used aircraft is a false assumption. Even though it is a large part of its operating strategy, the firm has recognized that it still needs to keep a continuous flow of new aircraft as well, just at a much lower rate that many of its competitors. This idea can be illustrated through Deltas future aircraft purchase commitments for the firm lasting through 2018 presented below: (Delta Airlines Inc., 2015).

These obligations to its future commitments demonstrate Delta’s understanding of the current state of its fleet, as the company is firmly committed to purchasing 208 aircraft in the future. Although a vast majority of Delta’s comes from its own personal operations of these aircraft, the other 17% as represented by regional carriers also plays an important role as well (Delta Airlines,

Inc., 2015). What Delta’s fleet size data does not include is the total fleet size of its regional carriers responsible for transporting customers to these larger hubs in major cities for Delta to then take to the said destination. The following chart breaks down Delta’s regional carriers by fleet size. With a total of 482 total aircraft held by regional competitors, this table shows the importance of the regional carriers from a broad spectrum to Delta’s operating success, as these airlines cover a vast number of small regional airports around the United States, helping Delta produced a total passenger revenue in 2015 of $34.7 billion (Delta Airlines, Inc., 2015).

Cargo Operations Delta Cargo represents another segment of Delta’s operations that represents a much smaller overall percentage of its operating revenues at 2% (Delta Airlines, Inc., 2015). This operating segment uses Delta’s global network that has been developed over time through passenger operations, allowing it to also connect to the world’s major freight gateways. The beauty of providing cargo services as well as passenger services to customers is that both processes are able to utilize the same resource, that being the cargo space in the rear of the aircraft. Along with the similar use of resources, Delta Cargo also relies on the utilization of the SkyTeam Alliance through “SkyTeam Cargo”, which is an extremely similar partnership between the same airlines apart of the SkyTeam alliance, allowing all of these airlines to continuously move goods throughout the US and internationally over six continents (Delta Airlines, Inc., 2015). With such a small contribution to the overall operating income, Delta Cargo only holds 2.1% of Delta’s 80,000-employee base, showing relatively smaller importance compared to passenger operations (“Job Statistics”, 2013). Today, Delta Cargo provides more than 320 destinations for its goods to be delivered to, carrying over 2.4 billion-cargo ton-miles each year. Unlike the success that Delta has had through its passenger operations, Delta Cargo has been an operating segment that has struggled recently to increase its overall revenues. In 2014, Delta Cargo produced operating revenues of $934 million continents (Delta Airlines, Inc., 2016).

Carrier Total Endeavor Air, Inc. 117 ExpressJet Airlines, Inc. 110 Skywest Airlines, Inc. 113 Compass Airlines, LLC 42 Shuttle America 71 GoJet Airlines, LLC 29 Total 482

Figure 3-6: Regional Airline Partner Fleet Sizes

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However, when examining the outcomes of 2015, it can be seen that Delta has been having some difficulties bolstering this operation as its revenues have dipped significantly to $813 million, a 13% decrease in revenue in one fiscal year (Delta Airlines, Inc., 2016). What makes this decrease important is the fact that from 2014-2015 the global economy has seen a drastic decrease in oil prices, a factor that should have increased the overall operating margin of Delta Cargo, was seemingly still not enough to keep cargo revenues from suffering this 13% blow. Refinery Operations As briefly previously mentioned, in 2012 Monroe Energy LLC, a wholly owned subsidiary of Delta Air Lines, purchased the Trainer Refinery for $150 million, after receiving $30 million from the state of Pennsylvania as a part of a deal to support job creation in the area (Mouawad, 2012). Delta considered this an innovative approach towards managing its fuel costs because no other airline owns its own refinery. This purchase directly correlates to Deltas overall operating strategy to vertically integrate the company in order to reduce operating costs. Delta's planes were burning through the equivalent of 260,000 barrels a day, representing a third of total costs (Delta Airlines Inc., 2013). At the time, Delta figured $2.2 billion of the $12 billion a year it was spending on fuel went to refiners as profit. By making jet fuel in the company’s own refinery, Delta figured that it could keep some of that profit for themselves in hopes to reduce annual fuel expense by over $300 million (Mouawad, 2012). Today, a total of 80% of Delta’s annual fuel expenses are covered through the production of this refinery (Delta Airlines Inc., 2015 With the capacity to produce up to 185,000 barrels of oil per day producing both gasoline and diesel fuel, the Trainer Refinery provides jobs to over 400 people in the surrounding community who had been previously laid off due to the facility’s poor performance and close a few months before (Carey, 2012). For Delta, although this purchase is a seemingly advantageous one given that no other airlines have ever undertaken as oil refinery before, CEO Richard Anderson compared the purchase of this refinery to the equivalent of purchasing a Boeing 777. This refinery according to Delta has not only reduced overall fuel costs but also had an impact on reducing the overall fuel price for other major airline competitors as well in the process. When examining the refinery, it can be seen that from its first three years of operations it produced $116 million loss in 2013, a $96 million profit in 2014, and a $290 million profit in 2015. This purchase has proven to be profitable for both Delta and whole industry itself even with the drastic drop in oil prices over the given years as well, (Delta Airlines, 2015). Supply Chain Integration and Outsourcing As one of the primary airlines at the forefront of its industry, Delta Airlines has constructed a complex and extremely efficient supply chain in order to provide its various categories of service. Delta is involved in providing a portfolio of different services, with the supply chain consists of 33 providers of goods, from big names such as Boeing and Airbus, to even the competitors such as Deutsche Lufthansa. With this long list of suppliers, it allows Delta to remove some of the risks associated with having a supply chain with few providers of goods. Delta’s Supply Chain Management (SCM) organization partners with many businesses to help provide goods and services, formulating strategies to deliver efficient results for the company.

