Airlines Strategy Analysis Essay Example

major US carriers, to agree on concessions that would assist in reducing labor expenses.

Delta Air Lines is currently facing various challenges that are adversely affecting its financial performance and employee morale. Firstly, the airline will experience an additional $140 million in expenses this quarter due to the unexpected retirement of pilots, thereby causing an expansion of its projected loss for the fourth quarter. Furthermore, there has been a decline in employee morale attributed to significant layoffs, pension trusts protected from bankruptcy, and executive bonuses that are not linked to performance.

In terms of market share, Delta's position has weakened over time. Between 1993 and 2003, its market share decreased from 17.4% to 15.1%. Moreover, when compared to 2000 and 2001 figures, Delta's yield witnessed respective declines of 13% and 5%.

The U.S. Department of Transportation reported a 2.6% decrease in RPMs for the entire U.S. industry in 2002. Out of the top 10 U.S. airlines, Delta was positioned as the fifth airline according to rankings.

Airlines are facing a decline in passenger load factor and a continuous trend of being unprofitable. The stock price has decreased by 66% from $38.0 on September 1st, 2001 to $13.02 on November 1st, 2003 (see appendix A). In the last two years, the company has been unable to make any profit and is expected to suffer another loss this year. Nevertheless, there are market opportunities for cost-effective new regional jets that offer low expenses and flexible route planning.

CNN reports that there is an expected 50% increase in air traffic in the next decade. Additionally, during the third quarter of 2003, there was an 8.2% rise in the U.S. GDP, indicating a significant

growth in both business and consumer activity.

Delta can operate an unlimited number of regional jets, as stated in its pilot labor contract. However, each jet must have a maximum seating capacity of 70 seats. This flexibility allows Delta to remain competitive in the dynamic industry, alongside Southwest, Jet Blue, and Air Tran. Additionally, Delta has a 40% ownership stake in WORLDSPAN, L.P., one of the online reservation services it partially owns.

Delta is a limited partnership that operates and markets a computer reservation system (CRS) and other related systems for the travel industry. The CRS services are mainly used by travel agents to book various travel reservations, including airline, hotel, car rental, and issuing airline tickets. Delta also has an approximately 18% ownership in Orbitz, LLC, which is responsible for running an online travel agency offering travel services through the internet to both consumers and business customers. In order to improve efficiency and save costs, Delta can invest in technology by installing self-service kiosks at airports. This implementation would not only reduce expenses but also increase the speed of air travel, which currently incurs a $25 fee per paper ticket.

Following the events of September 11th, Delta and the entire aviation industry faced increased expenses associated with security measures. These expenditures included reinforcing cockpit doors, obtaining new equipment, providing training, conducting additional security checks for employees and suppliers, and paying high premiums for war and terrorism risk insurance. As per the International Air Transport Association (IATA), the global airline sector suffered losses amounting to $18 billion in 2001 and $13 billion in 2002. Consequently, both United and US Airways filed for bankruptcy in recent years. Economists anticipate

that it will take until 2005 for the industry to fully recover from the impact of September 11th; nevertheless, uncertainty surrounds this projected outcome.

Delta faces competition from various competitors in the time-sensitive industry. It has been significantly impacted by discount carriers, which offer superior routes, newer aircraft, and more frequent flights. Additionally, Delta encounters competition from other significant national and regional airlines. Moreover, Delta competes with alternative transportation options like automobiles, railroads, and buses. The economic recession starting in 2001 resulted in substantial reductions in corporate travel budgets, making other transportation modes more appealing to cost-conscious leisure travelers.

Although the airline industry as a whole has been in decline, there is a significant deterioration in service quality leading to unsatisfactory customer service. John Kay suggests that sustainable competitive advantage comes from excelling at what others cannot do as well, rather than duplicating what others already do successfully. Despite facing reduced revenue from decreased air travel, Delta is establishing an enduring competitive advantage through its frequent flight options, improved customer loyalty program, and extensive network reach (www.eracast.com).

