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Analyzing Porter's Five Forces on Delta Airlines

(DAL)
By Greg DePersio | January 28, 2016 9:48 AM EST

Fundamental analysis helps investors gain a clear picture of a company's financial position and its
position within the marketplace. This information leads to better investing decisions, since share
price appreciation tends to follow sound fundamentals. Fundamental analysis starts with examining
a company's financial documents, such as its financial statements,
statements, annual and quarterly reports,
and stock performance. The most shrewd investors go beyond looking at a company's financial
position and study the potential effects of external forces on the company's health. One of the most
effective tools for this is Porter's Five Forces.

An Overview of Porter's Five Forces

Porter's Five Forces is an analytical framework developed in 1979 by Michael Porter. Porter's goal
was to develop a thorough system for evaluating a company's position within its industry and to
consider the types of horizontal and vertical threats the company might face in the future. A
horizontal threat is a competitive threat, such as customers switching to a substitute product or
service, or a new company entering the marketplace and appropriating market share. A vertical
threat is a threat along the supply chain, such as buyers or suppliers gaining bargaining power, that
can put a company at a competitive disadvantage.
The Five Forces model evaluates three potential horizontal threats and two vertical threats. Industry
competition, the threat of new entrants and the threat of substitutes represent the horizontal
threats. The vertical threats come from the increased bargaining power of suppliers and the
increased bargaining power of buyers. Using the Five Forces framework, investors can determine the
most viable threats to a company. With this information, they can evaluate whether the company
has the resources and protocol in place to respond to likely challenges.

An Overview of Delta Air Lines

Delta Air Lines, Inc. (NYSE: DAL

DAL)) is the oldest airline still in operation in the United States. The
company was founded in 1929 and has its headquarters in Atlanta, Georgia. As of January 2016,
Delta ranks second in domestic market share for U.S. airlines at 16.9%, trailing Southwest at 18%
but leading United at 14.7% and American at 14.3%. Delta's sheer size and its status as a longtime
leader in the airline industry has helped ensure its continued success. The company's market
capitalization is over $35.3 billion.
Delta had a strong year in 2015. The company's earnings grew substantially. It had great cash flow
and strong operating margins, and its share price appreciated by 4% during a year when the broader
stock indexes, such as the S&P 500, struggled to tread water.

Industry Competition

The level of competition in the airline industry is high. The big airlines essentially fly to the same
places out of the same airports for about the same prices. The amenities, or lack of amenities, they
offer are similar, and the seats in coach are just as cramped no matter which airline you choose.
Delta's traditional rivals include United and American, but the company also faces major
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competition from the growing popularity of value carriers, most notably Southwest but also JetBlue
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and Spirit. Because the air travel experience for a customer is remarkably similar no matter which
airline he takes, airlines are constantly threatened by the prospect of losing passengers to
competitors. Delta is no exception. If a customer is planning to book a flight from Houston to
Phoenix on Delta but a third-party price aggregator, such as Priceline, reveals a better deal from
United, the customer can make the switch with a simple click of the mouse. Delta manages these
competitive threats with extensive marketing campaigns that focus on brand awareness and the
company's longstanding reputation.

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Bargaining Power of Buyers

Buyers have immense bargaining power over airlines

because the cost and effort required to switch from
one carrier to another is minimal. The emergence and
raging popularity of third-party trip-booking
websites, and smartphone apps, exacerbates this
issue for the airlines. Most travelers do not contact an
airline, such as Delta, directly to book a flight. They
access sites or apps that compare rates across all
carriers, enter their trip itineraries and then choose
the least expensive deal that accommodates their
schedules. Delta can respond to this market force by conducting market research and offering more
direct flights at low prices to the destinations fliers search for most frequently on third-party
platforms. Additionally, the company should strengthen relationships with credit card companies
and strive to offer the best reward programs; customers are loath to switch carriers when they have
accumulated what they view as "free" miles with a particular airline.

Threat of New Entrants to the Marketplace

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Bargaining Power of Suppliers

Partner Links

Potential new entrants to the marketplace represent a minimal threat to Delta. The barriers to entry
in the airline industry are remarkably high. The operating costs are massive, and the government
regulations a company must navigate are numerous and exceedingly complex. There is not a single
airline founded during the 21st century that has even 2% market share. JetBlue, founded in 1998,
represents the newest airline to make a dent in the industry, and its market share is still less than
one-third of Delta's.

The list of airline suppliers is actually quite long. The list of airlines for suppliers to sell to, however,
is short. This asymmetry places the bargaining power directly in the hands of the airlines. Bargaining
power is particularly strong for Delta, given its position as the world's largest airline by total
passengers. It is, however, worth mentioning that as of January 2016, Southwest is right on its heels.
Put simply, Delta's suppliers have a strong incentive to keep the relationship on good terms. Delta
can likely find a replacement supplier without problem if the relationship goes bad. The supplier, by
contrast, is unlikely to find another buyer capable of replacing the sales volume represented by
Delta.

Threat of Substitutes

A substitute
substitute,, as defined by the Five Forces model, is not a product or service that competes directly
with the company's offerings but acts as a substitute for it. Thus, a United flight from New York to
Los Angeles is not considered a substitute for a Delta flight with the same start and end points.
Examples of substitutes are making the trip by train, car or bus. Unless a trip is very short, such as
traveling from Los Angeles to Las Vegas, no methods of travel rate as viable substitutes for air travel.
New York to Los Angeles is a 6.5-hour flight. The trip takes 41 hours by car or bus, and a train cannot
get you there much faster. Until a new technology comes along that supplants air travel as the
fastest and most convenient way to travel long distances, Delta faces little threat from substitute
methods of travel.

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