Running head: DELTA AIR LINES, INC.

ORGANIZATIONAL ANALYSIS

Delta Air Lines, Inc. Organizational Analysis Rita E. Sprouse Ohio Dominican University

DELTA AIR LINES, INC. ORGANIZATIONAL ANALYSIS Table of Contents

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Organizational History and Current State of Affairs

This portion of the paper will include key information about Delta Air Lines, Inc. (Delta): (a) history; (b) culture; (c) important leaders over the years; (d) current products and service offerings: (e) target markets; and (f) methods of product and service delivery. History This section describes the history of Delta. The company was founded in Macon, Georgia, in 1924, as the worlds first crop-dusting service, Huff-Daland Dusters. The company moved to Monroe, Louisiana, in 1925. In 1928, field manager C. E. Woolman and two partners purchased the service and renamed it Delta Air Service after the Mississippi Delta region it served. Delta was the first international mail and passenger route on the west coast of South America. Delta operated its first passenger flights over route stretching from Dallas, Texas to Jackson, Mississippi, via Shreveport and Monroe, Louisiana. Also, Delta was awarded a US Postal Service contract in 1934 to fly from Fort Worth to Charleston via Atlanta (Hoovers, 2011). In 1941, Delta relocated to Atlanta. Woolman became the president in 1945 and he managed the company until his death in 1966 (Delta, 2011). Delta offered its first night service in 1935, using the Stinson Model A; the first Delta aircraft with two pilots. Douglas DC-2 and DC-3 service was introduced and the introduction of flight attendants, called stewardesses, added to flight crews. Delta contributed to the war effort by modifying 1,000 plus aircraft, over-hauling engines and instruments and training Army pilots and mechanics. The company was recognized in 1945 by the National Safety Council, for more than 300 million passenger miles and 10 years of flights without a passenger or crew fatality. In 1946, Delta was recognized for more than one-half billion passenger miles without a fatality (Delta, 2011).

Delta added more flights in 1952 after it purchased Chicago and Southern Airlines. It offered its first transcontinental flight in 1961. In 1972, it purchased Northeast Airlines, which added service to New England and Canada; it offered service to the United Kingdom (UK) in 1978, when the US airline industry was deregulated (Hoovers, 2011). Delta reached a milestone is reached and celebrated 50 years service (Delta, 2011). In 1982, Deltas employees pledged $30 million to buy a Boeing 767 jet, The Spirit of Delta. The company posted its first loss in 1983 due to the weak U.S. economy and rebounded in 1985 when it was able to purchase Los Angeles-based Western Air Lines in 1986. Delta then began service to Asia in 1987. In 1990, Delta joined TWA and Northwest to form Worldspan, a computer reservation service (Hoovers, 2011). Delta continued to purchase gates, planes, and routes despite a slump in 1990 earnings. These purchases elevated it from a domestic player to a top international carrier; however it also contributed to a $2 billion loss for the company between 1991 and 1994. In efforts to recover, Allen began a cost-reduction plan in 1994 that cut several routes and 15,000 jobs over three years. These measures negatively affected employee morale and the companys reputation began to suffer in customer service. The company decided to discontinue unprofitable international routes in 1995 and introduced no-frills Delta Express in 1996 (Hoovers, 2011). The companys unprofitable code-sharing agreement was dissolved with Singapore Airlines and it began a Latin American expansion drive. Delta signed a marketing accord with United under which the carriers consolidated their frequent-flier programs (Hoovers 2011). In 1998, Delta was the first airline to install automatic defibrillators on board all of its aircraft and Air Transport World magazine named Delta its global Airline of the Year (Delta, 2011).

Delta formulated an alliance with Air France and Aeromexico in 1999. SkyTeam was launched in 2000, which included Korean Air Lines. This realignment led it to end code-sharing deals with the Swiss Group, Sabena, and Austrian Airlines. Delta purchased Atlantic Southeast Airlines and Comair regional carriers. After the terrorist attacks on New York and Washington, DC, on September 11, 2001, air reduced travel forcing Delta to reduce its flight schedule and workforce by about 15% (Hoovers 2011). As a result, Delta posted its first financial loss in six years (Delta, 2011). To attempt to streamline the business further, the firm sold a 40% share in reservation system Worldspan in 2003. Delta launched a budget carrier named Song in 2003 to compete with other low-fare carriers (Hoovers, 2011). The company leads the industry with a new model for passenger check-in: (a) lobby redesign; (b) expanded kiosk use; (c) the introduction of Delta Direct phone banks; (d) lobby assist agents; and (e) new signs and processes to improve traffic flow. This undertaking implements the largest domestic codeshare alliance with Continental and Northwest. It is the first US airline to offer prerecorded audio flight information at the gate. Delta is celebrating 83 years of passenger service as of 2011 (Delta, 2011). Delta filed for Chapter 11 bankruptcy protection on September 14, 2005, and emerged on April 30, 2007. In November 2006, US Airways Group, Inc. proposed a merger with Delta, initially offering $4.0 billion and 78.5 million shares of US Airways common stock. On January 10, 2007, US Airways increased the bid to $5.0 billion and 89.5 million shares. However, Delta argued that its stand-alone plan offered better value to creditors, and the creditors committee announced support to Deltas stand-alone plan on January 31, 2007, and on February 1, 2007, US Airways withdrew its proposal (Standard and Poors, 2011).