Delta is currently implementing a range of strategies to gain and sustain an advantage over its direct competitors. These strategies encompass having mostly non-union employees, providing more flexibility with part-time staff. Moreover, Delta stands out in the airline industry with its exceptional airport model and extensive global route system, making it the top carrier for worldwide passenger transportation. Furthermore, Delta has gained recognition for its groundbreaking work on developing the most advanced single-aisle in-flight entertainment system.

Despite these strengths, Delta does not possess a specific profitable niche or vulnerability.

After evaluating Delta's mission, it is evident that it is in line with the

company's goals and objectives. However, in order to keep up with the changing industry, Delta needs to adopt new strategies to fulfill its mission. The challenges that Delta faces are outlined in Porter's model (see appendix B). One specific challenge is the increasing operational expenses, which have been rising since 09/11.

The rise in fixed costs is due to increased security measures for employees and suppliers, as well as higher insurance premiums for protection against terrorism risks. Labor expenses, including salaries and wages, make up around 40% of total operating expenses. Standard & Poor's reports that labor costs accounted for 43.9% of industry revenues in 2002 - a rise from 40.6% in 2001 and considerably higher than the 34.9% recorded in 2000.

Delta is currently facing challenges due to the increased cost of labor, resulting in the layoff of 16,000 employees. This accounts for 18% of Delta's total workforce. Despite other major airlines reducing salaries and wages, Delta is struggling to match their competitors' labor costs. To remain competitive, Delta needs to find alternative areas for expense reduction.

The situation becomes more complex as Delta's pilots are among the highest-paid compared to other US carriers. These pilots are unwilling to accept a temporary salary reduction for long-term stability. Additionally, there has been an unusually high number of retirements among Delta's pilots this year, putting added strain on the company's pension fund since retired pilots receive a lump sum portion of their benefits (Banstetterm, Nov. 3).

According to reports, Delta is not planning to reduce the wages of employees working at its new airline, Song. This decision puts Delta at a disadvantage compared to its competitors, as they will

be able to operate with cost structures that are 10-30% lower. It has been noted that Delta's senior 757 pilots currently earn approximately $245 per hour, while pilots at Southwest earn $149, AirTran earn $118, and JetBlue earn $100 (Banstetterm, Nov. 21, p. 2). For more information, please refer to Appendix C.

Fuel costs continue to be elevated as a result of persistent problems in the Middle East. In December 2002, fuel expenditures surged by 35% from the previous year and were predicted to keep rising. This emphasizes the importance of modern aircraft fleets that can deliver superior fuel efficiency and mileage compared to older versions. Moreover, another expense emerged following the September 11th incidents, which was a government-imposed security fee for each passenger. As stated in Delta's annual report for 2002, there was also a decline in passenger traffic due to both real and perceived inconveniences resulting from heightened airport security measures.

Regrettably, the implementation of new security measures has resulted in a decrease in convenience for air travelers. This has led to an increase in baggage checks and longer wait times at airports. Furthermore, taxes and fees have doubled in the last decade, causing most consumers to be unwilling to bear the additional costs. Additionally, Delta's cargo operations have been adversely affected by recent security protocols mandated by the Federal Aviation Administration (FAA). Previously, half of Delta's mail business entailed transporting parcels weighing over 16 ounces. However, these heavier mail items are now prohibited on passenger airlines. As a result, Delta has witnessed a 7% decline in its cargo revenues.

Labor-Management Mistrust Delta used to have a reputation for equal treatment of its leaders and employees.

However, a discrepancy arose as executives awarded themselves significant bonuses, all the while requesting job and wage reductions from workers. This raises concerns about their competence in leadership as these bonuses were primarily influenced by cash flow rather than profits and operational performance measures. Additionally, Delta established separate trusts for 33 executives to protect their augmented pension benefits from creditors in the event of bankruptcy, further contributing to the existing mistrust.

