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DELTA AIRLINES- COST CUTTING (6)

On September 2015, Delta Air Lines Inc. lodged for bankruptcy, owing to skyrocketing jet
fuel prices, heavy competition and increased scarcity of cash flow. Delta airline resorted to
Chapter 11 protection from creditors with the bankruptcy court in New York, listing total
assets of $21.56 billion and $28.27 billion in debt. Few of the underlying factors for Delta
airlines bankruptcy was short sightedness, destructive decision making and poor relations
with the workforce.

COST CUTTING STEPS UNDERTAKEN BY DELTA AIRLINES INC. WERE AS

FOLLOWED-

CONSTANT INNOVATION

1. Undertook ancillary business practices, which included airplane maintenance, repair,

private jet services; and vacation consolidation, and requiring them to be significant
cash-flow generators.

2. Unlike many of their competitors, Delta Airlines tied up their capital in new
airplanes, also adopted an opportunistic fleet strategy that combined new aircraft
with used jets that were refurbish and operated them at a much lower overall cost.

3. As a part of its restructuring process Delta airlines also reduced the number of 50-seat
aircraft in operation as they had become extremely inefficient when fuel costs spiked.

VERTICAL INTEGRATION AND MERGERS

1. Bought equity stakes in leading Brazilian, Mexican, and British carriers, they were
able to make virtual mergers with strong partners in their largest and busiest
international travel markets. Government regulations against foreign ownership of
airlines prevents actual cross-border mergers, so this move helped them expand their
coverage and evade massive tax structure for foreign airlines. Example- Virgin
Atlantic had a giant European network and the number two position at Heathrow
Airport, the most important hub in the region if not the world; when Singapore
Airlines divested its 49% share in Virgin Atlantic, Delta airlines carefully seized the
opportunity.

2. Jet fuel was Delta airlines single largest expense that accounted about $12 billion
annuallyso they wanted to attain a global advantage at securing it and then
supplying it to their operations across the globe. Use of hedging and dynamically
pricing the ticket to insulate themselves from oil price fluctuations. But this was
rather a common approach adopted by the whole industry so they decided to go a step
further. Rather than to get controlled by the producers (OPEC), they got into the
petroleum business. this gave rise to the vertically integrated structure and helped
them gain control over our supply chain.

3. During their restructuring period a significant number of East Coast refineries were
shutting down which would have resulted in price rises and eventually it would have
been costly for Delta airlines. They justified their move of buying the refinery by
concluding that if the refinery closed, the fuel prices would rise by 10%15%. If we
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bought it, we could begin to lower our fuel costs. For $150 million, the price was
reasonable thats roughly what would have costed them for a new Boeing 787.

4. They also signed an exclusive long-term lease for a ship that can move Gulf Coast
crude up the East Coast so that they can achieve self sufficiency by self-supply at
significantly less expense. Delta airlines average cost of fuel per gallon has been five
to 10 cents less than the industrys over the past two years.

5. In order to pursue their goals of greater efficiency and control. Delta airlines
decision to take our reservations system in-house reduced their reliance on a third
party to manage their data, which allowed their system to evolve and grow to meet
their needs.

LESSONS LEARNT

Delta has become much leaner after reducing capacity and saving $1 billion in labor costs by
restructuring and eliminating 6,000 jobs. Their rapid and successful reorganization left the
airline with lower operating costs, improving revenue generation and a reduced debt load.
So in a nutshell, Delta Air Lines is retiring its 747s, older 757s, and domestic 767s in order to
lower its maintenance costs. It is also using hedging to protect itself from any sudden spike
in oil prices in a cost-efficient manner. The company also has a refinery that helps keep its
fuel expenses on the lower side. Apart from cost savings, the company is also working
toward minimizing its tax exposure by increasing its pension plan contributions.

REFERENCES

1. https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-
airline

2. http://marketrealist.com/2015/07/delta-air-lines-market-reactions-weak-despite-
strong-2q15/

3. http://marketrealist.com/2015/07/delta-air-lines-market-reactions-weak-despite-
strong-2q15/