Important Leaders Over the Years C. E. Woolman became the president in 1945 and managed the company until his death in 1966. In 1987, a longtime employee, Ronald Allen, became CEO. Leo Mullin replaced Allen in 1997. In 2003, CEO Leo Mullin stepped down and was replaced by Gerald Grinstein (Hoovers, 2011). Richard Anderson, the former CEO of Northwest Airlines, succeeded Grinstein as Deltas CEO in September 2007 (Trubey, 2008). Culture Delta company culture is addressed. In 2006, Delta became the National Safety Councils 2006 Occupational Industry Leader the first airline recognized. J.D. Power Customer Satisfaction Survey ranked Delta second overall of the network carriers in overall customer service. Business Traveler readers named the company Best Frequent Flyer Program, Best Airline Web Site, and Best Airport Lounge (Delta, 2011). In May 2006, the companys pilots voted to accept a contract with changes in pay, benefits, and work rules designed to save Delta about $280 million a year. The deal avoided an impending strike that the company said would have put it out of business (Hoovers, 2011). In 2008, Anderson oversaw one of the airline industrys biggest mergers when Delta acquired Northwest Airlines. The culture of Delta Air Lines Inc. will survive the carriers merger with Northwest Airlines, said Deltas CEO Richard Anderson to a group of Atlanta business executives. Anderson said, its commitment is evident, its decision to offer employees profit sharing and its emphasis on customer service, the company is also dedicated to providing the best compensation (Trubey, 2008). The acquisition deal faced several hurdles, including review by antitrust regulators and initial opposition from Northwests unionized pilots. A month after the acquisition was

announced, a deal was finally agreed upon, and both sets of pilots were given raises and an equity stake in the combined company. The consolidation was completed with Northwest Airlines in early 2010 (Hoovers, 2011). Delta employees attempted to unionize three times in eight years according to The Atlanta Journal-Constitution. The Associated Press wrote that Delta is the only big U.S. airline that is mostly nonunion. TheStreet.com wrote that Deltas CEO Richard Anderson reminded workers that after the merger the carrier agreed to provide 15% of pre-tax profits and 15% of its stock to employees. Additionally, although the carrier lost billions of dollars in 2007 and 2008, it offered raises in both years. The publication quotes Anderson as saying: Theres a moral obligation to make this a good place to work (Mutzabaugh, 2010). The New York Times reported, flight attendants at Delta Air Lines rejected, by a narrow margin, a third attempt to be represented by a union. Delta has argued that unions could disrupt its corporate culture, which relies on direct talks with workers. That culture of cooperation contrasts with the poor relations that Northwest had with many of its own labor groups. Our direct relationship works well for our people and our company, Delta said in a statement after the vote. Our flight attendants have spoken and we are pleased that so many flight attendants agree (Mouawad, 2010). Deltas commitment to its employees expands even further; maintaining strong working relationship, it is important to mention that it has been named one of Human Rights Campaigns 2011 Best Places to Work for Lesbian Gay Bi Transsexual (LGBT). The Human Rights Campaign recognizes our commitment to and culture of inclusiveness in our workplace, said Mike Campbell, executive vice president Human Resources and Labor Relations. Once again achieving a perfect score on the HRCs Corporate Equality Index acknowledges our consistent effort in making Delta a great place to work for our employees worldwide (Delta, 2011).

Current Products/Services Offerings, Delivery and Target Markets This section addresses current products, services, delivery, and target markets. As of April 20, 2010, Delta served 355 destinations worldwide in 65 countries. Revenues in North America accounted for 68% of 2009 total, Transatlantic 18%, Latin America 5%, and Pacific 9% (Standard and Poors, 2011). Delta provides scheduled air transportation for passengers and cargo throughout the United States, and around the world. Deltas route network is based on the hub system it operates at airports in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Paris-Charles de Gaulle, Amsterdam and Tokyo-Narita. The hub operations include flights, which gather and distribute traffic from markets in the geographic region surrounding the hub to domestic and international cities and to other hubs. The network is supported by a fleet of aircraft that vary in terms of size and capabilities (iStockAnalyst, 2010). Current State of Affairs Delta became one of the worlds largest airlines by traffic after its $2.8 billion acquisition/merger of Northwest Airlines in 2008 (Hoovers, 2010). Recently, Delta became the second largest in October 2010 with the merger of UAL Corporation and Continental Airlines (Standard and Poors, 2011). Fortune 500 2010 World most admired companies, ranked Delta 84th in its top100.
Mission and Vision Statement

