HBR Delta Case Analysis
“Keep Climbing, Delta.”
Executive Summary:
How does the price of crude oil affect an airline’s profits? How can Delta respond to possible loss of profits from fluctuating oil prices?
The airline mergers and consolidations over the past decade have shifted competitive focus from increasing market share to obtaining and preserving profitability. One expense over which airlines have little control is the price of oil. The volatility of its price is partially due to geopolitical uncertainty and fluctuations in the value of the US dollar against foreign currencies. Similarly, any news of an improving US economy will drive oil prices higher.1 An airline can effectively control its balance sheet, yet may compromise profits because of increasing crude oil prices (see Figures 1 and 2). Every dollar increase in the price of jet fuel causes the US airlines industry to spend an additional $445 million per annum in fuel expenses2. To mitigate this volatility, in April 2012 Delta acquired an oil refinery outside Philadelphia for $150 million and will invest another $100 million to upgrade technology and maximize production. This made Delta the first airline to vertically integrate by purchasing a refinery, they believe it will provide 80% of their jet fuel needs, and they forecast their fuel costs will decrease by $300 million per annum. This integration they may have opened the door for a new revenue channel among leading airlines.
What is the competitive environment for customer growth now and in the future? What opportunities are available to increase prices?
The US domestic airline industry is in the mature life cycle stage with significant barriers to entry (see Figure 3) and the biggest source of customer growth has been through consolidation. This suggests that many companies are struggling to sustain operations. Of the eight major domestic airlines in 2004, only five remained active in 2012.3 Delta’s market share nearly doubled after their
Executive Summary:
How does the price of crude oil affect an airline’s profits? How can Delta respond to possible loss of profits from fluctuating oil prices?
The airline mergers and consolidations over the past decade have shifted competitive focus from increasing market share to obtaining and preserving profitability. One expense over which airlines have little control is the price of oil. The volatility of its price is partially due to geopolitical uncertainty and fluctuations in the value of the US dollar against foreign currencies. Similarly, any news of an improving US economy will drive oil prices higher.1 An airline can effectively control its balance sheet, yet may compromise profits because of increasing crude oil prices (see Figures 1 and 2). Every dollar increase in the price of jet fuel causes the US airlines industry to spend an additional $445 million per annum in fuel expenses2. To mitigate this volatility, in April 2012 Delta acquired an oil refinery outside Philadelphia for $150 million and will invest another $100 million to upgrade technology and maximize production. This made Delta the first airline to vertically integrate by purchasing a refinery, they believe it will provide 80% of their jet fuel needs, and they forecast their fuel costs will decrease by $300 million per annum. This integration they may have opened the door for a new revenue channel among leading airlines.
What is the competitive environment for customer growth now and in the future? What opportunities are available to increase prices?
The US domestic airline industry is in the mature life cycle stage with significant barriers to entry (see Figure 3) and the biggest source of customer growth has been through consolidation. This suggests that many companies are struggling to sustain operations. Of the eight major domestic airlines in 2004, only five remained active in 2012.3 Delta’s market share nearly doubled after their