Delta's Risk & Performancet: Can performance be predicted?

Can a firms performance be predicted two years out to earn a premium return? The following article points to an overwhelmingly "NO."...

"In calculating Delta's 2 year expected market return, we'll be utilizing the Capital Asset Pricing Model. We're utilizing the following assumptions: Beta of 0.7 (eTrade), risk-free rate of 0.62% (2-year note on June, 2010), and a 2-year market return of 33.1% (S&P 500). By the CAPM method Delta's expected rate of return should be:

1.24% + 0.7(33.1%-1.24%) = 23.54%

We can conclude that Delta's expected 2-year return since June, 2010, as calculated by the capital asset pricing model, should have been 23.54%.

Actual Returns

Historically, Delta hasn't issued dividends, making the only gain from the investment through capital gains. Had an investor invested 24 months ago, they would have lost 6.1%. These figures exclude devaluation from inflation, which represents an even steeper loss."

This article proves that methods of predicted performance are only as good as the data that is put into the CAPM equation, and that the CAPM has some fundamental flaws in the equation. The most basic flaw is the Beta. The Beta is already hard to determine and if it is not accurate the final number will be off. 

In the case of Delta airlines between 2007 and 2009, systematic risk was too large and unpredictable due to the recession. This caused a -6% loss for the stock. This just shows that you can not diversify systematic risk. 

http://seekingalpha.com/article/702221-airline-industry-focus-on-delta-part-2
http://www.investopedia.com/articles/06/capm.asp#axzz2JKRZULnd

Delta Airlines Vertical Integration Strategy

Delta Airlines is attempting to do something that no other airline has done before. Delta is attempting to vertically integrate the jet fuel industry with its airline company. Delta recently bought an idled oil refinery in Philadelphia for $150 million in early 2012 and has since spent $100 million in improvements necessary to make the jet fuel to fly its airplanes. This move is the first of its kind and is expected to save the company $300 million a year (2013) in fuel costs while supplying 80% of the company's jet fuel requirement. This equates to approximately 7 cents a gallon.

Delta has also played with the idea of buying crude oil in North and South Dakota that is almost $20 cheaper per barrel than the current crude oil being shipped over from the North Sea and Norther Africa.  This is a big deal when you factor in their 12 billion dollar bill for jet fuel in 2011.

These two strategies will combined to save the company over $300 million a year and bring the company to the forefront of how aviation business is done. They are in unproven and uncharted territory but the $250 million isn't much when compared to their 2011 net income of $1 billion.

There is a lot of controversy with this strategy considering it is so new and unconventional for the airline industry. A lot of pundits are skeptical because Delta specializes in flight, not crude oil refining.

Personally, I think this is a radically new strategy for an airline and I think that this strategy will catch on if it works. It is obviously a big risk and the first person always gets hit in the face when they try something new. I think Delta can pull it off.

http://centreforaviation.com/analysis/deltas-unconventional-fuel-hedging-strategy-to-be-put-to-the-test-as-new-refinery-opens-82467

Delta Airlines: A Brief History

(from Wikipedia)


Delta Airlines was born as Huff Daland Dusters, Incorporated, an aerial crop dusting operation on May 30, 1924, in Macon, Georgia. Formed with a Huff-Daland Duster, the first true crop duster, the plane was deployed to combat the boll weevil in 1925 and was nicknamed "The Puffer" due to the clouds of white pesticides it emitted. Delta Air Corporation owned the plane (now in the Southern Museum of Flight). The company moved to Monroe in Ouachita Parish in northeastern Louisiana, in 1925, and began carrying passengers in late 1929. The single passengers sat in a chair placed in the bin where the pesticide was usually kept. The first routes were from one Southeastern state to another. Collett E. Woolman purchased the company on September 13, 1928, and renamed it Delta Air Service, with headquarters in Monroe.[12]


Delta grew through the addition of routes and the acquisition of other airlines; it replaced propeller planes with jets in the 1960s and entered international competition to Europe in the 1970s and across the Pacific in the 1980s. The company logo of Delta Air Lines, reminiscent of the swept-wing design of the DC-8 airplanes, consists of two 3D triangles.[13]




The current Delta Air Lines is the result of many airline mergers over the past 80+ years. The most recent merger was with Northwest Airlines on October 29, 2008 and at the time formed the world's largest airline. After approval of the merger, Northwest continued to operate as a wholly owned subsidiary of Delta until December 31, 2009 when both carriers' operating certificates were merged (the Delta certificate survived).[14] Delta completed the integration with Northwest on January 31, 2010 when their reservation systems and websites were combined, and the Northwest Airlines name and brand were officially retired.[15]


Predecessor carriers forming the current Delta Air Lines include:


• Chicago and Southern Air Lines (formed in 1933, merged into Delta in 1953).[12] Delta flew under the carrier name of Delta-C&S for the following two years.[16]


• Northeast Airlines (formed in 1931, merged into Delta in August 1972)[12][17]


• Northwest Airlines (formed in 1926, merged into Delta in 2010. Also known as Northwest Orient Airlines from 1950-1989)


◦ Republic Airlines (formed in 1979, merged into Northwest Airlines in 1986)


▪ Hughes Airwest (formed in 1968 as Air West, name change to Hughes Airwest in 1970, merged into Republic Airlines in 1980)


▪ Bonanza Air Lines (formed in 1945, merged into Hughes Airwest (Air West) in 1968)


▪ Pacific Air Lines (formed in 1941, merged into Hughes Airwest (Air West) in 1968)


▪ West Coast Airlines (formed in 1941, merged into Hughes Airwest (Air West) in 1968)


▪ North Central Airlines (formed in 1946, merged into Republic Airlines in 1979)


▪ Southern Airways (formed in 1944, merged into Republic Airlines in 1979)


• Pan American World Airways (formed in 1927, portions of which were merged into Delta in 1991)


◦ Atlantic, Gulf, and Caribbean Airways (formed in 1927, merged into Pan American World Airways in 1928)


◦ American Overseas Airlines (formed in 1937, merged into Pan American World Airways in 1950)


◦ Aviation Corporation of the Americas/American International Airways (formed in 1926, merged into Pan American World Airways in 1928)


◦ National Airlines (formed in 1934, merged into Pan American World Airways in 1980)


• Western Airlines (formed in 1925, merged into Delta in 1987)


◦ Standard Air Lines (formed in 1927, merged into Western Airlines in 1930)