This portion of the paper will describe the mission statement for Delta Air Lines, Inc. (Delta). According to the authors of Strategic Management and Competitive Advantage, Jay B. Barney and William S. Hesterly, a firms mission is its long-term purpose. Missions define both what a firm aspires to be in the long-run and what it wants to avoid in the meantime. Missions are often written down in the form of mission statements (Barney and Hesterly, 2010).

Mission Statement: Definition The Business Dictionary defines a mission statement as a: written declaration of a firm's core purpose and focus which normally remain unchanged, whereas business strategies and practices may frequently be altered to adapt to the changing circumstances. Properly crafted mission statements: (1) serve as filters to separate what is important from what is not; (2) clearly state which markets will be served and how; and (3) communicate a sense of intended direction to the entire organization. A mission is different from a vision in that the former is the cause and the latter is the effect; a mission is something to be accomplished whereas a vision is something to be pursued for that accomplishment (Business Dictionary, 2011). Entrepreneur.com stated that a mission statement defines what an organization is, why it exists, its reason for being. At a minimum, your mission statement should define who your primary customers are, identify the products and services you produce, and describe the geographical location in which you operate (Entrepreneur, 2011). While defining a firms mission is an important step in the strategic management process, it is only the first step in that process. A firms mission can help, hurt, or have no impact on its performance, missions by themselves do not necessarily lead a firm to choose and implement strategies that generate competitive advantages (Barney and Hesterly, 2010). Deltas Mission Statement We Deltas employees, customers, and community partners together form a force for positive local and global change, dedicated to bettering standards of living and the environment where we and our customers live and work (Company-Statements-Slogans, 2011). According to Deltas website, Delta is focused on global good, entitled Delta Force for

Global Good, which includes the following categories: (a) Advancing Global Diversity; (b) Improving Global Wellness; (c) Improving the Environment; (d) Promoting Arts and Culture; and (e) The Breast Cancer Research Foundation (Delta, 2011). Organizations Business, Philosophy, Core Values, and Beliefs Delta states, it is a culture of global inclusion and represents people of all languages, ethnicities, cultures, gender identification, races, ages, sexual orientation, educations, religion, work experiences, family status, capabilities, political views, geographical and regional identification values, skills, personalities, citizenship status, socioeconomic backgrounds, community membership and even communication styles (Delta, 2011). Delta supports organizations within its local communities that are focused on Health and Wellness. Delta is a proud sponsor of the American Cancer Society, The Breast Cancer Research Foundation, St. Jude Childrens Hospital, the Childrens Miracle Network, the Carter Center, and Habitat for Humanity, as well as many other causes (Delta, 2011). Delta is an active partner in supporting community organizations, museums and exhibits that enlighten and inspire people to better themselves and better their world. Current partnerships include the National Black Arts Festival, the Atlanta Symphony Orchestra, Tribeca Film Festival, the Minnesota Orchestra, the High Museum of Art, the Guthrie Theater, the Fox Theater, and many others (Delta, 2011). TheStreet.com writes Delta CEO Richard Anderson is quoted to have said: Theres a moral obligation to make this (Delta) a good place to work. William Swelbar, a research engineer at the MITs International Center for Air Transportation, said he thinks there a good reason for Delta to make that argument. One of the things Delta has always had with their workforce is flexibility, and that drives their culture (Mutzabaugh, 2010).

CEO Richard Anderson said, Its (Delta) commitment is evident, in its decision to offer employees profit sharing and its emphasis customer service, the company is also dedicated to providing the best compensation possible (Trubey, 2008). Personal Version of Deltas Mission Statement Delta has a vested interest in employees, customers, shareholders, local and global environments, by promoting diversity, superior customer service, maintaining profitability, and continually investing in the improvement of the environment. We encourage positive partnerships and understand that the ability to continually progress, transform, and expand our business is vital for continued sustainability as a leader in the airline industry. Changes to Deltas Mission Statement Enhancements to Deltas mission statement: (1) naming the shareholders; (2) maintaining profitability; and (3) the ability for the firm to continually progress, transform, and expand. It is important that the business adapts to the varying needs of the market and recognizes these changes are necessary to sustain a successful business. For Delta to continue to be the leader, it will need to acknowledge when these changes need to take place. Delta must be willing to adjust and make decisions that are best for the firms survival, while continuing to value employees, customers, and the environment. It must formulate positive partnerships and identify when or if these partnerships need end.
Analysis of the External Environment

This section describes the external environment for Delta Air Lines, Inc. (Delta). One of the critical determinants of a firms strategy is the evaluation of the threats and opportunities in its competitive environment. If a firm understands these threats and opportunities, it is one step closer to being able to choose and implement a good strategy; that is a strategy that leads to competitive advantage (Barney and Hesterly, 2010).

