The airline industry is highly cost-driven creating an extremely competitive environment in which to operate. The majority of customers prefer an inexpensive and hassle-free airline experience; for those business customers who previously paid for the extra features, such as first class, the ability to reduce costs has become more important causing them to consider finding lower priced business class seats or flying coach instead. This trend is referenced in Exhibit 1.
The airlines which have focused on building their business model to provide a unique or exceptional flight experience in the past must now consider ways to reduce costs in order to appeal to a market which is increasingly demanding more affordable prices. The larger airline companies, such as Delta, have been historically able to enjoy economies of scale and reasonably control prices, but are now being threatened by newly entering companies built on lower cost structures.
The competitive problem which Delta Airline’s currently faces involves their strategy to appeal to those customers looking for a better experience, despite the fact that most customers are focused on finding the cheapest airfare.
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As the industry grows to favor low cost leaders, Delta struggles harder in its attempt to compete as a product differentiator. COMPANY BACKGROUND Delta Airlines, Inc.
is an air carrier company competing in the “low cost” dominated market of airlines whose business structure consists of three major business divisions: passenger, cargo and other. Delta is the largest competitor in the cargo division, in terms of revenue, among US passenger airlines. The “other” division of the business unit focuses on providing maintenance, repair, and overhaul (MRO) services, pilot training, travel packages, staffing services, and other various support activities.
The problem is focused primarily within the passenger segment of Delta’s services. The airline provides its customers with more than 13,000 daily flights to 313 destinations within the US, as well as within 58 countries; their services are offered on all 6 populated continents operating through 10 hubs located in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita.
Delta also utilizes their membership in the SkyTeam global alliance giving them access to many major international airlines, but also giving those competitors access to their routes as well; additionally, they have multinational marketing alliances with many other international airlines outside of the SkyTeam. Delta also offers the SkyMiles frequent flier program, which is the world’s largest airline loyalty program, the Business Elite service, and more than 50 Delta Sky Clubs in airports worldwide. These services offer customers who choose to participate the ability to earn mileage as a reward for frequently flying on Delta Airlines.
HISTORY OF DELTA AIRLINES The airline company was first founded as a crop-dusting service under the name of Huff Daland Dusters in 1924 in Macon, GA; and by 1928 they had moved to Monroe, LA. Huff Daland Dusters was bought by CE Woolman, along with two of his partners, and established as Delta Air Service. The first passenger flights offered under the new airline were flown between Dallas, TX, and Jackson, MS. In 1953 they acquired Chicago and Southern Airlines (C&S), the first airline for Delta, and flew passenger flights under the name Delta C&S until 1955.
Over the course of the past 60 years, Delta has acquired, merged, and formed alliances with several large international, domestic, and regional airlines in its efforts to increase the number of routes and the size of the business. The most significant developments were the acquisition of PanAm’s European flights and PanAm Shuttle, and the merger with Northwest Airlines. The acquisition took place in 1991 when Delta purchased all of PanAm’s transatlantic and European flight routes; this was the largest acquirement of flight routes in history giving Delta a substantial and competitive edge in the European market.
They also purchased PanAm Shuttle, which it renamed Delta Shuttle, which currently offers hourly flights from New York to Boston, Chicago, and Washington D. C. , as well as among Los Angeles and San Francisco. The merger that made Delta the largest passenger airline in the world occurred in 2008 when they combined their assets with those of the sixth largest airline in the US, Northwest Airlines. Although Northwest operated under their own name until the integration was complete in 2010. For a list of Delta’s major mergers and acquisitions see Table 1.
Despite the success Delta has experienced from these powerful unions, they have also experienced downturns. During the 1990’s and 2000’s, Delta performed a series of mergers and acquisitions which eventually led to the filing for bankruptcy protection under Chapter 11 in 2005. This in turn led to Delta’s having to sell its wholly owned subsidiary Atlantic Southeast Airlines to SkyWest Airlines. For a complete breakdown of Delta’s subsidiaries, see Table 2. COST CUTTING IN THE AIRLINE INDUSTRY The airline industry is currently characterized by the substantial price competition.
The operating costs are seriously impacted by changes in volatile fuel prices, passenger traffic, government regulations, and a number of various other factors. In order for an airline company to profit from its operations, they must figure out a way to minimize and control these costs, while maintaining the ability to preserve enough of the features necessary to keep customers satisfied. Due to the fact that Delta is the world’s largest airline in terms of fleet size and passenger traffic, they face a larger challenge than the competitors.