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This helps ensure a continuous supply of cost-competitive, quality goods and services to meet the company’s business needs. The following chart provides a general overview of Delta's top 15 suppliers relative to total costs for 2015: (Bloomberg, 2016) As of the last fiscal year, Delta has begun a new business venture with the Airbus Group, one of the leading providers in passenger airlines. Representing 20.74% of Delta's total costs, this new deal solidified Delta's purchase of 25 state of the art Airbus A350-900 aircraft and 25 advanced Airbus A330-900neo aircraft to be constructed for 2017, further bolstering its current fleet of 809 aircraft (“Delta Adds”, 2014). This long body plane order is soon to be a part of Delta’s expansion into the Pacific network, as it is trying to bolster its long range routes between the US and Asia. These jets are expected to generate a 20% overall improvement in operating cost per seat compared to its current Boeing counterparts in the Boeing 747-400 and the Boeing 767-300ER aircraft as well (“Delta Adds”, 2014). Airbus's major competitor, Boeing, also represents a large portion of Delta's total expenses, 16.07%, for 2015 as a result of Delta's 20-year contract with the firm. This contract included an initial order for 106 aircraft worth $6.7 billion in 1997, with the option to purchase an additional 124 aircraft for $8.3 billion (Bryant, 1997). At the time, this agreement was very similar to an agreement that Boeing made with American Airlines as well. This initial order was a huge step for Delta’s expansion as it almost doubled its fleet size to 414 planes (Bryant, 1997). Today, Delta’s positive relationship with Boeing continues as recently towards the close of 2015 the airline completed the purchase of a used Boeing 777 for $7.7 million (Ausic, 2015). Being that Delta is trying to continuously expand its fleet size and number of destinations for its customers, it should be no surprise that two of the other major suppliers specialize producing aircraft parts and even aircrafts themselves, those being United Technologies Corporation and Embraer SA. United Technologies is a producer of jet turbofans that purchased and installed on many of the aircrafts that the company purchases. Some of these fans could even be added to the 20 Embraer E190 aircrafts that Delta recently purchased in July of 2015. Delta added Embraer as well as Airbus to its portfolio of different types of aircrafts. Delta’s costs were based around its sole aircraft supplier Boeing. Through diversification Delta is now less susceptible to risk. This transition could be very helpful for them in case one of its aircraft suppliers goes out of business.

Figure 3-7: Percentage of Total Cost by Supplier

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Controlling a fleet of 809 aircrafts is a magnanimous task due to the parts and maintenance that is required to keep these planes running as Delta is always on the search for replacement parts. One of its investments in order to combat the issue of finding replacement parts is through the Oracle Corporation, who have created an online trading exchange for these major airlines so that both aircraft goods and services can be traded between that various airlines that join this exchange. Along with its trading technological services, Oracle also proved Delta with the “Oracle Service Cloud” in order to enhance the levels of in-flight connectivity as well as a part of Oracles contract with the one of Delta’s other entertainment providers, Gogo Inc. (“Gogo Deploys Oracle", 2013). Along with the trading exchange, Delta has also developed its own maintenance repair program through its 2.7 million square foot Delta TechOps operation at Atlanta Hartsfield-Jackson Airport (ATL), to play an important role, providing maintenance and spare parts services not only for Delta, but other airlines, and even the U.S. military (Facilities, 2016). With another location at Minneapolis-St. Paul Airport (MSP), Delta TechOps is the largest airline MRO (Maintenance, Repair, and Overhaul) and the third largest worldwide. Delta TechOps serves more than 150 aviation and airline customers from around the world, specializing in high-skill work such as engines, components, avionics, airframe and line maintenance (Facilities, 2016). Delta TechOps employs more than 9,600 maintenance repair & overhaul professionals and is one of the most experienced aircraft MRO providers in the world with more than seven decades of aviation expertise (Facilities, 2016)

