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Delta Airlines (DAL)
Delta Airlines is a US based commercial airliner, operating more than 15,000 flights globally every day, 180 million customers each year, through its own branded business and network of global operating partners1. In conducting business, the company operates a fleet of aircraft ranging which consume fuel, and emit harmful greenhouse gases impacting the environment: CO2, H2O, NOx, CO, SOx, and other volatile organic compounds 2. Worldwide during 2015, commercial aviation contributed 781 million tons of CO2 to the atmosphere. To regulate, US and international environmental agencies have regulated airline emissions through equipment certification standards – over 60 as of 2005 – fuel venting requirements, and Exhaust emissions requirements 2. These regulations are imposed via taxes by some international nations, but surprisingly the not US. In the US, airlines are only exposed to taxation via fuel tax surcharges, like those in consumer gasoline and trucking businesses. The EU has recently notably imposed Emissions Trading Scheme, to be enforced April 2017, which is a cap/trade system to limit emissions allocated based on credits issued and regulated by the International Civil Aviation Organization (IACO), 6.
To react to these fuel tax surcharges and other regulations, Delta has passed on these taxes to its customers, and is now required by the FAA to detail these on each ticket price in order to provide transparency. To comply with regulatory equipment standards, it has invested in more money in maintenance of existing equipment as well as updating its fleet to raise fuel efficiency and remain in compliance, as market analysts are predicting as of April ’16 4. For example, cutting edge aircraft – Airbus A380, Boeing 787, and Bombardier CSeries use less than 3 liters of jet fuel per 100 passenger kM’s, which is approximately the same efficiency as modern compact cars 3. Delta has traditionally operated an older fleet of McDonald Douglas aircraft to avoid heavy CapEx investment, particularly during economic downturn: 2011, 2008-2009, etc. Additionally, Delta has implemented inflight and on the ground fuel efficiency measures to reduce total environmental impact, for example, only fueling the plane with the necessary fuel tank for the upcoming flight, rather than completely FULL by default 6.
Adjusting operating procedures to save fuel is a reactive means to mitigating environmental impacts, but can be deemed effective as it has overall reduced the total amount of fuel consumed on comparable, increasing customer demand. Alternatively, investing in innovative, efficiency improved technology for engines and aircraft equipment is a more proactive measure, and will have long lasting benefits into the future, despite the heavy capex in the near term – i.e., list price for a Boeing 787 can range from $120-180MM. This investment is to only have increasing benefit with the (arguably eventual) rise in crude oil prices. Along with improved efficiency and reduced variable costs, newer equipment can yield both branding and service benefits, as the new models offer improved customer experiences, such as the 787, being quieter and less pressurized within the customer cabin 5.
These steps to improvement are admirable; however, Delta could be doing more. Although at an acknowledged impact to customer service, Delta could substantially improve efficiency on a per customer-mile basis by reducing or even eliminating low customer volume routes, flying only routes which maximize equipment utilization – i.e., flights with full passengers. On a per customer basis, this would ensure that whatever aircraft was being used would optimize to utilize fuel in the most efficient way per service rendered – in this case travel – and potentially lessen its carbon footprint for comparable demand. Delta could also establish joint ventures with both equipment manufacturers and fuel producers to innovate on equipment and alternative fuel technology, for example, biomass fuel and solar. For carriers to work collaboratively with the manufactures could align incentives more that would support innovation by eliminating links in the value chain, which would be more analogous to the US auto industry, which has innovated on both engines and fuel (e85 ethanol) to improve efficiencies to comply with CAFÉ standards by 2025.
Threats to any of these practices could be decreased customer service levels by reducing the total available routes in the network. Also, the risk of a huge capital investment will require potential debt and/or reduction in cash reserves, putting Delta at much higher risk during volatile market conditions (e.g., bankruptcy during 2005), or labor dispute issues such as the numerous pilot strikes over the years.
Given this constantly changing market environment and resulting regulations internationally, Delta has an opportunity to differentiate itself as a market leader in terms of environmental sustain practices, which will both impact its customers price, its bottom line, and the overarching brand reputation.
1 Delta Airlines, “Corporate Stats and Facts”, http://news.delta.com/corporate-stats-and-facts, accessed November 2016
2 Federal Aviation Administration Office of Environment and Energy, “Aviation and Emissions: A Primer”, https://www.faa.gov/regulations_policies/policy_guidance/envir_policy/media/aeprimer.pdf , accessed November 2016
3 AirTransitAction Group, “Facts and Figures”, http://www.atag.org/facts-and-figures.html, accessed November 2016
4 Motley Fool, “Delta May Be About to Order a Boatload of New Planes”, http://www.fool.com/investing/general/2016/04/24/delta-may-be-about-to-order-a-boatload-of-new-plan.aspx, accessed November 2016
5 Quora, “What is it like to fly on the new Boeing 787 Dreamliner?”, https://www.quora.com/What-is-it-like-to-fly-on-the-new-Boeing-787-Dreamliner, accessed November 2016
6 Delta Airlines, “Delta Airlines Annual Report 10-K 2015”, https://www.sec.gov/Archives/edgar/data/27904/000002790416000018/dal1231201510k.htm , accessed November 2016