Considering that fuel costs typically account for 35 percent of airline operating costs, every penny increase in the price per gallon for jet fuel costs Delta about $40 million per year. Owing to the fact that the airline industry has little to no control over rising fuel costs, it is imperative for Delta to reduce costs or increase passenger travel in order to remain competitive. The following are some ways airlines typically reduce costs in passenger travel: Standardized Aircraft – offers the ability to buy aircraft in bulk, lower maintenance costs, and incur less costs on training personnel.
Online ticket sales and flight check-in – resources are not used on call centers or agents and it reduces the need for check-in desks and employees to work them. Baggage charges and fees – fuel consumption and aircraft loading times are directly related to baggage volume and weight. In order to offset these cost, some airlines have imposed charges for checked baggage, late-checked baggage, and extra baggage in an effort to reduce aircraft weight and time spent loading the aircraft.
Point to point flights – this means that flights are flown directly to the destination instead of going through a central hub. This reduces the number of flights an airline flies and reduces the need to accommodate passenger connections, which greatly reduces the need for numerous employees. Other options for reducing costs include: hedging fuel costs by purchasing and storing fuel while fuel prices are low, removing non-essential features from aircraft, lowering airport fees by reducing time aircraft stay on the ground, and using staff to do multiple tasks.
Although there are multiple ways in which costs can be offset, an airline of Delta’s size can have a very difficult time making these kinds of adjustments. For example, Delta already owns many different models and sizes of aircraft that are needed for each individual route (regional, domestic, or international); they have also already increased the number of online and kiosk services for its customers to reduce the need for some employees, but still require customer service representatives due to the large number of flights and passenger volume which they handle daily.
DELTA’S COMPETITIVE PROBLEM The number of low-cost carriers has grown exponentially and have put the full service airlines under many competitive pressures; the number of low-cost carriers in Europe increased ten-fold from 1995-2001. * In order to maintain the ability to compete in the airline industry today, an airline must obtain the most operationally efficient model available. The market has developed so many low cost alternatives that maintaining a high number of services is difficult to correlate with cost reduction possibilities.
Delta has built such a large empire in a very costly industry, thus leaving themselves in the difficult position of creating an ability to offer lower price options in order to compete while still attempting to cover the costs associated with offering those flights. The goal of differentiation can lead to an advantage in the long-run if the importance of maintaining the ability to profitably compete in the short run is acknowledged, and the creation of the long run strategy for competitive advantage is properly managed.
An important portion of the long run strategy for a full service airline should be customer relationship management (CRM), but they must be able to integrate the policies organization wide while maintaining a profitable business competence. The current access Delta has had to cost reduction opportunities are insufficient to affect the appropriate level of change within the cost structures they currently maintain. This results in an inability of Delta’s to operate solely within the low cost structures of their competitors.
By moving slowly toward the strategy of offering better associations with their customers and creating long-term relationships, they can gain a sustainable competitive advantage within the industry. The existing elements of a CRM strategy which Delta utilizes are its frequent flyer programs, which don’t focus closely enough on customer needs and wants. The profitability made available to the airlines as a result of this relationship is a great help to the airline, but do not provide an advantage for the company.
Exhibit 2 shows the global system seat capacity by alliance; Delta’s association with SkyTeam is not providing a competitive advantage in the market. The industry’s current take on offering CRM is to simply keep up with competitor’s offers as opposed to evaluating the most valuable customers and tailoring offers to them. This results in the services offered by any competitor become quickly widespread throughout the industry and do not help to offer any differentiation from the competitors. For example, Delta waited to deploy the self-service kiosks claiming that they could save money on the later investment.
* This attitude creates a lag in the customers perceptions of the company; this lag is especially detrimental to a company trying to establish themselves as differentiated from their competitors. Exhibit 3 shows the US carrier capacity increase or decrease in trans-Atlantic markets during the third quarter of 2013. DELTA’S ATTEMPTS TO RECTIFY THE ISSUES As previously mentioned, Delta has implemented many cost cutting maneuvers over the years. They started in 1993 with launching non-stop flights between Los Angeles and Hong Kong.