When examining Delta Airline’s supply chain relative to the competitors of its size, American Airlines & United Airlines, it can be seen that these three show many similarities. In the airline industry, it is very difficult to differentiate a company from others due to the fact that all of these firms are so inherently similar in its offerings and capabilities. When looking at American Airlines, it too also has major contracts with both The Airbus Group as well as Boeing, whose business with American represent 19.5% and 17.75% respectively (Bloomberg, 2016). These companies also all rely Gogo Inc., an entertainment provider, for Wi-Fi and in-flight entertainment as well. With such similar competencies in supply chains, Delta’s push to vertically integrate throughout its supply chain has proven to be a step that has allowed to separate themselves on the basis of operational efficiency with facilities like Delta TechOps and the Trainer Refinery. What vertical integration has done for Delta is that it has reduced some of the risks associated with running an airline through the implementation of these processes. In the long run, this gives Delta more overall control over its supply chain, which is a very positive step in the right direction for a company in an industry that has such high risks associated with it. Technology and Systems In an effort to create the most efficient and accurate supply chain possible, Delta implemented the Aeroxchange (AEX) supply chain platform in 2009. This state of the art technological infrastructure was put in place concentrating on a set of operational tools to ensure peak

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performance after Delta had completed its acquisition of Northwest Airlines at that time (“Aeroxchange: Aviation”, 2016). This operating system is very popular among many airfare provides, even being utilized by Delta’s competitors including American Airlines, and United Airways. The Aeroxchange Marketplace subscription provides Delta with extremely integrated ways for Delta to manage the various aspects of its supply chain, including: purchase orders, repair orders, loan, borrowing and exchange programs, as well as asset management software. This is in an effort to increase repair turn-around times, increase asset utilization, as well as increase selling opportunities for assets as well (“About Aeroxchange”, 2016). The tools that Delta uses in order to measure the various important aspects of the suppliers are as follows: Contract Lifecycle Management, Spend Analysis, Virtual Memory and Transportation Management System, Warranty, and Supplier Performance (“Cost Management Initiatives”, 2016) With all of this data and tools available at its disposal, the implementation of this program has been considered to be extremely successful. It has helped Delta reach the extremely high operating levels it is able to work at every day. Along with the AEX Supply Chain Platform, Delta also relies heavily on technology in its day-to-day operations through passenger service and flight operations systems. In the past, Delta and its major competitors such as United and American Airlines have all outsourced these technological systems to a firm named Travelport, a travel commerce marketplace that provides technology, distribution, and other solutions to the global tourism industry. However, this arrangement shifted in 2014, as Delta finalized an agreement with the company to reacquire the intellectual property and data rights that are key in to its operating systems. As the only airline in the industry to have done this, Delta gained the advantage of having complete control over these passenger service and flight operating systems, allowing them to make changes to it that more suit the specific needs of Delta. In doing so, Delta also brought on 175 technological professionals from Travelport as well to increase flexibility in adapting the system. Now, Delta’s passenger service system “Deltamatic”, responsible for the essential but basic functions such as reservations, check-in, standby lists, and bagging and ticketing, is under the control of these IT workers, as it is constantly enhanced to meet Delta’s needs. As a result, this transition allows Delta to have complete control over its business destiny, not having to rely on third party vendors to create new programs and products to enhance the market. Beyond technological advantages that Delta has developed to improve aircraft maintenance, the airline has dedicated themselves to implementing in flight Wi-Fi with expanded coverage for customers in addition to a Guest Service tool that is used by the flight attendants in an effort to help improve engagement with customers while on board. This improved Wi-Fi as well expanded coverage will ultimately result in faster connectivity as well as coverage over regions, specifically Latin America and the Caribbean, which had not normally been able to obtain coverage (Ghee, 2015). Delta is teaming up with Gogo to implement 2Ku upgrades on both long-haul domestic, Latin America, and Caribbean routes as well as air-to-ground technological improvements on short-haul domestic aircrafts (Ghee, 2015). These new technological improvements demonstrate the importance and emphasis that Delta places on innovation as well as its constant efforts in trying to improve the overall customer experience while on board. Delta’s dedication to improving its in-flight experience can be seen through its goal to have its entire international fleet offer Wi-Fi by mid-2016 (‘Delta to Upgrade”, 2015). In addition, Delta

