Delta Air Lines (A): The Low-Cost Carrier Threat

Overview of Delta Airlines (A): The low-Cost Carrier Threat The big challenge for DA is competition from carriers like Southwest and Jet Blue. DA is organized by function, solutions focused on individual parts of the company. The main Problem of Delta Airlines didnt have a comprehensive response to low-cost carriers across functions. One of the Options that Delta should launch its own low-cost carrier but the Problem is Nearly all major airlines had done this unsuccessfully, proved unsustainable over time, never had a highcost carrier transformed into a low-cost carrier. The challenge for DA is to find a way to deal with LCCs and compete with the challenging conditions of the Airlines Industry. Another Problem Since deregulation (1978) airlines margins were persistently below the average o the US industries. For each of the five largest carriers average return on investment was below cost of capital due to September 11, 2001 the demand for air travel declined sharply. The Air Transportation Safety and System Stabilization Act -attempted to compensate airlines for losses incurred due to attacks. Despite the act airlines went bankrupt in 2002. Over 80, 000 employees were laid off. After deregulation, an airlines profitability hinged largely on the fraction of its flown seats occupied by passengers- load factor. Costs measured in cost per available seat mile (CASM) cost required to fly one seat one mile. Yield is total passenger revenue/number of revenue passenger miles (RPM). RPM is number of revenue seats times the number of miles flown. The Average stage length is flight distance and the Marginal cost is to add a passenger to a flight is negligible but Marginal cost to add an incremental flight to a schedule is higher. That means airlines can lower CASM considerably by increasing the number of hours per day service. Turntime of the plane important it means how quickly airline could turn and take off. Cost per available seat mile was low for airlines that flew long distances. After deregulation, with high fixed costs and expensive labor airlines had to develop a systems that ensure high load factor. Airlines shifted to hub and spoke model which helped achieve high load factor and market power in hubs they dominated. By 2002 major airlines adopted hub and spoke approach except Southwest. There is a competition from shorter routes less then 600miles compete with buses,

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automobiles and railroads. The industries were segmented into major, national, and regional carriers in terms of annual revenue. Price was the overriding concern of 1/3 of passengers, since deregulation prices had reduced by 45%. Beyond price, passengers choosing airlines focusing on safety, reliability and convenience and other factors like quality, amenities, entertainment and food. Airlines encouraged loyalty by frequent flier programs, differentiation of service, frequent departures, and a distinctive culture. Business travelers less sensitive to price- concerned most with schedule. The rise of the internet made customers more aware of price. Consumer can check price online, place reservation and compare fares. Yield Management- the computer system became a powerful tool for adjustable rate airfares also flexible and quick. This system boosted the airlines. This has also lead to a competition and increased pressure among airlines industries to offer best fare possible. Cost analysis of DA: There has been substantial lay off in 2001, employee salaries and benefits were the largest expense i.e. 40% of the total cost. 10-15% of total cost was Fuel cost. 15-20% of TC was Services cost. And 15% of TC was Aircraft and facility rental. And other cost like food cost, maintenance materials and landing fees. After 2001 only the low cost carriers Southwest, JetBlue, and AirTran remained profitable. LCCs had been gaining market share and earning higher long run profit- legacy carriers. Company Analysis: Southwest: Rollin king and Herb Kelleher the founder of SWA in 1976 emerged into the airline market with love theme and differentiate strategy. It provide frequent point to point service, no meals, no seat assignments, no frills, enthusiastic work force, low price and high load factor. There has been numerous imitators who attempted The Southwest Affect had little success. They expanded quickly, poor decisions regarding route selection, or confronted with fierce competition. JetBlue: A Successful copycat of SWA. JB could get the low cost model, new technology and strong brand. With the most highly capitalized start-up it grew over time, 60% of flights booked on-line. The fleet with entertaining environment like video monitors, leather seats, flexibility among employees. The company created the image as paperless airplane and cheap chic.

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Where SWA competes with couch, car and bus, on the other hand JetBlue makes low fare flying attractive to brokers, bankers fashion models and finance officers. CALite: a stripped down, no-frills service established by Continental Airline in 1993 was first to response to Southwest. It schedule passengers on a mix of CALite and mainline flights, people went entire days without meals only served continental meal at appropriate time. It attempted to launch low cost subsidiaries and slow down SWA expansion in the west coast. Shuttle by United, Metro Jet by US Airways leaded to 69% higher costs then SWA. By 2002 nearly all the low cost subsidiaries had been shuttered. Subsidiaries dont work- they are not truly low cost Delta Airlines: In 1925 it was the largest privately owned fleet of aircraft. After merger with Western Airlines, 1987, they were the 3rd largest domestic passenger carrier and also gave an access to routes from New York and New England to Florida. After deregulation they were the most profitable airline. Of Deltas more than 75,000 employes pilots were unionized which is a productivity advantage. Their compensation and benefits among pilots and non pilots were near top f the industries. Florida itself 30% of the revenue. They were served by large Boeing which has more seats therefore, cheaper per passenger. By 2002, Delta faced a competitive threat to its market position: mainline hubs and spoke carriers dropping fares, regional airlines were eating away deltas traffic in midsized market and LCCs made significant inroads into Deltas Florida market. Delta Express: In 1996 when SWA entered into the Florida market same year DA launched Delta express a low fare subsidiary that served Florida markets from non-hub airports in Midwest and Northeast. It was an effort to built Deltas leading position in Florida. To avoid internal competition, Delta removed all the mainline flights routes that served by Express. DEA was the only low fare subsidiary that survived after 911. Analysis of DA based on Porters Five Forces Model Buyers: HIGH bargaining power. People who have to travel a lot like bankers, brokers, fashion models, finance officers might otherwise not travel. They were more sensitive to schedules & frequent-flyer programs & price of tickets & fares.