Opportunities This section describes opportunities (or trends) Delta is currently experiencing: (1) company growth due to strategic merger, becoming the second largest passenger airline in the world after merging with Northwest Airlines in 2008 (Delta Air Lines, 2011); (2) offering services in the world market for aircraft maintenance, repair and overhaul (MRO), MRO market looks strong and is expected to grow during the next six years (Datamonitor, 2009); (3) increasing market awareness as a preferred international carrier with place-based digital advertising (Edison Research, 2009); (4) currently only airline offering no expiration on Sky miles (Delta, 2011); (5) recession coming to an end, recovery of U.S. airline industry (Datamonitor, 2009); (6) the company is well positioned to capitalize on the growing U.S. regional airline industry (Datamonitor, 2009); (7) moderate growth in global air freight industry (Datamonitor, 2009); (8) profit reported 2010 in second quarter, compared to prior years loss 2009 (Forbess, 2011); and (9) expanding opportunities for diverse business suppliers, new web site expands opportunities for minority, woman-owned and small business suppliers (Delta, 2011). Threats This section describes threats Delta is currently facing: (1) environmental findings regarding high-level carbon emissions could reveal more environmental damage than previously determined (Delta, 2011); (2) according to U.S. Department of Transportation, Delta drew the most consumer complaints of any U.S. airline in 2010 (USNews: Delta the worst airline, 2010); (3) union battle continues in legal filings (Mouawad, 2010); (4) Delta matched American Airlines fare hike (Baysden, 2011); (5) increasing competition for routes, services, and fares

(Datamonitor, 2009); (6) jet fuel prices continuing to fluctuate and are likely to increase due to 2011 turmoil in oil-producing regions. An External Factor Evaluation (EFE) Matrix was constructed to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information (David, 2009). EFE Matrix list the external factors identified through the external-audit process; identifying a total of 16 opportunities and threats that are currently affecting Delta and the airline industry. A weight factor ranging from 0.0 (not important) to 1.0 (very important) was assigned after comparing successful and unsuccessful competitors; the sum of all the weights assigned to the factors must equal 1.0. A rating was assigned to each opportunity is between 1 and 4 for each external factor to indicate how effectively Deltas current strategies respond to the factor. Ratings are company-based and both threats and opportunities can receive a 1, 2, 3, or 4. Each factors weight is multiplied by its rating to determine a weighted score. The sum of the weighted score for each variable (opportunity and threat) to determine the total weighted score for Delta. The weighted score for Delta is 2.64. The EFE Matrix for Delta Air Lines, Inc. is provided in Table 1.1. Note that the most important factor to being successful in the airline business is Environmental finding regarding high-level carbon emissions as indicated by the .11 weight. Also note that Delta is doing excellent in regard to handling two factors Second largest passenger airline in the world, after merging with Northwest Airlines in 2008 and Recovery of US airlines industry recession coming to an end. The factors are listed in quantitative terms to the best extent possible, rather than in vague terms (David, 2009).

The total weighted score of 2.64 is above the average (midpoint) of 2.5, so Delta Air Lines, Inc., is doing pretty well, taking advantage of the external opportunities and avoiding the threats facing the firm. There is definitely room for improvement, because the highest total weighted score would be 4.0. As indicated by ratings of 1, Delta needs to capitalize more on the 2010 company profit in 2nd Quarter, compared to prior years loss 2009 and increased awareness as preferred international carrier with place-based digital advertising opportunities.

TABLE 1.1 EFE Matrix for Delta Air Lines, Inc.

Key External Factors
Opportunities
Second largest passenger airline in the world, merged w/Northwest Airlines 2008 Delta expanding its outreach to small, minority-owned businesses enhancing diversity Delta SkyMiles do not expire, only airline that offers no expiration Recovery of US airline industry recession coming to an end 2010 Company profit in 2nd Quarter, compared to prior year's loss 2009 Delta is well positioned to capitalize on growing US regional airline industry Delta increased awareness as a preferred international carrier w/placebased digital advertising Moderate growth in global air freight industry World market for aircraft maintenance, repair, and overhaul (MRO) 0.1 0.03 0.05 0.05 0.03 0.04 4 2 3 4 1 2 0.4 0.06 0.15 0.2 0.03 0.08