Driven by the success of this emphasis on overseas routes they began “code-sharing” agreements in 1994 allowing the airline to buy tickets from competing airlines and resell them to its own customers allowing more flight flexibility. They also began a restructuring campaign reducing the operating expenses and cutting the work force down. This campaign was a drastic attempt to slash costs in a program they coined Leadership 7. 5. This program was attempting to reduce the cost of flying to 7. 5 cents per mile, resulting in an overall reduction of $2 billion in operating expenses over a three year period.
* One of the ways Delta was to make this possible was by slashing the work force by 20 percent, realign the domestic routes, and discontinue some routes in Europe. Exhibit 4 shows the trend in Europe toward lower cost airlines. These reductions left the company more profitable in the short run, but also created a loss in reputation due to the decline in customer service and the increase in customer complaints which resulted from the overcrowding and frequent delays. By 1997, they had dropped to last place in on-time rankings. The most recent cost reducing strategic move for Delta came when they purchased an oil refinery in Trainer, PA.
They brought the refinery on-line in 2012 after the investments required to maximize its jet fuel production. This could result in a huge advantage for Delta over the volatile and ever rising fuel costs the industry is so prone to. Delta also decided to invest $2 billion in enhancing the customer facing services including access to boarding passes, flight updates, and even luggage-tracking capabilities through a mobile app. * This move toward more tech-savvy offers to customers shows a clear direction toward a CRM strategy which could result in future advantage for Delta.
THE EXTERNAL ENVIRONMENT To evaluating a firm’s external environment is to understand the environment in which they compete and the structure of the industry. It is necessary to know the industry structure because it drives competition and, in turn, determines profitability. The Porter’s Five Forces Model, and the addition of complementors, demonstrates the attractiveness of an industry and gives an analysis from the perspective of the focal firm by giving information on the industry’s buyers, suppliers, or rivals; this also helps identify opportunities and threats for a company.
When applying this model to the airline industry, we see that the intensity of competition for any industry that develops rivalries generally have low product differentiation, high fixed costs as exit barriers, and a large number of competitors. We can determine from this information that overall rivalry for Delta would be high because major airline companies compete closely and powerfully for global market share and growth. American Airlines, Northwest, AirTran Airlines, US Airlines and United Airlines are just a few of the competitors that help develop a high intensity for competition for Delta.
The threats for potential entrants are a minor threat to existing airlines. The more airlines there are, the lower prices will be, due to competitive forces that drive the ticket prices down. So for the airline industry, the threat for entry would be at a medium level. This is because new entrances may be able to secure second hand aircrafts to establish a lower cost structure from lesser start up costs than are typical. However, securing airport infrastructure, such as facilities and airline routes are also difficult to acquire because of the high number of government regulations.
Hence, because the government regulations for an airline are very strict and there are quite a few regulations to follow, such as security, aircraft integrity, air/land traffic controls and business regulations, the threat for substitutes that would compete with Delta Airlines would be analyzed at a low level. This is due to the fact that there are many other means of transportation in the market, but they are inadequate compared to the efficiencies of traveling by plane, such as international travel.
Examples include: trains, buses, boats and railways. In regards to the buyer power in the airline industry, the lack of product differentiation, the small number of buyers, and the fact that the buyer is an only customer of the focal firm would result in a high level of buyer power. This is evidenced by a wide variety of other airlines to choose from, and the customers have the option to compare ticket prices online and choose the cheapest (which may not be Delta as evidenced earlier in this report).
With the continually rising fuel costs, the cost of production of the actual aircraft, and the extensive government regulations, it is hard for a company to consistently lower prices and turn a profit in the airline industry. Exhibit 5 shows the average fuel costs and average fares for the industry, representing how Delta is unable to produce a large profit due to the cost of tickets and the high fuel costs. This is why Delta Airlines attempts to create a better flight experience as an alternative to cheaper fares. As for the bargaining power of suppliers in the airline industry, this could be analyzed at a high level.
This is due to the fact that there are just two types of suppliers that meet the average government regulation requirements. In this industry, Airbus and Boeing control this market; therefore Delta can only rely on them to supply the aircrafts. A complementor can be the determining factor of whether or not a customer chooses to fly with them or a competing airline. Therefore, complementors are crucial to Delta’s services and offers because an advantage or product improvement can affect the overall demand for their service.
