Delta Air Lines Cost and Productivity Analysis

1. Delta Air Lines Cost and Productivity Analysis Ujaval Patel

2. Airline Information • Delta is considered a legacy carrier. • It has: • A heterogeneous fleet mix • Fleet hubs (Dom: ATL, DTW, MSP, LGA, SLC, JFK, CVG, MEM; Int: CDG, NRT, AMS) • Small percentage of unionized workers • Categorized seating classes • Seat assignments • Frequent flyer program • GDS

3. Definitions • RPM –Revenue Passenger Mile – One revenue paying passenger transported one mile. ∑ i = 1 to All Flights (# of revenue passengers * # of miles traveled) • ASMs – Available Seat Miles – One available seat flown 1 mile. ∑ i = 1 to All Flights (# of seats on flight * # of miles flown) • RASM – Revenue Per Average Seat Mile –Revenue made from each seat mile offered = Operating Revenue/ASMs • CASM – Cost Per Average Seat Mile -Cost to operate each seat per mile offered = Operating costs /ASMs • Yield – measure of the average fare paid by all passengers per mile flown. = Total Operating Revenue/ # Revenue Passenger Miles = Load Factor * Yield • PRASM - passenger revenue per ASM. = Total passenger revenue/ASM • Fuel Consumed – Total volume of fuel used • Fuel Costs per ASM = Fuel Cost / ASM • Non-Fuel Costs per ASM = (Operating Expenses – Fuel Costs)/ASM

4. RSM, ASM, and Load Factor Comparison • The trends shown represent the rise in 3rd Quarter RPMs and ASMs. • 2010 showed a great increase in both RPMs and ASMs, though the trend seems to be tapering off a little, due to the merger with Northwest. • The load factor has gradually increased from ~80% to ~90% in 6 years.

5. Operating Revenue, Operating Expenses, and Income Before Taxes • The 3rd quarter is prime summer traveling season and sees the most RPMs and ASMs. • 2008 and 2009 signal the high cost to keep up profits up even during the summer. • The merger in 2010 saw expenses and revenues dramatically rise, and this has led to higher Q3 profits.

6. RASM, CASM, Yield, PRASM • By 2009 the yeild was dropping and CASM was seeing a rise. This was cutting into profits. • With the merger in 2010, the yeild was climbing again and CASM was dropping . Though, currently CASM is back at 2009 levels.

7. Fuel OPEX, Non-Fuel OPEX, Fuel Consumption • The summer months tend to have higher than average fuel prices. • 2008 saw a price spike in fuel prices and thus there was a spike in Fuel OPEX. • With the merger Fuel OPEX has increased steadily, while Non-Fuel OPEX and fuel consumption has remained relatively steady.

8. OPEX ASMs and Fuel Cost • The price of fuel saw a spike in 2008 and the price dropped back down in 2009, but it has steadily creeped up over the past 3 years. • As expected Fuel OPEX per ASM closely follows the trend of fuel cost. Where as Non-Fuel OPEX has remained fairly stable.

9. Final Thoughts • Fuel prices and dropping profits in Q3 were probably an indicator of two years of lost profits at Delta in 2008 and 2009. • With the merger in 2010 with Northwest fuel expenses did rise as the fleet size increased. • Additionally, airline expenses rose to handle the larger company that was formed. • With an increased market share and a drop in CASM after the merger profits rose, and have steadily risen since.