Delta: An Oligopolistic Market Essay
The elasticity of demand is based purely on current market conditions, the customer’s purpose for travel, and available substitutes. While sitting in Atlanta’s Hartsfield International Airport, one cannot help but to notice and feel an overwhelming dominant presence of one particular airline. Delta as we know it today, traces its roots way back to 1924. Huff Daland Dusters was founded as the world’s first aerial crop dusting organization.
In 1928 the company became Delta Air Service, and the following year Delta carried its first passengers over a route stretching from Dallas, Texas to Jackson, Mississippi with stops in Shreveport and Monroe, Louisiana. In 1941, the company moved its headquarters from Monroe to Atlanta, Georgia (Woolman, 2009). Deregulation of airline industry in US brought many changes to the way the industry operated, which automatically resulted in increase in the number of carriers which specialized in services which were limited to regions and non-stop operations round the clock.
These low cost carriers strategy was to purchase older cheaper aircraft and sometimes also operated outside the boundaries of industry wide online reservation systems which many of the larger carriers have implemented effectively (Bennett & Craun, 2008). Against the inconvenience caused to the passengers, low fares as compared to the industry standards were offered to the passengers and every now and then new marketing strategies were implemented in order to lure more passengers to use their services on the basis of cost based competitive strategy. This paper also focuses on one of the low cost airline i. e. Delta Airlines and its oligopolistic position in the airline industry.
By investigating Delta Airlines, a better analysis of price versus service impact in the airline industry as a whole can be understood and the impacts on travelers and people investing in the organization. Till late 1070s, much of the prices were setup by the government which resulted in price not being a factor of competitive advantage of any airline and airlines tend to compete on the basis of their services and image that they had developed In the mind of their passengers.
As the number of airlines increase, the difficulty of decreasing prices of tickets in order to attract more passengers becomes difficult. This results in very highly competitive battle among the airlines sometimes which have caused major impact on the industry itself. This phenomenon has been a major case as airlines try to cut each other out on the basis of the cost of travel they can provide to their passengers, the minimum the better. These results in shrinking profits and in many cases the airlines go out of business.
Finally the Congress realized that many airlines would fail if no change in the pricing policy was made which prompted the development and implementation of the Civil Aeronautics Act in 1938 (Bennett & Craun, 2008). The airline industry has an overall elastic touch to its name. The elasticity cannot be considered to be complete as there are two main reasons that need to be highlighted: the business customer against the non-business customer. The demand is quite elastic with respect to the demand.
When the price of the tickets increases, the automatic result is a decrease in the number of tickets purchased – in the same percentage (Buck, 2008). The elasticity is greatly affected negatively when business customers are considered. The concept behind this has been the simple reason that business passengers do not cancel their tickets as the prices are too high. While on the other hand, the ratio of reasons is inelastic as they are not affected by the changing prices of the ticket.
They will have to fly even though the prices are relatively higher, adding an inelastic blaze to the product mix. A business can only disregard the price factor only if the business is able to have some tax exemptions to power their pricing policy. This concept of elasticity of demand is crucial as it leads to the cutthroat competition situation where competitors battle out each other wildly. If the airline industry was composed of business customers, the ideal of cutthroat competition would be a non-factor (Daft, 2001).
As the demand for air travel is elastic, introduction of substitutes can add value to the competition present in the market. Business and non-business customers both can use the substitutes but it could be more seen in the non-business sector as business people are more inclined towards a faster mode of traveling. If the prices of an airline ticket increased invariably by a large amount, then other modes travel would become more popular and passengers would give preference to them over the extremely expensive airlines (Buck, 2008).
Although headquartered in Atlanta, Delta is a Delaware corporation. Delta Airlines provides air transportation for passengers and freight in and around US and all over the world. As of February 1, 2001, Delta served 201 domestic cities in 45 states, the District of Columbia, Puerto Rico and the U. S. Virgin Islands, as well as 50 cities in 32 countries. With its domestic and international code share partners, Delta’s route network covers 218 domestic cities in 48 states, and 131 cities in 58 countries (Delta: Destinations covered, 2009).
When analyzing Delta’s past records both financial and operational, one its strongest attribute, is that it is the largest U. S. based airline in terms of aircraft/flights departures and passengers traveling on their planes, and third largest as measured by operating revenues and revenue passenger miles flown. Delta is the leading U. S. airline in the transatlantic, offering the most daily flight departures, serving the largest number of nonstop markets and carrying more passengers than any other U. S. airline.
Delta Airlines has the highest number of passengers transported worldwide. Through a vast worldwide route system Delta has flown over 117 million passengers, more than any other airline can have done or achieved that pinnacle (Delta Airlines: Company History, 2009). The main factor for the success of the airline has been its constant dependency of cost cutting measures and ability to meet the demands and needs of the customers in order to facilitate the huge airline industry where cut throat competition has prevailed for years.