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provides customers with Delta Studio, which allows free and paid streaming of different entertainment options that are available with any Wi-Fi equipped domestic flights. Overall, the utilization and constant advancement of technology plays a vital role in customer satisfaction and is advantageous to Delta because it helps to solidify its positioning within the market as well as with consistent customers. Although this improved installation of in-flight Wi-Fi with Gogo will help improve overall customer satisfaction, there have been recent complications with Gogo as it relates to competing firms. American Airlines has stated that it is planning to switch from its current provider, Gogo, to a competing company in order to improve the wireless speed of 200 of its Boeing 737's (Shine, 2016). The airline company went to the extent of filing a lawsuit in order to end its contract early and switch to ViaSat, which is a similar provider that is also used by United, JetBlue, and Virgin America. This news could have an adverse effect for Delta and its hopes of improving in flight Wi-Fi and coverage since there have been negative consequences with Gogo and American Airlines. A new service tool has provided the company with more technological advancements, specifically regarding customer relationship management. Delta had already begun providing its flight attendants with a Lumia 1520 phablet in an effort to reduce the amount of paper material used, and reducing the airline's carbon footprint (Ghee, 2016). This new Guest Service tool allows flight attendants to have all the customer information that is needed at their fingertips, including things such as recognizing high-value customers or those customers that may need extra assistance. This increased knowledge of customer information also enables flight attendants to have the ability to easily identify and address customers by their first names; simple tasks that have a large impact on customer satisfaction and the overall customer experience. This technological advance helps provide Delta with the advantage of having customer information on hand in order to help enhance and personalize the overall customer experience (Ghee, 2016). As of today, Delta is the only domestic airline that has made this transition to providing tablets to its flight attendants. Beyond the domestic market however, this trend is ever increasing as some of the large international airlines such as Emirates and British Airways. Both the technological improvements of increased Wi-Fi and the implementation of a Guest Service tool illustrate the importance of technology as well as the advantages that Delta has when it comes to improving customer interactions and satisfaction while on board. Delta wants to take its efforts of improving customer experience as well as overall operations to the next level by funding a research center at The Georgia Institute of Technology. The purpose of this research center includes the following: collaboration of Delta employees and staff as well as Georgia Tech staff and students, project development, and a space for experimentation. Delta has secured a 5-year lease for this building (“Delta: Airline Foundation”, 2015). The Delta Air Lines Foundation has also committed to a $3 million multi-year grant to the Georgia Tech Foundation for the Georgia Tech Advanced Manufacturing Pilot Facility (“Delta: Airline Foundation”, 2015). This generous grant helps to show support for education within the greater community and its commitment to not only being dedicated to research and development within the company, but also within the educational community. This research center demonstrates the extent to which Delta is investing its time and money on research and development within its company. Ultimately, Delta holds its company to high standards with how it goes about expanding and improving its company both technologically and

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operationally. It is obvious that customer relationship management plays a large role in the company through its constant efforts in trying to improve how the employees interact with customers in order to provide an enjoyable experience. These extra efforts have proven beneficial for Delta as the company’s innovative strategies, such as the Guest Service tool, which emphasizes the importance of personalization with regards to customer relationship management, helps set Delta apart from its competitors. Although other airlines are doing similar things, such as offering Wi-Fi availability, Delta has maintained a high position with consistently trying to be innovative with its technological advancements, and this new investment with Georgia Tech gives Delta a greater advantage with research and development.

Sustainability and Corporate Social Responsibility

The issues of sustainability and social responsibility are implemented into Delta’s core values and goals and is evident in how the firm conducts its operations. In an effort to be transparent with its customers and stakeholders, for the past six years Delta has provided an annual Corporate Responsibility Report, which lays out Delta’s strategy and provides data of its overall performance for that year and compares it to previous years as well. One of its basic business principles states clearly to “be good corporate citizens”, which includes giving back to its communities where the employees serve from as well as minimizing Delta’s impact on the environment. Sustainability is defined by Delta as “meeting the company’s financial goals of growth and profitability over time, through business practices that minimize the environmental impacts of Delta operations and promote the health, welfare, and productivity of the individuals and communities we employ and serve” (Corporate Responsibility Report, 2014).

One way in which Delta promotes this specific ideology is through the implementation of an Executive Environmental Leadership Council. This council is made up of leaders who help to encourage sustainable practices within the company as well as creating and promoting corporate responsibility plans to enact. In 2014 specifically, this council oversaw multiple different issues including: climate change and biofuel strategy and planning, environmental partnership such as with The Nature Conservatory partnership, and customer and employee engagement in sustainability. As a whole, Delta’s core values consisting of honesty, integrity, respect, perseverance, and servant leadership are demonstrated throughout how it is able manage and operate the company in its entirety.

One of the ways that Delta ensures sustainable practices is by setting specific environmental performance goals. In addition to these goals, Delta consistently communicates with leaders keeping them up to date with progress on a quarterly basis as well as sharing information with customers and stakeholders on an annual basis. An audit program is also utilized as a way to keep the company accountable and aware of its current situation, maintain communication with divisional leaders, and encourage improvement. Another tool used by Delta is called the Environmental Programs Manual, which essentially helps to ensure that Delta is following the guidelines that it set with regards to sustainability that includes specific policies and procedures. It uses two other types of management, the Environmental Management System and the Environmental Management Information System, both of which help to improve compliance and

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support for these environmental programs. Lastly, Delta is adamant about implementing a sustainable attitude in the day-to-day management. It does this by having environmental coordinators in specific airport locations and maintenance departments. The roles of these coordinators is “conducting daily, weekly, or monthly inspections, recordkeeping to ensure all environmental permit conditions are being achieved, performing on-call spill response and reporting, and ensuring staff with assigned environmental tasks are trained”. They act as the liaison between airport environmental staff in order to make sure the entire company is consistent with the sustainable values (Corporate Responsibility Report, 2014).