The airline industry is currently facing numerous challenges, which include declining profits, market share, airport capacity, route structures, weather conditions, and advancements in technology. However, the most significant hurdles for airlines arise from the increasing costs of fuel and labor. These factors have significantly impacted the profitability of airlines.

Furthermore, the industry has undergone various changes primarily due to events such as 9/11, the war in IRAQ, and SARS. These events have profoundly affected the entire landscape of the industry. It is expected that most US carriers will continue to experience substantial losses in the near future.

Moving forward, one of the key priorities is to develop innovative strategies aimed at attracting more premium passengers. This particular segment offers the highest profitability per ticket.

Despite a 5.2% decrease in ASM's in 2001, the industry is experiencing low load factors of 70.4% compared to 72.4% in 2000. To stimulate demand and cope with excess capacity, most airlines have implemented discount fares.

Delta is facing competition from other low-cost carriers that operate a single type of aircraft, resulting in cost savings from maintaining a single parts inventory. These carriers offer minimal additional services and avoid costly hub-and-spoke airport networks that involve complex passenger and baggage connections. The costs for major hub-and-spoke

airlines like Delta can be 150% higher compared to carriers operating direct city-to-city flights. As the airline industry operates on a network basis, different competitors can emerge depending on the specific market being analyzed.

The airlines have poor customer service, causing late arrivals, lost baggage, inadequate problem recovery, and unfriendly technology. This creates distrust among the public and damages the industry's reputation. Despite increasing customer demand, customer service breakdowns persist due to organizational challenges. This gives the impression that airlines lack concern for their customers and are only focused on their own interests. In contrast, Delta has sought to gain a competitive advantage by demanding premium service at a discounted price from its employees. Delta employees are expected to achieve higher quality and productivity with fewer staff compared to other airlines.

Solutions

Superior financial performance for Delta can be achieved by consistently choosing and sticking to one of a small range of 'generic' competitive strategies. This requires orchestrating every activity in Delta's value chain in coherence with the chosen strategy. Delta's new vision should identify a market opportunity and provide a general plan for its exploitation. Additionally, it should address the needs and expectations of key stakeholders such as employees, customers, and investors (Holloway 2002).

Delta should adopt a "balanced perspective" that considers both competitors and customers. The key objectives include successfully negotiating a new pilot contract, cutting operational costs, increasing market share, improving customer service, and boosting employee morale (see appendix D). To achieve this, Delta should transition to a more organic organizational structure. Managers must tap into the existing motivation within the workforce rather than trying to elevate overall motivation levels. Instead, they should aim to harness

and refocus that natural energy.

Operational Cost Saving

Strategies: To decrease expenses, Delta should implement operational improvements, such as more efficient flight scheduling, optimizing crew resources, enhancing maintenance processes, and reducing aircraft turnaround times.

The text suggests that in order to reduce operational cost, Delta should consider outsourcing. However, it should be cautious about always choosing the lowest bid. The success of low cost carriers lies in their ability to outsource contracts and consistently receive optimal services at the best prices. Instead of acquiring new resources, Delta should focus on seizing opportunities that can be effectively utilized with existing resources. To adapt to the changing airline industry landscape, Delta needs to align itself with the prevailing circumstances while taking into account its own strengths and weaknesses. Despite currently holding the third position in market share, Delta's cost structure puts it at a disadvantage compared to its competitors. JetBlue and Southwest operate in the low-fare sector, whereas American and United are situated in the Power Alley (see Appendix E).

Delta's main strategic goal is to decrease costs and generate new revenue streams. To achieve this, Delta should prioritize a growth strategy that centers on expanding its market share and integrating forward in the industry. It is crucial for Delta to continue funding its current successful fuel hedging program in order to further reduce fuel expenses. Additionally, Delta has decided to defer the purchase of 8 Boeing 737's in 2005, indicating an effort to maximize the efficiency of its existing fleet. This move aims to cut costs in various aspects, except for fuel expenses.

