delta final.doc

7/28/2019 DELTA Final.doc

1/7

Q1.

Low rates of return on investment persist in the airline industry for several reasons,

involving several forces:

Union, employees and suppliers

From that point of view, Deregulation Act I 1978 by President Carter (line 16, p.2)

didn't change anything. Higher salaries and benefits are always on demand, and the

unions always have the power to go on strike if they don't get what they want, or

supplementing new work rules.

High salary structure which could represent 40% of total earnings in a 15 years career

(line 13, p.4) , together with10%-15% of total costs on fuel (line 16, p.4) , 15%-20%

of total costs on services, including commissions to outside constructors (line 21-22,

p.4) ' and a 15% of total costs on aircraft and facility rental (line 27, p.4) , created a

high cost structure.

With only 60%-70% load factor over the years 1978 to 2000, air carriers had a

relatively low profits (see Exhibit 1.(

Industry competitors-

Trying to differentiate themselves, major companies always try to improve service

offering, offer a variety of flight times, and improving inflight meals and movies,

causing high costs (line 12-13, p.2.(

Therefore, they had to charge twice as high as their intrastate counterparts (line 14,

p.2.(

High rivalry among the major companies caused too high costs, and in the intrastate

market, major air carriers needed to compete not only with each other, but also with

other intrastate small companies of flights of comparable lengths.


2/7

Customers

Passengers focused on safety, reliability, convenience, service quality, entertainment

and food when choosing airlines (line 12-13, p.3.(

Therefore air carriers needed to differentiate themselves and give the best in every

aspect in order to attract customers, which led to high costs.

The development of the airline reservation system enables an online price

comparison, and customers become more aware of low price alternatives.

Online web sites gave customers more efficient access to travel information, and

increased the pressure on airlines to offer the lowest price (line 44, p.3.(

Substitute products

In the intrastate field, the major airlines had to compete not only among themselves

and with the small intrastate companies, but also with the bus companies and with the

train companies, which are usually cheaper.

Q2.

Air lines such as Southwest airlines and JetBlue earn enviable returns from some

reasons:

Reducing CASM

CASM (Cost per Available Seat Mile) is the common measure of cost in the airline

industry. An airline could lower its CASM by increasing the hours per day of its

aircraft were in service (P.2 L.30). in order to do so it was very important to prepare

the plane to takeoff as quickly as possible. Southwest airlines was the fastest with 27

minutes between Landing and takeoff. Also those airlines offered flights without

meals and an all coach cabin flights.


3/7

Employees

Southwest and JetBlue enjoyed a good relationship and flexible work rules from their

employees.

Southwest gave to the employees bonuses (profit sharing plans by Southwest, P.5)

and worked closely with the unions.

JetBlue employed all nonunion workers which were proud to be workers and offered

high flexibility in the employment package and gave them good working conditions

(JetBlue P.6(

As a result the employees had a high motivation and performed better for example

contributed to quick turn time and high aircraft utilization (P.5(

Route and Airports selection

Southwest and JetBlue both provided services from secondary airports and by that

lowered the costs and avoided forceful battles with major airlines (P.5 L.39)

Innovation

Southwest was the first to set its price very low, and by that expanded her market also

to the auto travelers. By that they sometime increased the traffic on a certain route by

1000%/, which a lot from them were new customers.

JetBlue used technology in many aspects to be more efficient. 60% of the bookings

were online. The pilots used laptops which helped them in the "paperwork" so they

did it quicker and without any help. (P.6 L.31). also the reservation agents used the

internet to help handle peaks of reservation calls.


4/7

Q3.

General management mistakes:

Many LCC attempted to expand to quickly, chose the wrong routes, and confronted

harsh competition from other airlines when flying from same airport. (P.5 L37)

Employees

Unions such as the pilots union demanded the same salaries as in the legacy carriers

for the low cost workers as well. There was a problem to differentiate between the

salaries of the airline legacy carrier workers and its low cost carrier workers, a

problem which largely increased the costs.

Complicated Logistics

LC companies which used their legacy companies (like CALite and Continental) in

order to reduce costs, by mixing flights and using the same foundation (airplanes,

employees) (P7 L8). Because of all the logistics formation became large and

complicated this mixture confused and harmed the passengers.

Complicated management

Some low cost subsidiaries were managed by the same management as their legacy

carrier founder and therefore saddled some of the bureaucracy and constraints, which

increased the costs.

Industry competitions

Brand:

Several legacy airlines established their own low cost subsidiaries (P7 L 5).

Subsidiaries of legacy airlines had to compete Southwest which was the first low cost

airline and had a high reputation , achieved by their simple pricing structure , high


5/7

frequency flights and enthusiastic work force . Passengers related the low cost

subsidiaries to the legacy companies (sometimes the airlines themselves made the

relation) which was not always perceived as low cost. (P7 L 28)

Costs:

In the bottom line as can see from all listed above the Low cost subsidiaries of legacy

carriers could not compete with southwest's costs and sometimes their price was 70%

more expansive (P7 L26 ,Metrojet). Because the costs were higher the price was

higher and therefore less attractive for the passengers.

Q4.

The cross functional team was established to analyze and to process the data in order

to recommend the board of directors about the best strategic options, regarding the

low cost competition ("LCC").

Delta faces three strategic options:

1. Continue the status quo, in which Delta operates Delta Express, its low fair

subsidiary, simultaneously with its mainline flights. Although Delta Express

survived September 11th, by 2002 its profitability had deteriorated

considerably, as a result of the pilot union fight (Page 9, Line 3) and the new

high standards of JetBlue (Page 9, Line 5), the main competitor of Delta

Express.

Choosing this strategy will require re-branding of Delta Express, as well as

setting new goals and business objectives, in order to achieve better

performances.

2. Abandon the LCC market and compete it by creating new products and

services under the strong and familiar Delta brand. By doing that, Delta


6/7

will implement its size advantage, without need for neither new investments

nor changing the organization structure.

Previous attempts to establish LC subsidiaries had failed due to organizational

failures in the company's headquarters (Page 7, Line 2-7), and high labor costs

as a result of the union's fight, caused by the pay differential in the subsidiaries

(Page 7, Line 8-11).

In light of the above, it's possible that the conflict of interests is too strong to

enable an operation of a profitable LC, using the same resources of the parent

company.

3. Recognize the failure of Delta Express, and Launch a new brand to compete

in the LC market. In light of the conclusions learned from the previous

attempt of Delta Express, This is probably the most promising strategy.

Nevertheless, the shareholders will be skeptic about the profitability of this

strategy, due to the high up-front investment and the failure of other low cost

subsidiaries.

In order to make a recommendation to Delta's Board, the following steps should

be taken:

1. First, the task force has to decide where Delta wants to be in the LC market,

by defining Delta's vision, turn it into missions, and then set some new goals

and targets for the future, regarding the LC market.

2. SWOT analysis for each one of the strategic options, in order to understand

the current situation and the potential compared with the other competitors.

The following considerations should be taken: organizational structure,

reputation, and geographical distribution and market trends.


7/7

3. Internal analysis of Delta, in order to make the LC brand profitable without

impairing the old brand. Delta's advantage is its large resources labor,

maintenance, headquarter, but misuse of those resources will damage Delta in

the future.

4. External analysis of the market How to create added value in the LC market

for Delta's costumers? Does Delta have any advantage over its competitors in

prices or quality? What is the forecast regarding the factors that affects the

market?

5. A business plan for launching a new brand costs, structural change,

financing options, displaying few forecasts. It's possible that best solution is to

buy one of the exist LC airlines.

delta final.doc

Documents