Delta Airlines: Navigating an Uncertain Environment

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the company chose to divest its own unsuccessful subsidiaries: Delta Shuttle, Delta Express, and Song. The airline also sold off two regional subsidiaries of Northwest Airlines after the merger. More consequentially however, Delta filed for Chapter 11 bankruptcy in the mid-2000s. While retrenchment might have historically been the right directional strategy, I think that this strategy is wrong for Delta’s current situation.

The industry trend for airlines is to focus on growth through acquisitions and mergers as a way to streamline operations and boost buying power. Successfully doing so can result in reduced overhead costs and significant savings in operating expenses. Delta’s first merger took place in 1953 with Chicago and Southern Airlines. Future acquisitions and mergers include Northeast Airlines, Comair Airline, Western Airlines, Pan American World Airways, and most recent, Northwest Airlines. Additionally, Delta was a founding partner in the SkyTeam strategic alliance, which was made up of 11 international airlines that offered over 13,000 flights a day and reached 900 global destinations. The ability to successfully merge and acquire companies is a core competency for Delta. The benefits obtained from focusing on growth strategies have surpassed the associated negative aspects. With regards to their current situation, Delta needs to implement a growth strategy that allows it to tap into the market share of low-fare air travel.

Over the past five years, the overall industry trend was an increase in market share for low-cost carriers. Previously, Delta attempted to establish and operate its own budget airline, but failed as it realized it was incapable of operating as a low cost-carrier. Despite this failure, I believe it is crucial for Delta to compete directly in the low-fare market. With that being said, Delta needs to develop a strategic plan to acquire one of its low-fare competitors. Delta’s top competitors in this market are JetBlue and Southwest Airlines. In 2011 Southwest Airlines had a net income of $178 million, and was the most successful of the low-cost airlines. The airline also provides excellent customer service and no baggage fees. With Delta’s successful history of M&As and the guidance of an integration manager, I believe that the acquisition of Southwest would have synergistic benefits for both airlines.

FOF #3:

In 2012 Delta discovered the opportunity to enhance its vertical integration by buying a Trainer refinery. The Pennsylvania refinery produces 185,000 barrels-per-day and is owned by ConocoPhilips. Delta became interested at buying the refinery to obtain better control of one of its biggest, most volatile expenses—jet fuel. What are the issues that the airline should consider before moving forward with this strategic decision?

1. Funding- The cost to purchase the refinery is $180 million. Additionally, Delta would need to spend $100 million to modify the refinery in order to maximize jet fuel production. This is a huge and risky investment, especially after the merger with Northwest caused them to take on $904 million in debt. Moreover, this substantial liability may limit the airline’s ability of obtain financial funding for investments such as the purchase of the refinery or funding to continue operations if the refinery is unsuccessful. After Delta determines the future benefit of the investment, they need to divide that by the total cost of the investment to determine the return on investment.

2. Lack of experience- Delta has knowledge and expertise of operating a profitable airline. What the company lacks entirely is the experience in the oil refining market. Vertical growth can be very beneficial in reducing costs and gaining control over scarce resources. Taking over the process of supplying jet fuel is considered backward integration. The problem is that Delta currently lacks the human capital to make this integration successful. Additionally, the question also arises, if this company is a good investment then why are oil companies passing it up?

3. Reduction of costs- In 2011, fuel costs made up 36% of total operating costs. If this investment can significantly reduce that expense for the foreseeable future, then it is worth consideration. On the other hand, there is still no way to completely protect against fuel price volatility.

It is my recommendation that Delta pass on the opportunity to purchase the refinery. I think that the money would be wiser invested in decreasing its current debt. The idea to purchase the refinery is not a bad one, it is just not appropriate at this time. Rather than being a first mover, Delta should use the $280 million and pay down its debt and continue investing in its airline. Perhaps at a later date, when the company is more financially sound, the opportunity will present itself again. The risk is too great and the stakes are too