Sustainability is also evident in Delta’s supply chain and how it works to manage and ensure that its suppliers are using sustainable business practices. Additionally, Delta supports and encourages supplier diversity, which is seen in its diverse supply base. For example, "Delta seeks to utilize the products and services of qualified, small minority and women-owned businesses" (Corporate Responsibility Report, 2014). Delta received a Dow Sustainability index score of 87 in 2014, which is one of the highest in the entire airline industry. Delta’s Supplier Performance Management program allows Delta to communicate with 85 of the key suppliers through the use of monthly performances scorecards, periodic business reviews and discussions on developing and maintaining sustainable business processes”. In addition to the supply chain, Delta also puts a lot of focus on minimizing its overall impact on the environment through in multiple different aspects of the firm. These different aspects consist of minimizing spills, improving air quality, supporting and encouraging clean commute options, waste diversion, water impact, climate change, improving fuel efficiency, carbon neutral growth, managing absolute greenhouse gas emissions, and carbon mitigation (Corporate Responsibility Report, 2014).

In order to ensure the minimization of spills of jet fuel and related petroleum products, Delta sets a spill goal for different operating divisions. In 2014, Delta did not achieve the ideal goal of 69 or fewer spills, but the company is committed to reducing its amount of spills and investigates all Class I and Class II spills in order to determining the cause and prevent any future spills. Improving air quality is another aspect of sustainability within the company that Delta continues to improve through contracts with third-party certified environmental professionals and third-party station compliance audits. In an attempt to help encourage employees and the surrounding communities, Delta supports alternate commuting strategies that help to decrease environmental impacts, decrease personal costs, and improve air quality as well (Corporate Responsibility Report, 2014).

Delta’s commitment to embedding corporate social responsibility into its core values is evident through its impact an involvement within not only the local community, but the global community as well. Delta has “6 Pillars of Global Good” which help to define and guide the involvement level within the global community and are made up of:

1. Advancing Global Diversity 2. Improving Global Wellness 3. Promoting Arts and Culture 4. Saluting Armed Service Members and Veterans 5. Supporting Education

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6. Sustaining the Environment

These six principles encourage the involvement of Delta with various different groups and partnerships that go beyond just participating in activities that help Delta and illustrates Delta’s genuine concern for its impact on the overall current situation of the environment as well as its involvement in the global community. Senior Vice President of Corporate Safety and Security and Compliance states that, “At Delta, we believe that reducing our impact on the environment is business imperative” (Corporate Responsibility Report, 2014). This attitude is clearly demonstrated throughout all of the aforementioned elements of the company that emphasizes community involvement and environmental protection.

d. Managerial Accounting Analysis

Analysis of Cost Behavior As a service provider, Delta Airlines breaks down direct labor into five major categories used in the firm’s services. Management is the first major category, consisting of presidents, vice presidents, division managers and other high-level salaried positions that represent fixed costs to the organization. The next major category is flight personnel, consisting of captains, pilots, flight attendants, communications and navigations officers that are directly responsible for the service provided to the customer. This category is responsible for the direct labor of the service, meaning that these are the employees essential for every flight provided by the firm. Maintenance Labor is the next category consisting of chief mechanics, cleaners, crew chiefs and engineers that are necessary for the upkeep of the planes but its costs cannot be directly attributed to each flight, making them fixed costs. Aircraft and traffic handling includes baggage clerks, reservations managers, and refreshing crews who work to organize the flow of air traffic and cargo but the costs must be spread over a number of flights. The last category is other, which includes accountants, budget personnel, advertising specialists, and auditors who are critical to a firm’s operations but are not necessary to the operation of each individual flight, making them fixed costs (Analysis 2016).

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To the left is a diagram outlining the most recent breakdown of direct labor for Delta Airlines. With 26.2% of the entire employee workforce, Passenger Handling represents the largest percentage of the total employee base. These are workers in charge of customer service and are most likely salaried employees representing fixed costs to the organization. Flight

attendants, representing 24.1% of the total workforce, are the next largest group of employees. Unlike customer service employees, flight attendants are part of the direct labor that goes directly into the service of air transportation. Pilots are the next highest categories with 13.8% of the entire employee base and similar to flight attendants are integral to every flight provided by Delta. The rest of the categories represent smaller percentages of the employee base but share the commonality that the categories are not directly attributable to each individual flight and must be spread over a particular activity driver as a fixed cost. Although flight personnel only make up 40% of Delta’s employee base, the personnel account for slightly over 50% of Delta’s total salaries expense, shown in the chart below. Given all of this information, it seems that most of Delta’s service costs are mainly salaried employees that are necessary for flight operations and cannot be easily terminated due to union contracts (Analysis 2016).