The older fleet will inevitably raise fuel costs compared to what would have been if future

capital expenditures were not delayed. By December 2002, fuel costs had risen by 35% from the previous year, and this upward trend is expected to continue throughout the 2003 fiscal year. Due to the ongoing conflicts in the Middle East, there is no assurance of when these increasing costs will decrease. Nevertheless, Delta has successfully decreased fuel costs by $26 million before taxes in the third quarter of September 2003 through the implementation of the new fuel hedging program. During September 2003, Delta's average price for jet fuel was $0.

The cost of jet fuel is currently $79 per gallon, excluding fuel tax. Delta has recently implemented a fuel hedging program, with only 53% of its fuel requirements being hedged in the 3rd quarter of 2003. For the 4th quarter, Delta predicts that around 47% of their jet fuel requirements will be hedged. However, it is recommended that Delta increase their jet fuel hedging to 75% of the 4th quarter requirements.

Delta should make every effort to continue and potentially increase their focus on this program. They should invest in technology to reduce costs and improve efficiency, particularly by investing in distribution channels. In order to achieve this, Delta should aim to reduce ticket prices by installing additional self-service kiosks in airports and offering incentives to customers who use internet check-in options, such as a 2% discount. Delta plans to install over 400 more self-service kiosks in airports in 2003 and should continue this process until all major airports are fully equipped.

Delta can lower costs by promoting the use of booking services like Orbitz. They can aim to eliminate fees charged by travel agents by giving a

portion or the entire discount to the end user. In this way, Delta can advance its business by reducing reliance on middle-men or travel agents. Additionally, Delta may provide consumers with even further discounted fares.

3%) if booked by the online services in which Delta has a vested interest. Delta should also implement a temporary double-miles promotion that will provide flyers with double the SkyMiles for selecting to obtain their tickets through Orbitz. This double-miles promotion should not exceed a duration of six months to a year. This strategy not only reduces commissions paid to travel agents but also eliminates the $25 per ticket cost of issuing paper tickets through e-ticket purchases. By introducing e-ticketing, promoting online bookings, and enhancing jointly owned internet travel ports, Delta is advancing towards forward integration by gaining control over its distribution channels. To enhance labor-management relations, Delta must maintain efforts aimed at reducing capital expenditures and implementing cost-cutting techniques while simultaneously boosting employee confidence in the company's long-term stability.

Delta should adopt Southwest's 'no furlough policy' as a way to retain employees permanently. The new CEO, Grinstein, should prioritize building strong relationships within the organization and identify areas of improvement that can be effectively communicated company-wide. Additionally, Grinstein should overturn the 33 pension trusts set up during Mullin's tenure. It is also crucial for the labor force to gain better knowledge of the industry's economics to understand the rationale behind different initiatives. Lastly, Delta should ensure that all employees attend semiannual quality control training seminars specific to their respective departments.

In addition, immediate implementation of 40 hours per year of specific on-the-job training beyond the normal federal mandates is necessary. Furthermore,

management should agree to a cap on total executive pay and implement pension caps for unearned years as compensation for Mullin’s mistake last year. Bonuses should be solely based on performance. Moreover, it is essential to re-emphasize workplace values and beliefs such as pride, loyalty, and a sense of belonging to boost morale. Additionally, Delta needs to reach an agreement soon with its 8,500 pilots on a tentative pay cut.

Delta's pilots are earning an average of $245 per hour, which is the highest in the industry. The lowest wages for pilots at JetBlue are $100 an hour (see Appendix C). Due to challenging economic conditions and slow demand growth, Delta needs to make these cuts in order to maintain its leading position in the industry. Instead of the previous proposed 26.5% cut, Delta should now suggest a 20% reduction for all pilots, effective immediately (www.airportnet.org).

