Delta Airlines

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Situation Synopsis:

Margins in air industry have been shrinking for decades. Low Cost Carriers (LCCs) such as JetBlue and Southeast have made inroads to Delta’s Florida market which stands for 30% of Delta’s revenues. After 911 Attacks, the demand decreased. DeltaExpress, Delta’s low-cost subsidiary, is launched to respond LCCs threat but it is not as successful as it was thought it would be.

Delta’s current Strategy:
Delta mainline is a legacy airline and competes utilizing its low price and productivity. DeltaExpress tries to build on Delta’s leading position. DeltaExpress is an integral part of Delta and centrally managed in terms of pricing, flight frequency and routing and all the resources are shared. It benefits from the high levels of productivity amongst flight attendants and ground crew.

The relevant strategies for Delta are business level strategies (Cost leadership among Legacy airlines) and corporate level strategies (Diversification to LCC).

Problem Statement:
DeltaExpress’s cost savings such as low labor rates and higher aircraft utilization have not been sustainable. We have to devise a comprehensive strategy to respond to the LCCs ever-increasing market share. We will consider 3 major options of Continuation of Delta express with some modifications, reintegration of DeltaExpress to mainline Delta and launching a new LCC.

External Analysis:
Industry Structure and Trends:
Value chain is composed of: Suppliers, Airlines, Intermediaries (Travel agents, Internet) and passengers (Appendix 1).

Since deregulation, margins are decreasing and LCCs have entered the market. Passengers are price sensitive and business travelers’ major concern is flight schedule and then price. Other factors such as reliability, amenities and in-flight experience are sought by passengers. Demand is cyclical and changes with business cycles.

Out of ten major airlines in the US, except Southwest, all use hub-and-spoke system as well as two LCCs. Entry and exit to the market is hard due to huge amount of fixed costs and low margins. Advent of the Internet has affected the demand and supply side tremendously. Consequently, customers are more knowledgeable about the price and airlines utilize Internet to streamline the ticket selling by forward integrating of intermediaries which will save money and enable airlines to gain control over their distribution channels and shape customer demand. LCCs try to take advantage of entertainment technologies such as in-flight satellite channels and online ticket reserving and to differentiate themselves in the competition by choosing a “theme/Culture”. Working with a single aircraft supplier is utilized by some airlines to get better contracts and lowering maintenance costs.

Overall, an extremely tight market with low margins and agile competitors, thus remaining cost-conscious, offering value to the customer and managing capacity and distribution channels are all essential.

Industry Economics:
Load factor along with yield is a determinant of airlines’ profitability which reflects the amount that passengers are willing to pay. Cost is measured by cost per available seat miles (CASM) which in turn is affected by flight distance, type of aircraft as well as daily utilization and turn time. Salaries and benefits with 40% is the biggest portion of costs. The industry is capital and labor-extensive. The pricing practices has shifted from “cost-plus” to a completely deregulated one in which airlines manage their yields by offering different prices to different segment of customers according to their needs and preference. Delta has the best cost structure amongst legacy airlines but compared to LCCs, it has a prohibitive one that hinders it in the competition.

Although LCCs generate less revenue compared with Delta, their cost especially their salaries, maintenance and travel agent commission costs are less than those of Delta Decreasing capacity utilization and increasing...
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