Delta Airline Case 1-During the 1990’s, none of the five largest air carriers in the United States earned its cost of capital. Why do such low rates of return on investment persist in the airline industry? That’s correct, airline companies margins were below the average for US industries for a long time, especially after the 1978 deregulation. For 40 years, prior to 1978, the airline companies had operated under the regulation of the CAB (Civil Aeronautics Board), which was responsible for managing routes and fares, and thus protected companies revenues and, more important, profitability.
Protected by cost-plus pricing, airlines regularly assented to labor union demands and in fact didn’t care too much by the costs incurred by the union deals. Due to the market environment during regulation, the airline companies used to overcharge for tickets, to compensate the costs. After deregulation, airline companies found themselves with high fixed costs and expensive labor. The companies started then running to gain productivity, customer loyalty, explore other routes, decrease costs (using alternative airports, etc… and focus on how to develop a system that would ensure high load factors; the companies started to pursue the returns/ yields. Together with all the costs problems, the big legacy carriers had to fight the Low Cost Carriers that appeared after deregulation, and were gaining market share rapidly. 2-Despite the challenging industry environment, airlines like Southwest and Jetblue earn enviable returns. How? Southwest and Jetblue are part of the LCC that appeared after 1978 deregulation. These companies remained profitable despite all the markets ups and downs, and even after Sept 11/ 2001.
Basically, the LCC operated differently from legacy carriers using secondary airports, short turn times, high load factors and different labor costs (flexible work rules vs. profit sharing plans) helping the companies have a much more enthusiastic workforce. All this combined with a different mission and vision, so a different strategic planning is what makes them profitable. LCC don’t use legacy carriers as benchmarks, they don’t even look at them as competitors, because their competitors are cars, buses and other ways of travelling.
Even the way tickets are issued is different, and also focused on modern way of life, less burocratic, more self-service and, of course, cheaper. This companies have essential competencies: Values (they created a new way of flying, from the ticket purchasing to to the flying experience), Rare characteristics (they are not regular carriers, they created a whole new market), Hard to copy strategies and operational competency. They launched a new substitute product in an existing market, ending in the creation of a new market, where they have so much competitive advantages that others can’t compete. -Why have all the low-cost subsidiaries of legacy airlines, including Delta express, failed? All big legacy carriers launched low-cost subsidiaries, but none obtained success. Some reasons are written below: -They launched substitute products in their existing market, but they should have entered the new market, with a new company -The subsidiaries shared employees with the legacy carriers -They shared burocracy -They didn’t have a clear market and also marketing strategy, different from the legacy carriers -They carried the same costs to operate
In summary, LCC is a total different business than legacy carriers, and can’t be integrated in other business. It has to have its own market strategy, labor agreements, administration, ratios, etc… The only path to success is treating low-cost subsidiaries as a whole different business, inserted in a whole different market. 4-What will happen to Delta if it continues to respond to the low-cost airlines in the way it has in the past? Delta Express was created as Delta’s response for the growth of LCC’s, primarily in Florida. Express used to operate older Boeings and offer less in-flight services.
In the beginning, Express could negotiate with the pilot’s union, resulted in some pay cut. but this agreements were falling apart. More important, all decisions concerning its operations were made centrally, as part of mainline Delta, and even ground services were shared. In fact, they were committing the same mistakes as the other legacy companies when operating their low cost subsidiaries and the only logical path, if Delta continues to operate Express as part of its flying business is the fail path. Low cost is not the core business of Delta and operating a low cost airline is not the core competency of its executives.
That combined together cannot lead to success. 5-What are the options available to Delta? Based on the information available to you in the case, what course of action would you recommend? Based on the case, and most important on the experiences of success and fail of low cost carriers, I would recommend that Delta would restructure its operational and administrative office to support Express as if was a total different business: -Totally different staff (another business unit, independent from Delta) -Different business results statements Different cost and capital structure -Different flight equipments (new aircrafts, that would have fewer maintenance needs and high flying hours) -Different services provided in and out-flight -Easier ticket issuing -No Frequent flyer program -Stronger agreements with regulatory institutions over time-table -Different mission, vision and values (“new company”) -Different routing, pricing, pilots and flight attendance payments program, etc… -A clear target of being the number one low cost carrier in USA and not only diminish the market share of other LCC’s.
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