Question

Does Delta Airlines have a competitive advantage or disadvantage in its primary industry (airline industry)?

Answer 1

ANS. Delta’s competitive advantages lie in the ability to consistently maintain higher margins than its competitors. Delta owns the Monroe Refinery, giving them a cost advantage of approximately 5 cents per gallon on jet fuel. They also focus heavily on attracting the corporate traveler segment, which again provides higher margins and is less prone to price fluctuations. Delta’s industry leading customer service helps to maintain and grow their customer base in the United States and internationally while their partnership with American Express helps to instill high value for corporate and retail clients. It is important to note that Atlanta airport, the world’s largest hub, is dominated by Delta Airlines. This hub is incredibly efficient and within a 2 hour drive for 80% of the United States population. Furthermore, Delta purchases many of its airplanes used, while its main competitors purchase most new, giving Delta the flexibility to convert fixed costs into variable costs due to the lower purchase price of these aircrafts. Lower fixed costs and higher variable costs enable Delta to quickly and efficiently scale up or down to meet demand; this is a major advantage in times of low passenger volume

Risks:

Increasing fuel costs: A sharp increase in fuel prices would adversely affect Delta’s business and stock price because the company does not fully hedge its oil purchases. Airlines can’t not immediately offset increasing oil prices with higher fares so this remains a concern in the short term.

Excess Capacity: As airlines have bought more and more planes, they have more seats available for sale. This has led to decreasing fare prices as the airlines look to fill the extra planes they have available. Delta is looking to offset this by increasing its share of business class seats which have much higher margins than economy.

Geopolitical events: Events such as terrorist attacks have proven to hurt the airline industry dramatically. Also, Delta operates joint ventures around the world and has to worry about political events that could hurt operations around the world.