Some examples of complementors for the airline industry would be: Orbitz, MYOBtravel. com, Priceline, or Kayak. com. A visual representation of Porter’s Five Forces is available in Exhibit 6. THE INTERNAL VRIO The internal analysis of a company produces valuable insight into how the firm may be able to cut costs, differentiate, or otherwise better compete within their industry. This analysis, used in union with the external analysis, can be a useful tool with which the corporate strategy can grow and build off of.
The internal analysis consists of evaluating the value of the firm, the rarity of the product or service, whether or not the product or service is costly to imitate and whether the organizational structure supports the business in a valuable way. When these things are considered and implemented in a valuable way, they stand to create a sustained competitive advantage. VALUE Delta has done several things to attempt to increase the value of its flight experience. For instance, Delta has increased flight routes to provide more destination options with less time in layover.
In 2011, Delta awarded approval to create joint venture with Virgin Australia to increase options for customers traveling between Australia and the United States . ** Delta has also used its frequent flyer miles program in which they use their own “branded” credit cards to produce value for the company. Through the program customers earn miles by purchasing airline tickets, staying at partner hotels, by using ground transportation partners, and by booking vacations through partner company’s services.
These miles points can be converted to be used as Delta SkyMiles, and can be used to book flights, upgrade to First Class or Business Elite, pay for a membership to Delta Sky Club, shop at SkyMiles Marketplace, bid at SkyMiles Online Auction, and purchase Broadway tickets. Delta does make available the option to donate the SkyMiles to charity or give them to friends and family, which is unique. ** Also, by offering several options to check in they have added additional value to the process.
These features include: online check in, Fly Delta app check in, Airport Kiosk check in, Airport curbside check in. Passengers can also use the Fly Delta app to change flights, pay for checked bags, get airport maps, and get parking information; this app is made available to iPhones, iPads, Window’s phones, BlackBerrys, and Androids. ** Delta has also been using improvements in the customer’s flight experience to try to add value; they are the first airline to offer passengers the ability to keep their devices on and able to be used during flights.
They also offer power outlets for users who may need to charge devices and Wi-Fi access to passengers who wish to view Delta’s site (or Wi-Fi for purchase to those who wish to browse other sites). They offer complimentary inflight TV shows, movies, and music; the TVs are touchscreen, located on the back of the passenger’s seats, and controlled by the passenger giving them the ability to create their own satisfying, unique experience. Delta also offers overhead TVs that play new movies and popular TV shows, giving the customers yet more options for in flight entertainment.
** Several seating options are made available to Delta’s passengers to offer more comfort during the flights; these options include: flat-bed and seat sleepers for elite passengers, larger seats in first class, extra legroom in economy comfort, and window and aisle seats with bulkhead seats in preferred. ** RARITY Delta’s size creates a unique capability to utilize resources and capabilities in such a way that smaller inadequate firms cannot. However there are many airlines of various sizes in the current industry, especially when including both international and domestic carriers.
By working toward enhancing terminals to make them more appealing and partnering with Chef Michael Chiarello to create a three course menu for Delta flights, available to flights from LAX to JFK**, are some of the ways Delta is attempting to create a unique flight experience for their customers. This ability is rare in this industry which, for one, focuses on cost reduction, and for two, doesn’t possess the ability to create these sort of offerings. COSTLY TO IMITATE The practice of acquisitions and mergers in the airline industry is very costly.
It would be hard for any competitor to imitate Delta’s scale. This is largely due to the method by which companies within this industry achieve growth, through mergers and acquisitions which the government closely regulates. It would also be hard for a new competitor to stand against Delta’s long established brand. By merging with Northwest Airlines and therefore creating the largest airline company who also owns its own concourses in its main hub in Atlanta providing a advantageous control of the airport.
It is also difficult to imitate the level and types of services and amenities offered by Delta. They offer airport lounges for customers to await flights in, Wi-Fi for passengers, and the exceptional level of customer service provided to the passengers. ORGANIZATIONAL STRUCTURE Delta has been come to be known for its high employee morale, attributable to the fact that Delta offers above average compensation and benefits as compared to their competitors. They show pride in their employees and offer full medical benefits, 401K, and free travel.