Weight

Rating

Weighted Score

0.06 0.04 0.08

1 2 2

0.06 0.08 0.16

Threats
Intense Competition - routes, services, and fares Delta joined airline fare hike Delta drew the most consumer complaints of any U.S. airline in 2010, according to U.S. Dept of Transp. Jet fuel prices may swing wildly or likely increase due to 2011 turmoil in oil-producing regions Delta-union battle continues in legal filings Environmental findings regarding high-level carbon emissions could reveal more environmental damage than previous thought Reputation damaged Delta rated worst airline by USNews.com 2010 Total 0.06 0.07 2 2 0.12 0.14

0.08

0.24

0.05 0.08

3 2

0.15 0.16

0.11 0.07 1.00

3 4

0.33 0.28 2.64

Analysis of the Internal Environment

This section of the paper will evaluate the internal strengths and weaknesses of Delta Air Lines, Inc. (Delta) by providing financial statement summary information as well as financial ratios for Delta and the industry. To support this analysis a spreadsheet showing the last three

years of side-by-side income statement and balance sheet fiscal year end data have been provided. Delta recorded revenues of $28,063 million during the financial year ended December 2009(FY2009), an increase of 23.6% over FY2008. The operating loss of the company was $324 million during FY2009, when compared to an operating loss of $8,314 million in FY2008. The net loss was $1,237 million in FY2009, when compared to a net loss of $8,922 million in FY2008 (Datamonitor, 2010). Delta recorded revenues of $22,687 million during the financial year ended December 2008 (FY2008), an increase of 18.5% over FY2007. The increase in revenues was due to the inclusion of Northwests operations, fare increases, pricing and scheduling initiatives and increased service international destinations. The operating loss of the company was $8,314 million during FY2008, when compared to an operating profit of $1,096 million in FY2007. The net loss was $8.922 million in FY2008, when compared to a net profit of $1,612 million in FY2007 (Datamonitor, 2009). Delta is the worlds largest airline, providing scheduled air transportation for passengers and cargo throughout the US and around the world. Despite economic slowdown, the company has recorded strong financial performance in recent years. The company's revenue increased at a compounded annual growth rate (CAGR) (200409) of 13%. The revenue increased from $15,235 million in FY2004 to $28,063 million in FY2009. Delta witnessed an increase of 18.5% in its FY2008 revenues over FY2007 and an increase of 23.6% in its FY2009 revenues over FY2008. The increase in the company believes the merger will generate approximately $2 billion in annual revenue and cost synergies by FY2012 from more effective aircraft utilization and diversified route system (Datamonitor, 2010).

Although, Deltas revenues have increased in 2010, conducting an internal evaluation of its profitability accounting ratios suggest that its profitability increased due to the merger with Northwest Airlines, prior to this merger, Delta had two consecutive years of losses (2009 and 2008). Reviewing Deltas liquidity ratios, both the current ratio and quick ratio fall below the recommended ranges. Current ratio recommended range is 2 to 3, Deltas is .64. Quick ratio, a ratio of 1 is thought to be acceptable in many industries, Deltas is .61. Delta has high debt and is carrying a large amount of liabilities (Barney and Hesterly, 2009). Another ratio to evaluate is the leverage ratios, or ratios that focus on the level of firms financial flexibility, including its ability to obtain more debt. The debt to equity ratio is a measure of the use of debt versus equity to finance a firms business activities. Generally recommended less than 1(Barney and Hesterly, 2009). Deltas debt to equity ratio is .98. This indicates Delta has high debt and should not take on anymore. Please refer to the Table below containing some accounting ratios for Delta:
Accounting Ratios ROA ROE Gross Profit Margin Current Ratio Quick Ratio Debt to assets 2010 0.01 0.66 0.45 0.64 0.61 0.98 2009 N/A N/A 0.40 0.81 0.78 0.99

Deltas Balance Sheet and Income Statement Spreadsheets are provided on the following pages for reference.

Financial State of the Delta Air Lines, Inc

Balance Sheet Figure 1A
Values in Millions Period Ending Date Assets
Cash and Short Term Investments Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets

2010 3610.00 1456.00 318.00 1159.00 764.00 7307.00 20307.00 9794.00 4749.00 0.00 0.00 1031.00 43188.00 1713.00 0.00 2024.00 0.00 2073.00 5575.00 11385.00 13179.00 1924.00 0.00 15803.00 42291.00 0.00 0.00 0.00 13926.00 -9252.00 -199.00 -3578.00 897.00 43188.00 2/23/201

