Airlines industry margins
As you can see in the chart below, Delta (DAL) has outperformed its peers in terms of margins continuously for the past four years, followed by Southwest Airlines (LUV), American Airlines (AAL), and United Continental (UAL). Delta has been able to increase its EBITDA (earnings before interest, tax, depreciation, and amortization) by increasing revenue through higher yield, as we discussed in the previous article of this series, and through cost reduction initiatives.
Two major expenses dominate Delta’s operating expenses, comprising around 46% of total operating expense. These are fuel cost (24.9%) as well as salaries and profit sharing agreements (21.7%).
- Fuel cost in 2013 reduced by 7% due to lower purchase costs and hedging gains. Delta also expects to have lower fuel costs, though it expects profits (currently loss-making but expected to make profits in 2Q14) from a refinery acquired by its subsidiary. However, like all airline companies, Delta is also vulnerable to sudden volatility in crude prices.
- Delta has 78,000 full-time employees (18% represented by unions). According to IATA (the International Air Transport Association), the airline industry is highly unionized, with around 49% of working being union members. All other U.S. airlines except Delta are highly unionized. Despite this difference, Delta’s salaries increased 6.2% in 2013. Labor unions generally have high bargaining power because of the high costs involved in disrupting operations caused through strikes. There was also a 36% increase in profit sharing ($506 million in 2013), representing 8% of an employee’s annual pay.
- Other expenses include D&A (depreciation and amortization), aircraft maintenance, aircraft rent and landing fees, and restructuring charges. Delta has managed to lower its non-fuel unit cost growth from 4.6% in 2012 to 0.3% in 1Q14, and it targets keeping this cost growth below 2% in the long run.