Employees are satisfied with Delta’s open communication style, and tend to prefer to stay with the company; this fact was supported when Delta employees agreed to accept pay cuts during an unstable financial time. Another thing that sets them apart from other airlines is the relatively low level of unionization. Despite the fact that the airline industry is very labor intensive, only 17 percent of Delta’s employees are unionized. The high level of employee morale can also be attributed to the business principle upheld by Delta: “Commit to being a great place to work.
” They understand that by providing for their employees, their employees will reciprocate. Although Delta generates revenues through both air transportation and cargo shipments, the highest earning revenue activity is the air transportation. According to Bidnessetc. com, “Delta generated almost 86% of its 2012 revenues from passenger sales and the rest from cargo shipments and other airport services. ” While carrying cargo has not always been a part of Delta’s business model, it has proved to be very successful for them.
Delta started carrying cargo in 1946 and it soon started pursuing global cargo delivery. Delta Cargo can be broken down into 4 aspects: express, general, specialty, and services. Express cargo can be broken down to small international and large international. General cargo ships almost anything under 300 pounds. Specialty cargo is for animal remains, live animals, perishables, and firearms. Services include dangerous goods and coolers for international perishables. ** Since the acquisition of Northwest Airlines in 2008, Delta now delivers cargo to every region of the world.
In 2011, Delta Cargo produced $1billion of the company’s $35 billion generated revenue. ** RESOURCES AND CAPABILITIES The company’s resources and capabilities create a means to which the firm may utilize to create and sustain a competitive advantage. The capabilities are aspects of the business which create an ability to utilize resources in such a way as to add value to the company. These elements of analysis are essential to fully understanding how you can utilize assets to achieve the strategy, or to determine if that strategy is achievable.
EMPLOYEE/EMPLOYER RELATIONS Delta employs about 80,000 workers worldwide and operates on a particular code of business ethics, which are enforced throughout their labor force. They strive to maintain positive employee/employer relationships, have made it a goal to understand their employees, and are committed to building an open and honest communication structure. The company believes that their success is reliant on the relationships they build with their employees, as that reflects into the employee’s relationships with customers.
As Delta spent time building their brand name over the years, they have also built trust with their employee base. As previously mentioned, their customers voluntarily took pay cuts during a downturn in order to help stabilize the company. This is an extent of loyalty not often seen. With this help from the workers, Delta was able to maintain profitability for several years more. This loyalty can be seen reflected in the customers loyalty as the customers see the pride established in the workforce. Despite the benefits that the loyalty of employees provides, more is necessary to provide a true advantage to Delta.
LOCATION Delta is headquartered in Atlanta, GA, within the most frequently traveled airport in the world. The Hartsfield-Jackson Atlanta International Airport flies more than 994,000 aircrafts which service more than 89. 4 million passengers each year, Delta accounting for approximately 56 percent of these flights.?? This clear dominance at such an important hub gives Delta an apparent advantage over its competitors. They also offer 37 destinations across the Atlantic Ocean, in addition to being the primary carrier to Africa.
They have 10 hubs located in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita which offer a range of options available to those making trips through their services, allowing them to offer more flexibility within their scheduling. Delta has established clear advantages in the area of location establishment. REVENUE Although the majority of their revenue is produced through passenger air travel, they remain to be one of the leading cargo carriers amid US airlines.
The cargo revenue is produced through both domestic and international markets, and is associated with the largest global airline cargo alliance, Sky Team Cargo. Delta also offers its customers two general types of flights: an economy class, which is basic air transportation, and business class, which is luxury air transportation. The business class option is the more profitable division due to the fact that business travelers are less price sensitive and more concerned about comfort.
It also attests to the business class being more profitable when the fact is considered that the average traveler is more likely to change/cancel flights based on the price. “The industry faces substantial challenges from unprecedented revenue declines and volatile fuel prices, but Delta is the best positioned network carrier to weather these economic conditions(……)”.?? COMPETITION By analyzing a the competitors, the firm may be able to turn the attention on identified risk and better determine how to reduce costs.
Some of Delta’s major competitors include American Airlines, United Airlines, JetBlue, Southwest, and Continental Airlines. Exhibit 7 shows the year over year changes in revenue per seat mile by competitor since 2005. It has been considered that the low cost carriers may eventually dominate the market and push out the large, established companies like Delta which may not be able to sufficiently reduce costs in order to remain competitive. The trends in the market have shown the gaining popularity of the budget airlines. CONCLUSION