Delta Air Lines (a): the Low-Cost Carrier Threat

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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 benefits...
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