Figure 4-2: Delta’s Salary Expenses by Category

Figure 4-1: Employee Breakdown

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Process Analysis Flying expenses, which represent compensation to flight crews, aircraft fuel and other costs directly related to flight operation, make up 36.9% of Delta’s total operating expenses. This is by far the largest operating expense that Delta has and is directly based on how many flights there are, making it a variable cost. Based on Delta’s processes, facilities, and location, the company

uses a variable costing structure. This makes sense for Delta because fuel expense is the biggest expense for an airline, which is shown in the chart below, and the amount of fuel that an airline needs is directly based on the number of flights. If Delta does not have any flights for a particular day, then it will not incur any of these Flying Operations expenses. Fixed costs, such as General and Administrative or Depreciation and Amortization only make up 2.3% and 5.4% of Delta’s total operating expenses respectively. These fixed costs will be present no matter how many flights there are (Analysis 2016).

Figure 4-4: Materials Purchase Expense Breakdown

Airlines are known for having high fixed costs, with many airlines opting to purchase expensive new aircraft that come with low maintenance costs but high acquisition costs. Delta’s strategy, however, has been to purchase used aircraft, which offer cheaper acquisition costs but higher

Figure 4-3: Delta’s Operating Expenses by Category

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maintenance costs. This model leaves Delta with lower fixed costs but higher variable (maintenance) costs, allowing them to quickly scale up or down to meet demand, while not being burdened by the same level of fixed costs of other airlines. This creates sustained competitive advantage and reduced operational risk in the event of rapid increases or decreases in volume (Delta Airlines: Flying High in a Competitive Market 2015).

Instead of offering high fixed wages, Delta instead offers industry-leading profit sharing plans. This allows Delta to shift a portion of the labor costs from fixed to variable, allowing the airline to remain competitive even in market downturns, and reducing the risk of a potential employee strike (Delta Airlines: Flying High in a Competitive Market 2015).

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Strategy Map

Balanced Scorecard

Learning and growth Investment in retirement

plans

Financial

Customer

Internal business processes

Provide a safe work environment for employees

Be industry leader in on-time departures and taxi times

Earn J.D. Power award for customer service

Increase Shareholder wealth

Vertical Integration

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Balanced Scorecard

Perspective

Strategic Objective Measure Goal

Financial Increase Shareholder wealth

• Revenue growth

• Revenue per available seat mile

• Maintain 40/60 debt to equity ratio

• 7%

• 5% greater than competitors

• 8-10% pre-tax return

Customer Industry leader in on-time departure and taxi times Earn J.D. Power Award for customer service Improve customer satisfaction

• “Net promotor” score

• Reduce customer complaints

• Increase J.D. Power overall satisfaction score

• Increase by 10%

• 20%

• 9 points

Internal business processes

Vertical Integration (Tech Ops and Refinery) Efficient aircraft and terminal operations

• Completion factor

• Baggage handling

• MBE and WBE performance

• 100%

• 4.3 rating

• 7.5% higher

Learning and growth

Investment in retirement plans Provide a safe work environment for employees

• Improvement on employee survey

• Shared reward payments

• Investment in retirement plans( pension and 401(k))

• 5%

• 21 or more

• $1.5 billion

Analysis:

The Balanced Scorecard and Strategy Map, both depicted above, illustrate Delta's focus with regards to how it operates the company as a whole. Financially, Delta attempts to increase shareholder wealth through increasing revenue and revenue per available seat mile, while also

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maintaining a 40/60 debt to equity ratio. Delta's emphasis on achieving high customer satisfaction and emphasis on customer service is evident in its increased J.D. Power overall satisfaction score and 20% reduction of complaints. The "Net Promotor Score" is a survey that Delta has been using for many years, but in 2014 began sending email surveys to customers about their Reservations experience as well as those who visited the Delta Sky Club. In 2015, Delta began surveying its customers about aircraft cleanliness, a key performance indicator for 2015.

Internal business processes, learning, and growth both have significant effects on the way that Delta operates. It aims to maintain efficient aircraft and terminal operations through improving baggage handling as well as MBEs, minority business enterprises, and WBEs, women business enterprises. Additionally, uses its TechOps and Refinery as a way to improve the diversification as well as operations as whole. Delta's focus on employee satisfaction and overall treatment of employees is evident in its shared reward payments and investment in retirement plans.