Despite the potential hesitancy of the pilots' union in accepting these reductions, Delta has the ability to counteract them by offering a 3% annual increase above the industry standard rate for fiscal years 2008 through 2013. Since many of Delta's pilots opt to take a portion of their retirement benefits as a lump sum, Delta should propose a $1,000 bonus for any pilot who chooses to postpone these lump sum payments until after 2008. Implementing this end date in 2008 would grant Delta the flexibility to recover from its current unprofitable trend, even if the industry's anticipated recovery is not fully achieved by 2005. By maintaining positive cash flows, minimizing current labor expenses through a new pilot contract, and reducing retirement payouts, Delta can regain its position as an industry leader

and prepare itself for the promised future wage and retirement increases.

To encourage the pilots to agree to the new contract, Delta should offer them a 3% increase in profit-sharing packages, a signing bonus of 100 shares of additional company stock per pilot, and two seats on the board of directors. This will be in exchange for their acceptance of a 20% pay cut. The pay cut provision will also include no wage increases for the next five years, but in return, the pilots will receive an increased proportional allocation of future stock options. It is important to note that these stock options will be separate from those given to other employees.

Market Penetration is vital for Delta, as airline seats are perishable inventory. In order to maximize profitability, Delta must aim for the highest load factors on every flight. The average load factor for Delta in 2002 was 72.4%. To ensure success, Delta should strive to increase these load factors beyond the break-even point for each market. If a market cannot achieve profitable load factors, Delta should consider abandoning it.

Delta can improve its market penetration by utilizing its regional airlines, such as Comair, Song, and ASA. These regional airlines can be utilized for off-peak service when demand is not enough to justify using larger aircraft with over 100 seats. Normally, regional jets reach their break-even point at around a 50% load factor, while large jets require about 63%. Delta should assess regional demand more effectively and tailor their services to further expand their current market and achieve more profitable load factors. Fleet selection and fleet commonality, as well as factors like high utilization and reliability, are

crucial sources of competitive advantage for low-cost carriers. Delta should analyze the significance of these factors.

Improve Customer Service and Rebuild Customer Loyalty

Delta needs to implement new strategies that focus on enhancing customer service. Adding extra value to their services is necessary since airline loyalty is gradually declining due to internet sales, and consumers have become highly price-sensitive.

Delta can enhance the airport experience and improve self-service by implementing various automation measures. A prime example of this is the installation of self-service kiosks in multiple terminals. These kiosks provide customers with the convenience of obtaining their boarding passes without the need to wait in line at a counter. Additionally, Delta should consider the installation of new devices in every gate area. These devices would enable customers who have missed a connecting flight or experienced a cancellation to obtain a printout of a new boarding pass for the next available flight. Furthermore, Delta could enhance the onboard experience by introducing upgraded electronic gate displays at all terminals. Lastly, collaborating with the Transportation Security Administration to optimize passenger flow within the terminal could result in a 15% increase in efficiency.

Having flexible and friendly crews who go above and beyond to serve passengers is extremely important. Additionally, there are three key factors that enhance the Delta experience: Increased Comfort: In the next three years, all future planes will provide more leg and elbow room for every passenger, not just those in first class. The existing fleet will also be modified to cater to severely overweight individuals, as obesity affects one-third of the population (NPR radio). Special seats will be available on all upcoming flights for passengers weighing over 300 pounds

to ensure they have enough personal space. These special seat upgrades will be allocated on a first-come-first-serve basis and determined at the time of ticket purchase.

Effective immediately, Delta is implementing several measures to make their flights more kid-friendly. These include providing free headphones, in-flight children’s movies, a children’s music station, playing cards, wings from the pilot, and a coloring game booklet with crayons. Additionally, Delta is exploring a new approach to in-flight food. Rather than offering free meals, they are considering collaborating with theme-restaurant giants like Hard Rock to sell in-flight entrees and offer rotating menus. This shift not only lowers costs but is also expected to satisfy customers' desire for better-tasting meals. The introduction of this unique and innovative initiative could become a distinctive factor that influences passengers when booking their next flight. In the future, all Delta passengers will be able to order from a menu when booking flights online, ensuring that those who want better quality and variety have access to it and potentially leading to increased revenues.

