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Major Risks and Challenges in the Business of Delta Airlines Inc

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Leading Risks that can hurt Delta Airlines.

Delta Airlines is one of the leading players in the US aviation industry with a strong presence in the North American market. Apart from operational efficiency and customer service, Delta’s success is also attributed to its large fleet and alliances with leading players from other markets across the world. It has its head office in Atlanta, Georgia. Its CEO is Ed Bastian. The company employs around 88,680 people (as of 2018) and earned net revenue of $44.44 billion in 2018. Over the past several years, Delta’s financial performance grew stronger. It has earned an investment-grade label from major rating agencies based on its cash flow.

Growth of the company in recent years can also be attributed partly to the performance of the US economy which has performed well over the last two years. However, while Delta has maintained a strong position in the industry, the airline industry is still full of challenges including regulatory, operational and most of all competitive. While the Airline industry is expected to maintain its growth momentum in the future, there are always risks that can hurt operational performance and profitability. As in the case of Delta, the risks are nearly the same as the ones faced by the other players. Some of the factors that pose risks to Delta’s business and can hurt its profitability include the following:

Risks Caused by Rising fuel Costs:

The airline industry is dealing with several challenges. However, one of them is the rising operating costs. Each year the costs of aviation fuel are rising and driving the operating costs higher for airline companies. The business of Delta airlines is significantly impacted by rising fuel costs. Over the last decade, fuel costs have risen significantly and have been highly volatile at times. From 2017 to 2018, the average fuel price per gallon grew by 31%. Delta’s total fuel costs in 2018 were 23% of the overall operating expenses compared to 19.2% in 2017. Its total fuel costs rose to $9 billion in 2018 compared to $6.8 billion in 2017 (Annual Report, 2018). In this way, rising fuel costs pose a significant risk to Delta’s profitability.

Risks Caused by Disruptions in the supply of aircraft fuel:

The supply of aircraft fuel to Delta can be affected significantly due to various reasons. Natural disasters, weather events, geopolitical events, changes in government policies or other significant political events involving the oil-producing nations can also affect fuel supply and result in shortages in the future. Since Delta’s business depends heavily on the supply of aircraft fuel, its sales and profits will be affected heavily due to the shortage of fuel. However, Delta acquires a large part of its fuel from Monroe, a wholly-owned subsidiary of Delta airlines which mitigates some of the risks associated with fuel supply. Any kind of disruption to fuel production at Monroe could still affect Delta’s capacity to acquire fuel significantly and pose risk to its business and profits.

Risks Related to fuel hedging:

The fuel hedging activities of Delta airlines are intended to manage the volatility in the price of jet fuel. However, rebalancing its hedge portfolio and market to market adjustments may negatively affect the financial results of Delta airlines. A hedging program may fail to provide price protection due to market conditions and the choice of hedging instruments.

Risks Related to commercial partnerships with other companies:

Delta airlines has invested in and partnered with several other airline companies. Its commercial relationships with the other airlines in various parts of the world may not always produce the desired results. To expand its global network, Delta has made significant investments in other airlines. There are significant risks and challenges involved in its relationship with the other airlines including risks to ROI. Apart from that Delta is also dependent on those airlines for its global route coverage. Delta does not exercise significant control over the operations of the airlines it has invested in. Any form of extended disruption to the operations of the partner airlines can have a negative impact on the global operations of Delta also.

Risks Related to Data Security and IT Infrastructure:

Delta’s business also depends heavily on its technology systems and IT infrastructure.  The company stores large volumes of passenger and employee data. Any cyber attack could compromise passenger or employee information resulting in significant liability and have an adverse impact on Delta’s business. Securely operating the It networks and technology systems in which this data is stored is critical to the successful operation of delta’s business. It is why cyber-attacks meant to disrupt its IT systems pose a significant risk to Delta’s business operations. Moreover, cybersecurity risks are evolving constantly and the threat to passenger’s personal information stored by Delta is also growing continuously posing a major challenge before the company regarding secure storage of its passenger and employee data. Any internal error or failure can also affect the IT systems maintained by Delta airlines.

