Delta Airlines Case Study

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We could conclude that JetBlue and Southwest were earning enviable returns because of their differentiation strategy where they offer low-cost services to their customers that allow them to get revenues even when the external environment is facing difficulties. Also, they were able to maintain low cost air fares through the optimisation in operational aspects of the inbound and outbound logistics but also in their human Resources management. Specifically, they minimised labor expenditures and reduced hours spent on maintenance for faster plane turnaround leading to higher utilisation of planes.

Now, why did Southwest and JetBlue succeed in their strategy and not the other low-cost subsidiaries of legacy carriers? After an analysis of all of the LCS of legacy carriers (including Delta Express, CALite and Shuttle), it seems that these subsidiaries did not act as independent organisations but rather as business entities of a large enterprise under the same cost structure employed as overhead to smaller operations. Not only did this centralised control and management complicate the operations and logistics but it also confused passengers, discomforted the personnel, created confusion in the overall organisation positioning and it drove extra overhead for LCS. Another key factor is that LCSs are not able to control labor unions and cost differentials were eliminated in the long run, thus decreasing the entire premise of LCS in the first place.

RecommendationsOn the basis of the received information, Delta has several options to choose from:

- Modification of Delta Express in some way.

- Reintegration of Delta Express to its primary Delta brand

- Launch of new LLC subsidiary

1. If Delta decides to modify Delta Express in some manner, they should focus on their relationships with the unions to lower the labor costs. There should also be a clear differentiation strategy for their services compared to the competitors. It is important for the company to have a cost advantage as well as a differentiation strategy in order to overcome the increasing threat of the low cost competitor.

2. If Delta Express reintegrates to its primary Delta brand, the purpose of this strategic move would be to go back to the brand image it had before and reinforce it even more.

3. Launch the new subsidiary which requires tens of millions in capital, explanation to shareholders and analysts which is difficult but will pay off with greater benefits.

It is recommended to choose option 2. Based on the framework for responding to low-cost rivals found in « Strategies to fight low-cost rivals » by Nirmalya Kumar, we can conclude that yes LCC can take away any of Delta’s present or future customers. But if Delta increases the differentiation of their services enough by using a combination of tactics, it could pay off and create a strong counterattack for LCC. Which is why Delta should put the focus on the market in Florida that is generating around 30% of their revenues. To come up with a strong differentiation strategy, in-flight entertainment, space for legs and comfort of the seats should be farly superior compared to Southwest and JetBlue to stay ahead of the competition and make the customers want to pay for Delta’s services. Also, they should come up with loyalty programs that offer mileage advantage and membership cards that allow access or discounts to certain facilities, offer online promotions. An additional strategy on top of that, could be to try and negotiate a partnership with Southwest airlines so that they can benefit from the hub-and-spoke strategy, since they are the only airline not using this. For Delta, this could mean more long-distance flights coming to their hubs which would reduce the total cost and improve the load factor.

References

Delta Air Lines (A): The Low-Cost Carrier Threat by JAN W. RIVKIN and LAURENT THERIVEL

Strategies to fight low-cost rivals by NIRMALYA KUMAR

Exhibits

Exhibit 1. PESTEL Analysis

Political

- 9/11 terrorist attacks➔ 2-day grounding that resulted in a loss of $650 millin

➔ Sharp decline in demand for travel afterwards.➔ Security costs had risen for airline companies (insurance, airport tax, bulletproof cockpits, etc.)

Economical

-Average ROI for 5 largest carriers below cost of capital in 1990’s

-Since deregulation, airline industry US lower margins than US industries

-Hub-and-spoke system to ensure high load factor and enjoy market power in hubs

Social

-Huge growth in US airline industry : 620 million passengers in 2001.

-Boost of sale flight tickets after deregulation due to the lower prices.

Technological

-Customers gain awareness about flight tickets and can compare them thanks to the Internet

-Fuel cost dependent on airplane technologies

Environmental

-Not relevant in this case study

Legal

-Deregulation brought high fixed costs and expensive labor

-Before Civil Aeronautics Board (CAB) was responsible for routes of each carrier and covered their revenues

Exhibit 2. Resource Based View Model

Southwest

JetBlue

Resources

- Boeing 737 fleet, low cost maintenance, short turn times

- Simplified internal operations

- Enthusiastic workforce

- CASM of

-Airbus A320 fleet, low maintenance

- High technology, paperless airline, computers with operation manuals

-Non-unionised