Delta Air Lines (a): the Low-Cost Carrier Threat
Delta Air Lines (A): The Low-Cost Carrier Threat
Problem: Delta Airlines didn’t have a comprehensive response to low-cost carriers across functions.
Option: Delta should launch its own low-cost carrier.
Problems: Nearly all major airlines had done this unsuccessfully, proved unsustainable over time, never had a high-cost carrier transformed into a low-cost carrier.
Since deregulation (1978) the average return on investment below cost of capital for the 5 largest carriers. Due to 9/11 the demand for air travel declined sharply.
• Airline’s profitability hinged 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- total passenger revenue/number of revenue passenger miles (RPM)
• RPM- number of revenue seats times the number of miles flown
• Average stage length-flight distance
• Marginal cost to add a passenger is negligible
• Turn-time of the plane is important
• Cost per available seat mile was low for airlines that flew long distances
• After deregulation- high fixed costs and expensive labor, in need of systems to ensure high load factor
• Shift to hub and spoke model- which helped achieve high load factor and market power
• Segmented into major, national, and regional carriers
• Price was the overriding concern of 1/3 of passengers
• Airlines encouraged loyalty by frequent flier programs, differentiation of service်, 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
• Yield Management- the computer system became a powerful tool for “adjustable rate airfares”
• The internet placed increasing pressure on the airlines
• The Air Transportation Safety and System Stabilization Act- attempted to compensate airlines for losses incurred due to attacks
Total Cost
40% employee salaries and
Problem: Delta Airlines didn’t have a comprehensive response to low-cost carriers across functions.
Option: Delta should launch its own low-cost carrier.
Problems: Nearly all major airlines had done this unsuccessfully, proved unsustainable over time, never had a high-cost carrier transformed into a low-cost carrier.
Since deregulation (1978) the average return on investment below cost of capital for the 5 largest carriers. Due to 9/11 the demand for air travel declined sharply.
• Airline’s profitability hinged 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- total passenger revenue/number of revenue passenger miles (RPM)
• RPM- number of revenue seats times the number of miles flown
• Average stage length-flight distance
• Marginal cost to add a passenger is negligible
• Turn-time of the plane is important
• Cost per available seat mile was low for airlines that flew long distances
• After deregulation- high fixed costs and expensive labor, in need of systems to ensure high load factor
• Shift to hub and spoke model- which helped achieve high load factor and market power
• Segmented into major, national, and regional carriers
• Price was the overriding concern of 1/3 of passengers
• Airlines encouraged loyalty by frequent flier programs, differentiation of service်, 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
• Yield Management- the computer system became a powerful tool for “adjustable rate airfares”
• The internet placed increasing pressure on the airlines
• The Air Transportation Safety and System Stabilization Act- attempted to compensate airlines for losses incurred due to attacks
Total Cost
40% employee salaries and