The key to increasing Delta's customer loyalty could be to offer slightly more spacious seating and additional amenities. This can be achieved by using jets without first-class sections but with seats that have around 5 extra inches of legroom. Delta should also provide free chocolates and one free cocktail during evening flights. Setting itself apart with these "small but important" extras is crucial for Delta's success. For instance, Song's new colorful seats, flight attendant uniforms designed by Kate Spade, and martinis sold onboard aim to recreate the glamour of commercial aviation's past. Additionally, Delta should reduce penalties and fees for flight changes and heavy bags

to further enhance customer satisfaction. Implementing these innovative strategies may require structural adjustments but can lead to breakthrough success.

By making slight changes to the organization's structure, such as "specialization," Delta could potentially enhance the customer's perception of their overall travel experience. For instance, if Delta were to hire and assign at least one attendant to each gate who is exceptionally friendly, cheerful, courteous, and helpful before and after flights, it could give them a slight advantage over other airlines in the eyes of many dissatisfied travelers. Increasing the frequency of front-line employee interactions with customers would also help expedite the boarding process. Additionally, Delta could consider adopting a more service-oriented approach rather than solely focusing on providing physical seats or tickets (products). By incorporating elements of both a mechanistic and organic structure, as Southwest did with its relaxed corporate atmosphere, Delta could benefit from the advantages that each type of structure offers. Given the current high level of uncertainty and unpredictability in the airline industry, it can be argued that Delta should pursue more organic concepts that will enable it to adapt quickly to unstable environments and have greater flexibility for future strategic decisions.

The Employee Ownership Culture at Delta aims to generously reward employees when the company performs better. This is done through a profit sharing program, which does not require wage concessions, and a broad-based stock option plan. The stock option plan allows employees to participate in the financial benefits of an ownership culture and includes an additional 5% stock discount for all employees. This enables many employees to realize significant gains. The belief behind this approach is that people take better care of

things they own, which translates into better customer service. Ownership goes beyond financial benefits and is reflected in the importance placed on employee initiative and responsibility.

Delta should prioritize its new profit sharing plan as the centerpiece of its benefits program. In the future, all employees will be rewarded with 2% of the company's profits, allocated based on their relative salary. It is also suggested that Delta should learn from successful competitors by adopting effective communication strategies to ensure future success.

Last week, the Orlando Business Journal reported that US Airways established a consumer advisory board committee consisting of diverse customers to enhance its regular reviews. This committee convenes multiple times per year and offers open and honest feedback, criticism, and compliments to senior executives. Delta should follow suit by creating a comparable board to improve its customer service. Additionally, Delta should strive to make its ticket pricing transparent and competitive.

Pronged Hybrid Strategy: Consistently Technologically Innovative & Customer-Centric Delta plans to be the pioneer in using radio-frequency identification (RFID) tags on passenger luggage. These tags enable non-contact reading and are suitable for environments where bar code labels would not be able to withstand. This innovation will allow the airline to track bags with greater precision compared to current bar-code systems (www.computerworld.com). By implementing RFID technology, Delta can enhance its baggage handling operations, offer real-time baggage updates, and provide improved, faster, and more customer-friendly service.

Song is utilizing computer simulations to create a "zone" system for expediting the boarding process. Instead of boarding starting from the back rows, passengers seated in window seats have priority, then followed by those in middle seats, and finally by those in aisle seats.

(www.ajc.)

Enrich the travel experience through multimedia by offering in-flight entertainment on all of Delta's fleet. This strategy should be central to attracting passengers, as it will provide a more satisfying in-flight entertainment experience for all travelers.

Delta should also enhance each seat with increased capabilities, including email access, the ability to watch pay-per-view movies, play interactive video games, create customized MP3 playlists, and read about current connecting gate information. Additionally, future arm rests sh