Question 1: What drives the basic economies of the airline industry? The refining industry?
The revenue side of the airline industry is driven by the amount of passengers an airline can carry per flight. A common index is the percentage of filled seats: if it is low on a flight, that flight may be unprofitable. Fuel costs may represent 30 to 50% of total operating costs in the airline industry (Grassbaugh, 2013). For the refining industry, the cost of crude oil is the major driver (Grassbaugh, 2013). Hence, when the price of crude falls, refining margins tend to rise.
Question 2: How is Delta different from other airlines?
Mallikarjun (2015) posits there are so many competitors in the American airline industry, that it is hard to ascertain the prevalence of an airline over others. However, Delta showed to be timely (only 16% delayed flights in the first quarter of 2015), and second in customer satisfaction in 2015 (Mallikarjun, 2015). Such characteristics have also been pointed out on previous occasions (Century of Flight, 2008). Furthermore, its margins have been the highest among its peers in recent years (Cederholm, 2014).
Question 3: How would owning the Trainer Refinery help Delta manage its fuel costs in the future? Is this offset by operation cost?
Delta had a high profit in 2011 and a bright outlook, but “jet fuel costs were killing it” (Grassbaugh, 2013). The idea behind the acquisition of the then closed Trainer refinery was an attempt to hedge its main operational cost, as fuel margins soar with the decline of oil prices (The Economist, 2012). Delta and – surprisingly – competitors have benefited from the refinery since the restart of its operations led to an increase in fuel supply (Cederholm, 2014). The cost reduction, estimated n $382.8 million in 2013 (Cederholm, 2014), was higher than the combined acquisition cost of $150 million plus the $100 million in retooling (The Economist, 2012).
Question 4: What impact does buying an oil refinery have on Delta as a company? Is this a good strategic move? Why/why not?
Delta attempted at a vertical integration since it acquired a main supplier. Therefore, it was a strategic move that has led to a reduction of prices in recent years (Cederholm, 2014). However, if oil prices return to high level, both of its airline and refining business may suffer: when the crude price is high, refining margins decrease; simultaneously, fuel prices rise and depress airline margins. The jury is still out on this bold move by Delta.
Question 5: How does the merger between Delta and Virgin Airlines impact the company as a whole?
Delta acquired 49% in Virgin Atlantic in 2012, for $350 million, in an attempt to obtain a larger share of the London-NYC market (News Hub, 2013). The market perceived the acquisition as a daring move since Virgin had been operating at persistent losses (Levine-Weinberg, 2016). Recently, Virgin has benefited from improved finances, market share gains, and higher profits (Levine-Weinberg, 2016). Therefore, most observers consider the merger was positive for both companies.
References
Cederholm, T. (2014, June 19). Why airlines like Delta are haunted by rising fuel prices.
Retrieved June 30, 2016, from http://marketrealist.com/2014/06/airlines-like-delta-
haunted-rising-fuel-prices/
Century of Flight. (2008). History of Delta Airlines. Retrieved June 30, 2016, from
http://www.century-of-flight.net/Aviation history/coming of age/usairlines/Delta
Airlines.htm
Grassbaugh, H. (2013). Case Studies. Glendale, AZ: Thunderbird School of Global
Management.
Levine-Weinberg, A. (2016, March 25). Delta Air Lines' Virgin Atlantic Investment Is Being
Vindicated -- The Motley Fool. Retrieved June 30, 2016, from
http://www.fool.com/investing/general/2016/03/25/delta-air-lines-virgin-atlantic-
investment-is-bein.aspx
Mallikarjun, S. (2015). Efficiency of US airlines: A strategic operating model. Journal of Air
Transport Management, 43, 46-56. Retrieved June 30, 2016, from http://www.sciencedirect.com/science/article/pii/S0969699714001525
News Hub, D. (2013, June 24). 49 percent stake in Virgin Atlantic acquired. Retrieved June
30, 2016, from http://news.delta.com/49-percent-stake-virgin-atlantic-acquired
The Economist (2012, May 09). An airline buys an oil refinery. Retrieved June 30, 2016,