IV. SWOT ANALYSIS, SUMMARY, & RECOMMENDATION

SWOT Analysis

Strengths Weaknesses

- Vertical Integration: TechOps Refinery

- Customer Satisfaction

- Pension Obligations - Dependent on Domestic Market - Liquidity - Fleet Age

Opportunities Threats

- International Expansion - Growing Global Tourism Industry

- Oil Prices - Political Conflicts/ Terrorism - Stringent Regulations

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Strengths

Diversification

In examining the diversification levels of an airline such as Delta, there are many different ways this process can be undertaken in order to reduce the overall risks for the firm. One of the most basic forms of diversification can be seen through examining not only Delta’s supply chain, but also some of its major competitors of the same relative size as well. From a supply chain perspective, Delta has a total of 33 suppliers, each contributing its own special ability in the supply chain. When comparing Delta’s supply chain diversification levels to its two major competitors, United Airways and American Airlines, the only other airline that surpasses Delta in this category is United holding a total of 34 suppliers, while American holds constant at 30 suppliers. As expected, through the examination of the low-cost providers, the most diversified supply chain is Southwest with 22 suppliers, while JetBlue using 15 suppliers, and Virgin America using five (Bloomberg, 2016).

Along with the supply chain diversification, Delta has also taken on the objectives of vertically diversifying its supply chain as well. This can be seen through the wildly successful Delta TechOps program, which is of extreme value to Delta as it not only provides maintenance and repairs for its own aircraft, but are also suppliers of parts to many of its competitors, and even the US Military. With 9,600 employees and growing, this department now has two locations in Delta’s central hub in Atlanta as well as in Minneapolis. At the close of 2015, revenues were estimated to be $1 billion (Delta Airlines, Inc., 2015). Another step that Delta has taken in an effort to further diversify is through the purchasing of Trainer Refinery in 2012, which was a move considered to be extremely bold at the time by Delta is yet to be repeated by any other airlines. The facility includes a series of pipelines as well as terminal assets that allow Delta to be able to supply fuel to its airline operations in the Northeastern US, supplying major hubs such as LaGuardia and JFK (Delta Airlines, Inc. 2015).

Customer Satisfaction

In an industry that lacks many specific competitive advantages, customer satisfaction has been a credential that many travelers have turned to as a method of discerning the best or the worst airlines. One of the most reputable sources for customer satisfaction evaluation is J.D. Power Customer Satisfaction Study performed annually on a multitude of companies in various industries. In 2015, Delta ranked number six overall among all airline providers. However, among the domestic market, Delta’s ratings lead them to a second place in 2015, finishing with a total of 709 points based on a 1000-point scale (“2015 Satisfaction Study”, 2015). Alaskan Airlines was the only domestic carrier that finished ahead of Delta in this category with a customer satisfaction score of 719 (“2015 Satisfaction Study”, 2015). However, it should be noted that not only does a majority of Alaskan Airlines flights only transport passengers to and from Alaska, it also has a substantially lower numbers of trips as well, leaving less chance for customer dissatisfaction.

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SkyTeam Alliance

The SkyTeam Alliance is a partnership between a multitude of both regional, domestic, and international airlines in an effort to enhance the overall traveling experience for the customers of these airlines that includes Alaska Airlines, GOL Airlines, Hawaiian Airlines, Virgin Atlantic, Virgin Australia International, Air France, Aeromexico, Air Europa, Middle East Airways, Great Lakes Airlines, and WestJet. Through the SkyTeam Alliance, Delta is not only able to access the passengers it would have otherwise not had, but it also allows Delta and other members of the team to be able to fly into destinations and routes that would otherwise be inaccessible without such a partnership. This alliance takes the 324 routes that Delta has access to on its own and quickly doubles it to approximately 800 destinations for them to be able to fly too throughout the US and internationally.

Weaknesses

Pension Obligations

Delta’s pension obligation is the largest in the industry when compared amongst its competitors. The low in pension obligation of $12 billion was still about twice the obligation of the next closest competitor, American airlines with $6 billion. In addition to this, Delta’s pension fund is underfunded and expected to create returns, which are unrealistically high. This causes liabilities for Delta, which ultimately cut into the bottom line. Pension obligation becomes an obstacle for Delta and inhibits the optimization of profits.

Dependence on Domestic Market

Delta’s dependence on the domestic market exposes them to danger, as any fluctuation in this particular market will affect 65% of its revenue. Delta’s competitors American and United Airlines decreased its dependence on the domestic market by expanding internationally, thus decreasing percentage of revenue coming from domestic markets to 56%. Furthermore, the growth rate of domestic markets is not as high as international markets. Should Delta remain as dependent on the domestic market it will expose them to the effects of any unfavorable macroeconomic changes concerning air travel in the US. This could include economic, legislative, or socio economic shifts.

