Delta Airlines Essay
Assignment Questions:
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 …show more content…
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). Global economic slowdown curtailed full-fare business travel
2) Southwest and JetBlue have different cost advantage and differentiation strategy, lets discuss separately each of it.
Southwest limit itself to a 10%-15% growth, differentiated strategy (love theme), simple operation (all-Boeing 737 fleet, no meals and seat assignment, no frills, flexible work rules, enthusiastic workforce, high aircraft utilization), good relationship with employee unions, focus on service, low price (compete with the price of auto travel), high load factor, Simple pricing structure which is transparent to customer
JetBlue
Low CASM, high load factor
Humanity, good amenities (in-flight entertainment system)
Low costs: simple fare structure
New technology: Internet (60% of seats were booked on-line), paperless operation, computerized, Reservation operation (not using call center)
Strong brand: “Cheap chic” image
Employees are all nonunion, high “esprit de corps”, flexible employee package,
3. There are several reasons of failing all subsidiaries of legacy airlines reasons are:
- “They’re still be a high-cost carrier selling cheap seats.” No real cost advantage, the parent hide true expense in financial statement
- Complicated logistics, poor service
- Bad union relationship: expensive labor, low productivity
- Corporate authorities reduce LCC’s independence: saddled with the same bureaucracy as the legacy airlines
4. If Delta continues to compete with strong competitor, such as JetBlue, without real cost-advantage or service differentiation, it will be forced to match JetBlue’s lower fare in order to protect market share yet incur huge financial loss.
5. There are some strategic options available to the cross-functional team that Mark Balloun co-leads: a. Delta Express may be modified in some manner: better relationship with unions to lower labor cost, differentiate service in order to compete with JetBlue…. b. Reintegrated with the primary Delta brand c. Launch new subsidiary: requires tens of millions capital, explanation to shareholders and analysts
6. Based on information I have I would suggest board members to change some factors in Delta Express like: to try and build better relationship with unions and lower labor costs, change structure and from functional and became more flexible strengthen connection between marketing and sales department and differentiate services.
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 …show more content…
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). Global economic slowdown curtailed full-fare business travel
2) Southwest and JetBlue have different cost advantage and differentiation strategy, lets discuss separately each of it.
Southwest limit itself to a 10%-15% growth, differentiated strategy (love theme), simple operation (all-Boeing 737 fleet, no meals and seat assignment, no frills, flexible work rules, enthusiastic workforce, high aircraft utilization), good relationship with employee unions, focus on service, low price (compete with the price of auto travel), high load factor, Simple pricing structure which is transparent to customer
JetBlue
Low CASM, high load factor
Humanity, good amenities (in-flight entertainment system)
Low costs: simple fare structure
New technology: Internet (60% of seats were booked on-line), paperless operation, computerized, Reservation operation (not using call center)
Strong brand: “Cheap chic” image
Employees are all nonunion, high “esprit de corps”, flexible employee package,
3. There are several reasons of failing all subsidiaries of legacy airlines reasons are:
- “They’re still be a high-cost carrier selling cheap seats.” No real cost advantage, the parent hide true expense in financial statement
- Complicated logistics, poor service
- Bad union relationship: expensive labor, low productivity
- Corporate authorities reduce LCC’s independence: saddled with the same bureaucracy as the legacy airlines
4. If Delta continues to compete with strong competitor, such as JetBlue, without real cost-advantage or service differentiation, it will be forced to match JetBlue’s lower fare in order to protect market share yet incur huge financial loss.
5. There are some strategic options available to the cross-functional team that Mark Balloun co-leads: a. Delta Express may be modified in some manner: better relationship with unions to lower labor cost, differentiate service in order to compete with JetBlue…. b. Reintegrated with the primary Delta brand c. Launch new subsidiary: requires tens of millions capital, explanation to shareholders and analysts
6. Based on information I have I would suggest board members to change some factors in Delta Express like: to try and build better relationship with unions and lower labor costs, change structure and from functional and became more flexible strengthen connection between marketing and sales department and differentiate services.