In order to extend an equipment or aircraft’s useful life, there were only a few possibilities for Delta: route changes, maintenance, and/or betterment through more efficient technology. Delta, has taken many routes in order to increase their profits very efficiently. Since acquiring the transatlantic from bankrupt Pan Am and later acquiring Northwest Airlines after they rose back from bankruptcy, Delta has acquired many aircrafts and equipment from other airlines.
Delta’s new approach in cutting down the size of their flights to be more cost and fuel-efficient has been one of their many ways of approaching their increasing debt and increasing fuel costs. An article published in 2011 shows that Delta has put in orders for Boeing aircraft MD-90 that were previously owned to come in during 2013-2017 through a financing program. These flights are more narrow and have less number of seats which and are more fuel efficient. In doing this, Delta believes they will be cutting down their maintenance costs and fuel costs. Fuel consumption took a huge toll on Delta’s revenue in 2011; their annual report shows an increase of nearly $2.9 billion from 2010. Also, from the annual report, it is clear that Delta still performs more on domestic flights than international, therefore depreciating their aircraft sooner than if they had more international routes. Their long-term debt seems to be forecasted to be increasing due to this financing with Boeing, co., however it is not evident that Delta would be making enough revenue to cover their obligations and costs, and attain marginal profits from the change in their strategy.
Another article published in 2012 explains Delta’s interest in lowering these fuel costs by buying a refinery. Through this Delta expects to have fuel savings of nearly $100; fuel costs were a major factor in Delta’s annual report of expenses and cost increase from previous years. Delta expects this new partnership with Trainer refinery to increase their margins and recover within the first year of operations once this falls into full act. We will have to take a look at Delta’s 2013 annual report to determine the benefits of this partnership in 2012.
Both the partnership and purchasing older flights (MD-90) to save per unit costs so that Delta can pay back their debt may not be a realistic approach to their current situation. By purchasing older planes, Delta may be trapped in increased maintenance costs. The useful lives of these planes are less, therefore reaching their salvage value sooner than other planes. Maintaining these planes may actually cost more in order to increase their useful lives than purchases newer plans with initial high life expectancy. Especially due to Delta’s often domestic routes, the flights are more likely to have maintenance problems, increasing their operational costs more. Boeing expects to come out with more efficient engine aircraft by 2017, which Delta was not interested in at all to save their expenses. Delta’s “penny-pinching” investments in their aircraft may end up working against them if the older aircraft die out sooner than their given expected life. The refinery partnership however may work in their favor to lower fuel costs, however I do not believe that they can make higher margins.
SOURCES:
http://online.wsj.com/article/SB10001424052702304050304577376354288927594.html?KEYWORDS=Delta+refinery
http://online.wsj.com/article/SB10001424052970203406404578072960852910072.html?mod=WSJ_article_comments#articleTabs%3Darticle
http://www.annualreports.com/Company/511
http://online.wsj.com/article/SB10001424053111904875404576530340951416116.html?KEYWORDS=Delta+aircraft
