1. During the 1990s, none of the five largest air carriers in the US earned it cost of capital. Why do such low rates of return on investment persist in the airline industry? 2. Despite the challenging industry environment, airlines like Southwest Airlines and JetBlue earn enviable returns. How? 3. Why have all of the subsidiaries of legacy airlines, including Delta Express, failed? 4. What will happen to Delta Airlines if it continues to respond to low-cost airlines in the way it has in the past? Can you size up, roughly, the financial consequences of continuing with the status quo? 5. What are the strategic options available to the cross-functional team that Mark Balloun co-leads? What steps should the team take to choose among the options and make a recommendation to Delta's board? 6.Based on the information available to you, what course of action would you recommend to Delta's board?
1) There are several factors that defined ROI rates in USA airline industry : Profitability → load Factor: the fraction of its flown seats that were occupied by paying passengers Cost was calculated as CASM
Yield was: total passenger revenue/RPM
- Airline deregulation act in 1978: fare dropped immediately (reduce fare by 45% since deregulation) - High competition:22 low-cost airlines joined the market, - High fixed costs, Expensive labor. Employee salaries and benefits were the largest expense for the typical major airline (40% of total costs) - Customers are price-sensitive: price was the overriding concern of one-third of all passengers. By the late of 1990s, internet allowed consumers to compare fares easily and become even more price-sensitive - Terrorist attacks of September 11, 2000 made the demand for air travel declined sharply (annual passenger revenues dropped 13.5% in 2001 to $80.9 billion). The cost of security and insurance raised (the installation of bulletproof cockpit doors, airport security tax)....