Large scale interruptions or disruptions at its data centers or external vendors where the company stores data can also compromise the security of critical information and affect business operations. Apart from the hackers trying to gain illegal access to Delta’s IT systems, viruses and other security issues also pose a significant threat to the company’s business operations. The company’s use of technology has grown a lot over recent years and disruptions or failure of customer-facing technologies like mobile device applications, kiosks, etc can also affect business operations.

Risks Caused by Terrorism and Geopolitical issues:

Terrorist attacks or geopolitical events or other forms of security events or their fear can also have a negative effect on the business of Delta airlines. While governments around the world have heightened security across airports, they still remain high profile targets for terrorist groups as well as domestic extremist groups. Recently, in January 2018, Iranian officials accidentally shot down an airplane. The event happened amid escalated tension in the region due to an American drone attack. Such geopolitical events affect air travel demand in the region. While Delta’s business may not be affected

By tensions in Iran, any such disaster in the US could have a sizable impact on its business.

Risks Related to Financial Debt:

From mid-2018 to mid-2019, Delta airlines had accumulated a significant part of its debt. During this time, its debt grew to $19 billion from $9.7 billion. However, the company also generated significant cash flow during the same period of time. While its current debt level may not be a threat because Delta is a highly levered company. Still, there are agreements governing its debt including credit agreements which include financial and other covenants. Failure to comply with these covenants can result in events of default.

Risks Related to Employee and Labor Disputes:

The business of Delta airlines is labor-intensive. It utilizes a large number of pilots, flight attendants, aircraft maintenance technicians, ground support personnel and other personnel. 19% of Delta’s workforce (pilots mainly) was unionized as of December 2018. If Delta or its subsidiaries are unable to reach an agreement with any of their unionized workgroups or if additional parts of its workforce become unionized, the result could be stoppages and work interruptions. Strikes or labor disputes with Delta’s unionized employees can result in disruption of Delta’s business operations.

Risks Related to Subsidiaries:

Monroe and Endeavor Air Inc are the wholly-owned subsidiaries of Delta airlines. There are several risks related to the operation of subsidiaries as well. Monroe Energy, LLC and MIPC, LLC are collectively called Monroe. There are several risks related to the successful operation of the subsidiaries of Delta Airlines as well. Monroe operates the Trainer refinery and related operations near Philadelphia, Pennsylvania. Apart from maintaining a sufficient supply of jet fuel for its NewYork operations, the ownership of Monroe also helps Delta mitigate the cost of refining margin reflected in the price of jet fuel. However, Monroe’s operations are subject to several environmental and other regulations. There are other types of hazards also which are unique to refinery operations and which can affect the operation of Monroe negatively and cause huge losses. Any major incident can cause Monroe to incur huge losses. 

Risks Related to Social Image:

Maintaining a strong social image is important for all major airlines since it has a direct impact on the level of demand, sales, and profitability. It is why apart from operational efficiency, Delta also focuses on customer service and CSR to maintain a strong social image. A strong social image in the airline industry is a source of competitive advantage and affects an airlines’ popularity as well as sales. The company operates in a highly visible, public environment where the level of social media exposure is also significantly high. Adverse publicity even if unjustified spreads rapidly through social media or with the help of digital media. If Delta fails to respond to negative publicity in a timely manner, that can have a negative effect on its business and damage its social image. If there is significant damage to the brand image and reputation of the company, it will also affect the financial results. Moreover, social image and reputation are also drivers of customer loyalty in the US airline industry and therefore it is important to manage them proactively.

CITE THIS
APAPratap, A. (2020, February 3). Major Risks and Challenges in the Business of Delta Airlines Inc. Retrieved from https://cheshnotes.com/major-risks-and-challenges-in-the-business-of-delta-airlines-inc/
MLAPratap, Abhijeet. Major Risks and Challenges in the Business of Delta Airlines Inc. 3 Feb. 2020, cheshnotes.com/2020/02/major-risks-and-challenges-in-the-business-of-delta-airlines-inc/.