Delta airlines has enjoyed an oligopolistic position in the airline industry against huge competitors such as United Airlines, Continental Airlines and Northwest Airlines which also have been directly assaulted by the low cost strategy from Delta Airlines, have taken a very limited approach in order to meet the competition in order to survive in the industry (Delta and Northwest Merge, Creating Premier Global Airline, 2008). Wall Street analysts have predicted a very aggressive response from other carriers of the industry who are waiting to see whether they are able to sustain their business travelers or not.
In recent years, many of the corporate clients and travelers have got fed up due to the high disparity in the prices of the last minute bookings on the big players of the airline industry such as United Airlines and as compared to those which have been booked in advance, which have caused these travelers to reply on online bookings or budget carriers to keep their spending on travels in check. To be competitive in the airline industry, Delta required an efficient flow of operations.
However, accurate advanced planning is nearly impossible because of such elements as changing economic realities and weather conditions, and unexpected maintenance issues. Delta Air Lines operates in a competitive industry. Amongst its competitors, its two largest were American Airlines and United. To survive in the industry it was necessary to employ and maintain technologically efficient and cutting edge systems. However, Delta systems of operations were mainly paper based; they still used pneumatic tubes to move information and they made little use of the internet.
As a result, the company lacked a competitive edge. The technology it had was based on various departments independently purchasing the technology they needed and hiring their own IT staff. In 1996, Delta was still known for its expensive airfares, poor service, limited leg room on flights and use of out-dated inefficient processing systems. The airline industry became increasingly competitive with the arrival of the low-cost carriers, such as, JetBlue, Southwest, and Airtran. These competitors were taking customers away from the major airline companies.
Delta projected that 40 percent of their customers chose low-cost carriers, which was a higher percentage than any other airlines (Buck, 2008). Delta management team developed their best business strategy to modernize and create an information system that would be much more advanced on the basis of the technology as compared to other airlines The system they proposed that would best suite there business need would be able to send all kinds of crucial data to every system that needed them.
For example, changes, such as a ticket sale, a flight delay, a landing time or a gate change, must immediately be relayed to a variety of systems so that passengers, flight crews, food companies, baggage handlers, the control tower staff, and even Delta’s executive manage would know what is happening on every Delta fight that is relevant to those people. Furthermore, Delta realized that a highly advanced telecommunication system would need to be put in place because on an average good weather day Delta has about 200 gate changes.
Therefore, Delta must use this advanced telecommunication technology to connect its applications and databases so that data will flow simultaneously to wherever they are needed. An entirely new information technology infrastructure would be required to do this. The new Delta information system call DNS could, if works as planned above could save Delta potentially hundreds of millions of dollar every year. Moreover, Delta chose TIBCO as its messaging software because of its lighting processing speed.
The software could handle 40,000 events per second and 180,000 messages per second (TIBCo employed at Delta, 2009). This middleware monitors network traffic and alerts applications to messages of interest as data are entered. Furthermore, this software acts as a data relay system that immediately pushes that data for every change or transaction to all computing systems that need them. U. S. Airlines face many issues today that ultimately will lower profits.
Delta Airlines will attempt to become the first major carrier to successfully launch a long term, low cost competitor. In the past year alone, low-cost carriers such as Jet Blue have claimed over 80% of the market share in New York to Florida flights. The new airline will be call Delta Song, and will cost $75 million. The Delta Song Concept will use only one type of plane, the Boeing 757, that will be outfitted with leather seats, interactive monitors that will allow users to watch pay per view movies, play interactive games and online shopping.
Song flights will fly between selected cities. Song planes will feature faster turnaround times of 50 minutes between landing and take-off. Flight time is expected to be approximately 13 hours a day, which is 23% higher than the Delta main line. Delta Airlines has for years focused on their huge competitive advantage which is low cost, thus, the demand for the booking and number of people travelling using Delta has been relatively higher as compared to other commercial airlines.
In the current recession period, where many big players of the airlines industry have been struggling to survive the huge impact of falling demand of the people travelling by air, Delta has also suffered huge losses in terms of revenues and finances to sustain the airline. Many of the former higher management staff of the competitor airlines has voiced their concerns in the past that in the current macro economic conditions of the industry, it is not possible for other airlines to compete with Delta Airlines in terms of both cost as well as new services which have additional cost over other recurring costs (Hinton, 2008).
It is by far a known fact that the airline industry cannot operate with success and prosperity under a completely deregulated philosophy. Too much regulation have already strangled the industry by large and has become too inflexible to operate efficiently. The airline industry must be as deregulated as possible in order to allow the flexibility needed to operate efficiently. But still there are some areas of the industry that must be controlled or else problems are sure to arise.