2009 4678.00 1353.00 327.00 853.00 780.00 7991.00 20433.00 9787.00 4829.00 0.00 0.00 749.00 43789.00 1249.00 0.00 1802.00 0.00 1533.00 5213.00 9797.00 15665.00 1917.00 0.00 16165.00 43544.00 0.00 0.00 0.00 13827.00 -9845.00 -174.00 -3563.00 245.00 43789.00

2008 4467.00 2652.00 388.00 637.00 830.00 8974.00 20627.00 9731.00 4944.00 0.00 0.00 808.00 45084.00 839.00 0.00 1097.00 295.00 1014.00 3360.00 6605.00 7986.00 855.00 0.00 6864.00 22310.00 0.00 0.00 0.00 9512.00 314.00 -148.00 435.00 10113.00 32423.00

Property/Plant/Equipment, Total-Net Goodwill, Net Intangibles, Net Long Term Investments Note Receivable - Long Term Other Long Term Assets, Total Total Assets

Liabilities and Shareholders' Equity

Accounts Payable Payable/Accrued Accrued Expenses Notes Payable/Short-Term Debt Current Port. Of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities

Total Long Term Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities

Redeemable Preferred Stock Preferred Stock - Non-Redeemable, Net Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total Total Equity Total Liabilities & Shareholders' Equity

http://moneycentral.msn.co

m Financial State of Delta Air Lines, Inc.

Income Statement Figure 1B
All Numbers in thousands Annual Data Period End Date Operating Revenue (Revenue/Sales) Total Revenue

2010 31,755,000 31,755,000

2009 28,063,000 28,063,000

2008 22,697,000 22,697,000

Cost of Sales Cost of Sales with Depreciation Gross Margin Gross Operating Profit Selling/General/Administrative Expenses, Total Operating Income Operating Income b/f Depreciation Depreciation Depreciation Unreconciled Operating Income After Depreciation Interest Income Other Income, Net Other Special Charges Special Income/Charges

17,358,000 17,358,000 14,397,000 14,397,000 8,573,000 4,763,000 5,824,000 1,511,000 1,511,000 4,313,000 35,000 (222,286,000) (450,000) (450,000)

16,643,000 16,643,000 11,420,000 11,420,000 8,243,000 2,048,000 3,177,000 1,536,000 1,536,000 1,641,000 27,000 (1,564,000) (407,000) (407,000)

14,870,000 14,870,000 7,827,000 7,827,000 5,832,000 9,156,000 1,995,000 1,266,000 1,266,000 729,000 92,000 (730,000) (8,427,000) (8,427,000)

Total Income Avail for Interest Expense (EBIT) Interest Expense Pre-tax Income (EBT) Income Taxes Net Income from Continuing Operations Net Income from Total Operations Total Net Income

1,612,000 1,004,000 608,000 15,000 593,000 593,000 593,000

(303,000) 1,278,000 (1,581,000) (344,000) (1,237,000) (1,237,000) (1,237,000)

(8,336,000) 705,000 (9,041,000) (119,000) (8,922,000) (8,922,000) (8,922,000)

http://finapps.forbes.com

2/23/2011

Internal Factor Evaluation (IFE) This section describes the internal environment for Delta Air Lines, Inc. (Delta). It is important to analyze a firms internal strengths and weaknesses. A strategic-management audit of a firms internal operations is vital to organizational health (David, 2009). Strengths This section describes Deltas strengths Delta: (1) strategic merger of Northwest Airlines (Datamonitor, 2010); (2) bilateral and multilateral marketing alliances with foreign airlines to improve its access to international markets (Datamonitor, 2009); (3) consistent top line growth (Datamonitor, 2009); (4) fleet upgrades and winglet installations annually through mid-2013; and (5) exit the all-cargo business at the end of 2009 with the grounding of the remaining Northwest Airlines' B747 200 freighters due to "age and inefficiency, a cost reduction measure (Delta Exits, 2009). Weaknesses This section describes weaknesses Delta is currently facing: (1) Overdependence on the North American market (Datamonitor, 2009); (2) High debt obligations (Datamonitor, 2009); (3) total current assets reduced from 7991 to 7301 (value in millions) (Money Central, MSN, 2010); (4) unfunded employee post retirement benefits(Datamonitor, 2010); and(5) sluggish performance of Delta in Atlantic & Latin American regions (Datamonitor, 2010). An Internal Factor Evaluation (EFE) Matrix was constructed to summarize and evaluate the major strengths and weaknesses in the functional areas of Delta, and it also provided a basis for identifying and evaluating relationships among those areas (David, 2009). IFE Matrix list the key internal factors as identified through the internal-audit process; identifying a total of 10