Liquidity

Compared to the industry standard, Delta holds less current assets relative to its current liabilities. This decreased liquidity can become an issue as it can lead to the inability to pay for short-term obligations. Furthermore, Delta’s current assets are comprised of more inventory than its competitors, which emphasizes Deltas lack of liquidity. Inventory is a relatively illiquid assets compared to other current assets as it is hard to be turned into cash. A lack of liquidity could inhibit Delta’s future

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Fleet Age

Even as a part of Delta’s operational strategy to acquire used and older leased planes instead of purchasing new ones due to the fact that this will lower Delta’s overall fixed expenses, this could become a major concern for the company as their overall fleet age keeps increasing. Today, the company has an average fleet age of 17.1 years, compared to their competitors this number is substantially higher while American and United have average flight ages of 11.2 years and 13.6 years respectively. Although the company has established that there will be future aircraft purchases and has the capability to service these planes through their extensive MRO department, Delta TechOps, it is still a safety concern for the firm.

Opportunities

International Expansion

Delta has recently begun expanding into global markets, specifically in the Latin America and Caribbean markets. Both of these expansions provide opportunities for Delta to increase the market share and strengthen the competitive advantage relative to the competition. Ultimately, the combination of the codeshare agreements, joint ventures, and alliances with other airlines previously mentioned will encourage even more growth given the historical success of these new ventures. By joining with other airlines, Delta can obtain a larger number of destination, which will increase its overall revenue (Lora, 2015).

Growing Global Tourism Industry

In general, the increasing economy is leading to more people traveling both domestically and internationally. There are predictions that this increase in travel

Delta is likely to benefit from the global travel and tourism sector’s growth potential. According to the World Travel & Tourism Council (WT&TC), the sector’s direct contribution to the world’s GDP was expected to increase by 4.3% in FY2014 and by 4.2% per annum over 2014–2024 to reach US$3.38 trillion in FY2024, in comparison with US$2.16 trillion in 2013. The sector's total contribution to the world economy is forecast to increase from US$6.99 trillion in 2013 to US$10.97 trillion in 2024. Visitor exports are expected to increase by 4.8% in 2014 and 4.2% per annum from US$1.29 trillion in 2013 to US$2.05 trillion in 2024. A rise in investments to US$1.31 trillion in 2024 is likely to support activity within the sector. Delta offers scheduled air transportation and cargo services across the world. This is expected to present growth opportunities for the company.

Threats

Oil Prices

The airline industry's business and results are dependent on the price of aircraft fuel. High fuel costs, or an increase in the cost of crude oil, could have a drastic material impact to Delta's operating results along with the entire airline industry. Over the last decade, fuel prices have

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increased substantially at times and have been extremely volatile, especially during the last few years. Specifically, for Delta, average fuel price per gallon was $1.90 for 2015, which was a 45.2% decrease from its average fuel price in 2014 of $3.47. This shows the overwhelming volatility of jet fuel prices, which decreased Delta's percentage of total operating expense from 35.4% in 2014 to 23% in 2015 (Delta Air Lines, Inc. 2015).

Stringent Regulations

The airline industry is becoming subject to increasing governmental constraints, which could very likely increase the operating costs of the entire marketplace. The entire airline industry is subject to extensive regulatory and legal compliance requirements that result in significant costs. The Federal Aviation Administration commonly updates regulations relating to the maintenance and operation of aircraft that requires significant expenditures. The airline industry is also heavily taxed due to the Aviation and Transportation Security Act mandate of the federalization of airport security procedures and imposes security requirements on airports and airlines. All of these additional taxes and fees could potentially negatively impact the industry if implemented (Delta Air Lines, Inc. 2015).

Terrorism

Potential terrorist attacks and the fear of such events may cause a reduction in demand for air travel along with increasing costs and reduction in revenues. The attacks of September 11, 2001 and all the aftermath that came along with it negatively impacted the business, financial condition and operating results of Delta, along with the entire airline industry as a whole. Even with increased security measures at airports and airlines, the industry remains a high profile target for terrorist attacks. Even if the airline industry is not directly affected by terrorist attacks, the fear of such events could have a significant negative impact on the industry by discouraging passengers from flying and requiring changes in the operations of airlines (Delta Air Lines, Inc. 2015).

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Summary and Recommendation

Delta Air Lines maintains a solid positioning within the airline industry relative to other airlines, as illustrated in the two perceptual maps and the analysis. Although, it struggles to compete with its competitors with regard to the pension obligations and debt. These factors influence its ability to expand in the ways that it would like to, internationally as well as within the North American market.

The purchase of Delta stock would be a very risky acquisition. Though the company is reporting profits in recent years, pays off debt and loss carryforwards, and started the payment of dividends all the risks analyzed above are not to be underestimated, which does not make an investment in Delta recommendable. Furthermore, while it is questionable if the growth in stock price can be sustained, it is no question that prices currently are already on a high level. However, the stock is not to be classified as a sell either, due to Delta’s positive recent operational performance and advantages over its competitors. The observation of the near future is important to make sure Delta appropriately addresses problems such as the increased pension obligations and how possible price changes in oil and fuel cost will impact its financials. Thus, we recommend to HOLD the stock of Delta Airlines.

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