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Substitutes: LOW bargaining power on long distances, HIGH bargaining power on short distances Short routes shorter than 600 miles consumer have an option to take automobiles, buses, railroads, coaches etc. which are comparatively much cheaper then airlines and consumer will not take into consideration fees for hotel and food. Long routes are almost exclusively internal to the industry. Criteria for switching to a substitute are budget, time & comfort.

Suppliers: MIXED-HIGH bargaining power y There are few numbers of Aircraft suppliers & aircraft manufacturers. There are only few providers of aircrafts and specialized in producing aircraft. So mixed bargaining power of suppliers. y One of the important resources is specialized employees expertise in know-how and management. In a way KSA (knowledge skills and Abilities) employees has high bargaining power where as for generic workers has low bargaining power. y Another important factor is Airport owner having strategic hubs & places depending on route destinations which has to be very specific, precise & important) has high bargaining power. y y Food providers have low bargaining power. Governments & Organizations for Agreement, Regulation, Safety & Insurance has high bargaining power

New Entrants HIGH bargaining power Though LCC Low-Cost Companies which are emerging into the market but there are still barriers for new comers in the airline industry are: y y y Very strict governmental regulations, restrictions & safety process required. Important investment to bring into the business to start a low-cost subsidiary. Learning Curve effect (experience & know-how gained by current competitors on the market) y Agreement with existing airports and hubs.

This barriers has a positive impact on DA or current airlines companies, it will not increase competition.

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Competition: HIGH bargaining power Competition is high in the airlines industries. Major passenger airlines: Alaska, America West, American, American Trans Air, Continental, Delta, Northwest, Southwest, United, US Airways are the direct competitor. And emerging of Low-Cost competitors building for years: Southwest, JetBlue + CALite, Shuttle, Metrojet has a huge impact on DA. Airline industry evolves neither in a monopoly nor in an oligopoly, but in an almost perfect competition. And this perfect competition makes it difficult to compete among industries. DA faced a very high competition in this segment to attain market share.

Problem Identification: Below are the identified problems of DA: y y DA didnt have a comprehensive response to low-cost carriers across functions. Nearly all major airlines had done this unsuccessfully, proved unsustainable over time, never had a high-cost carrier transformed into a low-cost carrier and this is one of the most important challenge for DA is to find a way to deal with LCCs and compete with the challenging conditions of the Airlines Industry. y Since deregulation (1978) airlines margins were persistently below the average o the US industries. y y Decrease of profitability, leading to hard battle between corporation and unions. Market Segmentation-customers select a carrier primarily on the basis of ticket price and beyond price, passengers focus on safety, reliability and convenience, quality, amenities, entertainment and food. y y Emerging booking flight tickets is online on the Internet Price sensitivity- By the late 90s, widespread access to airline fares and schedules via Internet. Consumers in this industry is very sensitive to price and airlines compete vigorously in terms of fares to attain customers. Customers are now easily able to compare fares and be aware of alternatives. y Switching costs- High repeat business for people choosing the same travel destinations but can also fluctuate and be a low repeat business if destination or airports provided by the airline dont correspond to expectations. y Upcoming airlines and differentiate strategies giving DA a very intense competition.

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y y

Airlines have close work with unions of workers, offering profit-sharing programs (SWA). Airlines getting new aircraft & Divers entertainments on board (LCC TV, Yoga cards etc) provide a sense of innovation in the mind of consumer (JetBlue).

y y

Very low CASM and high load factor for a high proportion of premium fares (JetBlue). Brand image defined as Cheap Chic (JetBlue).

Recommendation: After analyzing the case we draw up some of the recommendation for DA: y DA should have cost advantage and differentiation strategy unlike SWA have differentiated strategy (like love theme, family holidays, emotional appeal promotions). y Implement business strategy quickly to mobilize to employ its signature solution by development methodology a consultative series of steps: o Map out specific needs o Analyze proprietary historical data & customer purchasing trends o If so, the max product relevancy can be ensured o Identify the ideal mix of trip y Simple operation (all-Boeing 737 fleet, no meals and seat assignment, no frills, flexible work rules, enthusiastic workforce, high aircraft utilization). Encourage the aircraft environment. Maintain humanity, good amenities (in-flight entertainment system). y Maintain good relationship with employee unions and also with its customers, create loyalty and brand devotion. y y Come up with holiday packages and facilities to their loyal customers. Provide online offers e.g. be the first to buy online and get 20% discounts. It will encourage consumer to travel frequently online and in a way they will see other promotions and packages. y Provide attractive promotions for consumers. Frequent flyer promotions, millage advantages, membership card with special facilities. y Become market leader by innovation & customer service.

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Conclusion: All of the low-cost subsidiaries of legacy airlines, including Delta Express failed because theyre still are high-cost carrier selling cheap seats. And there is no real cost advantage, the parent hide true expense in financial statement. The Complicated logistics, poor service, bad union relationship (expensive labor, low productivity) and corporate authorities reduce LCCs independence. If Delta continues to compete with strong competitor, such as JetBlue, without real cost-advantage or service differentiation, it will be forced to match JetBlues lower fare in order to protect market share yet incur huge financial loss. To overcome with the current scenario DA has few options that can be implemented to defeat back to business; Delta Express can modify by creating better relationship with unions to lower labor cost, differentiate service in order to compete with JetBlue. Reintegrated with the primary Delta brand to attain pre- existed image in the mind of its customers. And Launch new subsidiary which requires tens of millions capital, explanation to shareholders and analysts which is difficult but will pay off with greater benefits.

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