strengths and weaknesses that are currently affecting Delta and the airline industry. A weight factor ranging from 0.0 (not important) to 1.0 (all-important) was assigned to each factor. The sum of all the weights assigned to the factors must equal 1.0. A rating was assigned to each strength; strengths must receive a 3 (a minor strength) or a 4 (a major strength). A rating was assigned to each weaknesses; weaknesses must receive a 1 (a major weakness) or a 2 (a minor weakness). Ratings are company-based, whereas the weights are industry based. Each factors

weight is multiplied by its rating to determine a weighted score. The sum of the weighted score for each variable (strength and weakness) to determine the total weighted score for Delta. The weighted score for Delta is 2.59. The IFE Matrix for Delta Air Lines, Inc. is provided in Table 2.1. Note that the most important factor to being successful in the airline business is Strategic merger with Northwest Airlines as indicated by the .15 weight. Also note that Delta is doing excellent in regard to handling two factors Consistent top line growth and Bilateral and multilateral marketing alliances with foreign airlines to improve its access to international markets. The factors are listed in quantitative terms to the best extent possible, rather than in vague terms (David, 2009). The total weighted score for Delta is 2.59, just above the average (midpoint) of 2.5, indicating there is definitely room for improvement in Deltas strategies, policies, and procedures (David, 2009). Delta has high debt, is over-dependent on the North American market, and its total current assets has decreased from 2009 to 2010. All of these factors need to be looked at closely. The IFE Matrix provides important information for strategy formulation. For example, Delta may want to focus on finding ways to reduce the companys debt. Delta may also want to become more aggressive in its expansion into foreign markets, to lessen its dependency on the

North American market, because that is a really important (weight .12) factor to being successful in the airline business (David, 2009). TABLE 2.1 IFE Matrix for Delta Air Lines, Inc.
Key Internal Factors
Strengths
Strategic merger of Northwest Airlines Bilateral and multilateral marketing alliances w/foreign airlines to improve its access to international markets Consistent top line growth Fleet upgrades and winglet installations annually through mid-2013 Exit the all-cargo business at the end of 2009 w/grounding of remaining Northwest Airlines' B747 200 freighters due to "age and inefficiency" - cost reduction measure

Weight

Rating

Weighted Score

0.15 0.12 0.12 0.08 0.06

4 3 4 3 3

0.64 0.36 0.48 0.24 0.21

Weaknesses
Overdependence on the North American market High debt obligations Total Current Assets reduced from 7991 to 7301 (value in millions) Unfunded employee post retirement benefits Sluggish performance of Delta in Atlantic & Latin American Regions

0.11 0.12 0.09 0.08 0.07 1.00

1 1 2 1 2

0.11 0.12 0.20 0.09 0.14

TOTAL

2.59
is the weighted average

Strategic Recommendations

This section of the paper will describe the Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis conducted on Delta Air Lines, Inc. (Delta). The Strengths-WeaknessesOpportunities-Threats (SWOT) Matrix will be presented; it is an important matching tool that helps develop four types of strategies: (a) SO (strengths-opportunities) Strategies; (b) WO (weaknesses-opportunities) Strategies; (c) ST (strengths-threats) Strategies; and (d) WT (weaknesses-threats) Strategies (David, 2009). SO Strategies use a firms internal strengths to take of advantage of external opportunities. WO Strategies aim at improving internal weaknesses by taking advantage of

external opportunities. ST Strategies use a firms strengths to avoid or reduce the impact of external threats. WT Strategies are defensive tactics directed at reducing internal weakness and avoiding external threats (David, 2009). A schematic representation of the SWOT Matrix for Delta is provided in Figure 2.1, and is composed of nine cells. The SWOT matrix is widely used in strategic planning; however, the analysis does have some limitations. First, SWOT does not show how to achieve a competitive advantage. The matrix should be the starting point for a discussion on how proposed strategies can be implemented as well as cost-benefit considerations that ultimately could lead to a competitive advantage. Second, SWOT is a snapshot in time. Keep in mind as circumstances, threats, and strategies change, the dynamics of a competitive environment may not be revealed in a single matrix. Third, SWOT analysis may lead to a firm to overemphasize a single internal or external factor formulating strategies. There are inter-relationships among the key internal and external factors that SWOT does not reveal that may be important in devising strategies (David, 2009). This section will identify one business strategy that will benefit Delta. A firms strategy is defined as its theory about how to gain competitive advantages. A good strategy is a strategy that actually generates such advantages. The ultimate objective, of the strategic management process, is the realization of a competitive advantage. Delta will have competitive advantage if it is creating more economic value than its rivals. Economic value is defined as the difference between the perceived customer benefits from purchasing a product or service from a firm and the total economic cost of developing and selling that product or service (Barney and Hesterly, 2009).

The business strategy Delta will need to implement is product differentiation. Product differentiation is a business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of their products or services relative to the perceived value of the other firms products or services (Barney and Hesterly, 2009). The strategic recommendation for Delta is to completely overhaul, improve, and implement a plan to transform Deltas reputation in customer service to become the best, not the worst, service provider. This is a forward vertical integration because Delta will be incorporating more stages of the value chain within its boundaries. Delta will utilize components within the organization to directly bring about this needed change (Barney and Hesterly, 2009). Delta offers airline transportation services for passengers and cargo (Delta, 2011). It has received harsh criticism by customers in regards to their customer service. USNews.com wrote, It (Delta) had the largest drop in passenger satisfaction in the American Customer Satisfaction Index. According to the Air Travel Consumer Reports, Delta was number one in delays for major airlines (78% of flights arriving on time in the 12-month period ending August 2010) and first in consumer complaints (averaging 2.23 per 100,000 enplanements in 2010) (USNews: Delta the worst airline, 2010). The Wall Street Journal addressed customer service in an article titled: Whats the Key to Good Customer Service? The article presented the following question: Why do some companies have consistently good customer service and others routinely disappoint and frustrate? (Whats the key, 2011). Response: Management, leadership and expectations. The article goes on to state, Effective leaders at companies create cultures where employees are treated with respect and expectations are clear that customers should be treated with respect. Managers and co-workers hold employees accountable. Providing good service to customer

becomes infectious. Its simply what you do at work, and if it is to be long-lasting, it has to be an enjoyable part of your job (Whats the key, 2011). Improving Deltas reputation in customer service will be costly. The following will need to take place: (a) a budget will need to be developed to face this challenge; (b) a committee or board formulated to oversee the project (an outside firm may need to be hired); and (c) a management and employee buy-in is required. The current standards and measurements that are in place at Delta for customer service will need to be re-evaluated. The committee will need to: (a) determine what items to keep, as well as what items to eliminate; (b) research all the markets Delta occupies, evaluating what is currently working and what is not; and (c) observe Deltas competition to gain an understanding as to how its competitors provide better satisfaction to consumers. Once the committee is able to obtain and evaluate all the critical information needed then a plan of action will need to be formulated. The committee will need to develop a branded customer service strategy that will incorporate Deltas mission statement. Both Human Resources and the Training department will play a role in this process. New training materials will need to be developed; training classes will need to be facilitated and feedback sessions conducted. It is crucial that the committee create an atmosphere to obtain employee and management buy-in for this overhaul to be successful. Employees will need to understand: (a) it is necessary to provide excellent customer service for the firm to continue to stay in business and grow; and (b) their actions to improving customer service standards will have an impact on the bottom line. It will need to be communicated clearly, whether the employee is a pilot or a baggage handler, that their actions directly impact the customer experience and perception. All employees need to be made aware of how they are personally held accountable to the success of Delta and the companys reputation.

Performance standards and expectations should be clearly written and presented to all employees. Employees will need to understand that these are the standards they will be evaluated on during their annual performance review. The employees will be provided with the necessary tools to become successful. Continued education and training will be provided to employees throughout their career, whether in a classroom setting or in a web-based training. Once training has been completed, Delta employees will be ask to sign a commitment letter stating that they completely understand excellent customer service is the standard at Delta, not an option, and employee improvement will be encouraged. Delta will engage the marketing department to assist in the communication of Deltas new strategy both internally and externally, concerning excellent customer service. The project will engage both managers and employees to assist in putting together a slogan that incorporates Deltas excellent customer service initiative. This will encourage employee buy-in, by creating a sense of ownership and pride for the company and this campaign. A contest will be rolled out to request employees to submit their ideas for the new company slogan concerning what they feel describes excellent customer service, as well as graphic design to visually display what excellent customer should look like. The employee (or employees) whose idea is selected will be recognized by the CEO and rewarded for their efforts. An internal rewards and recognition program will be established to encourage improved behaviors in customer service. Employees will be rewarded for excellent customer service. The committee formulated to oversee this project will also do surveys to understand in what ways employees wish to receive rewards and recognition. A recognition budget will then be determined and put into place for employees to receive incentive and be recognized for their outstanding customer service. Examples of employee recognition: (a) gift cards; (b) certificates;

(c) awards banquets; (d) various monetary rewards; (e) Delta logo merchandise; and (f) promotion. Deltas product differentiation is to be perceived as the airline providing the best customer service. Consumers will choose Delta over its competitors due to this service because it is valuable. Improving Deltas customer service and changing consumers current perception will not be an easy. It is imperative that Delta employees must understand if customers are not happy and satisfied because these customers will take their business elsewhere. If consumers stop using Delta and continue to choose to do business with Deltas competitors, it will be forced to begin cost cutting measures to stay in business. Employees need to be held accountable to excellent customer service standards and understand it is a vital component of Deltas success as a company.

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