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1.

During the 1990s, none of the five largest airlines in US were


profitable. Why do such low rate of return persist in airline industry?
Despite of challenges how do Southwest and JetBlue earn good
returns?

The airline industry transported 620 million passengers by 2001.


The key driver for profitability is a yield factor( i.e. the amount of price
paying passenger per seat)
Profitability in terms of yield is directly linked to
a) Duopoly in carrier market leading to higher supplier bargain
power
b) Price sensitivity of customers
c) Competition from rivals (pressure due to LCCs like Southwest
and JetBlue)
Modified Exhibit 6 Financial Comparisons Across
Airlines, 2001
Legacy

LCC

Delta

AirTran

JetBlue

Load factor (% of seats occupied)

14.25
68.30%

14.75
69.70%

9.78
76.90%

Southwes
t
12.48
68.00%

Revenue per available seat mile (c)

9.74

10.29

7.52

8.49

4.31
1.21

2.7
2.16

2.16
0.98

3.03
1.3

0.11
1.74

0.29
1.65

0.37
1.16

0.24
1.26

Landing fees

0.88
0.77
0.29
0.51
0.17

0.44
0.89
0.05
0.22
0.21

0.25
1.16
0.05
0.16
0.25

0.49
0.55
0.03
0.19
0.22

Other

0.42

0.84

0.16

0.23

Total

10.41

9.43

6.69

7.53

Income per available seat mile (0)

-0.68

0.86

0.83

0.97

Average stage length (miles)

747

533

985

515

Yield (cent per occupied seat mile)

Cost per available seat mile (c)


Salary and benefits
Fuel
Services
Advertising & promotions
Other services
Aircraft and facility rental
Depreciation & amortization
Rentals
Food
Maintenance and other materials

d) Outcomes of unionized workforce (high labor expense leading


to high power to unions in contract negotiations)
Components of Salary Expense (Effect of Union Power)
Employee Type

Portion of Total Salary


Expense

Pilots

42%

Airport Personnel

31%

Flight Attendants

18%

Maintenance

6%

Management

3%

Abnormally high portion of total salary was payed to Airport personel and
hence too much cost was encountered.
e) High fuel cost incurred by Delta ; Regional jets consume lesser
fuel with higher load factor

Even though the volume the ROR was low as


a) Low margins due to deregulation in 1978.
b) Decline in demand after September 11, 2001 attack.

Yield (cents)*
15
14.5
14
13.5
13
12.5
12
11.5
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000 2001a

Figure 1 From Exhibit 1

Load Factor (%)


74
72
70
68
66
64
62
60
58
56
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001a

Figure 2 From Exhibit 1

Load Factor (%)

Operating Profit/(Loss) ($bn)


15

10

5
Operating Profit/fLoss) (Sbn)
0
1990

1991

1992

1993

-5

-10

-15

Figure 3 From Exhibit 1

Five Forces Analysis

1994

1995

1996

1997

1998

1999

2000

2001a

Low cost carrier for leisure and business executives (small business) as
a substitute to ground travel between regional zones.

All the fleet was Boeing 737 and this decreased maintenance cost,
training cost for employees, faster turnaround time, more control over
employees and increased load factor.

Southwest

Despite of challenges how do Southwest and


JetBlue earn good returns?
POSITIVE forces
between LCC : Southwest Airlines, JetBlue ; legacy airlines : Delta,
American ; LCS (of the legacy carriers) : Delta Express , Shuttle

Rivalry
among
competiti
on

Threat of
For short distance : Bus, Train, personal vehicle
substitute
For long distance : Other Airlines and Jet Carriers
s
Preference more for Airlines (required more involvement and catered to
varied groups)

Power

High power, low switching cost and low loyalty


of Buyer
Business class focus more on schedule while leisure travellers focus on
price
High supplier power, with dominant duopoly ( Boeing and Airbus), limits Supplier
power
supply and majorly renting
High control of labor unions , travel agents for booking and airport
renting facilities

Earlier Low threat of entry; Low industry growth rate; Low profit
Now, High as LCC with lower fuel, labor and prices target the Deltas
routes

Threat of

entry

Hourly flights apt for executives with small business

Sense of ownership among employees, employees self-assuming roles


as per requirement, flexibility in employee work rules

Low aircraft rentals

No frill service with no numbered seats

On time departures with short turnaround time

Lower landing fees

JetBlues Strategy

high level executives that travelled to key destinations at a low air


fare but in a high class social environment

Self-owned Airbus 320 jets with coach only cabin fit out with leg
space & leather seats providing frills and ease of maintenance at the
same time

Individual 24 TV channel system

Light snacks between key airports

High on usage of technology, paperless instructions and


communication with pilots, automatic ticketing

Non-unionized workforce

Flexible jobs, work from home for booking agents

Modified Exhibit 6 Financial Comparisons Across Airlines,


2001
Yield (cent per occupied seat mile)
Load factor (% of seats occupied)
Revenue per available seat mile (c)
Cost per available seat mile (c)
Salary and benefits
Fuel

Legacy
Delta
14.25
68.30%

AirTran
14.75
69.70%

LCC
JetBlue
9.78
76.90%

Southwest
12.48
68.00%

9.74

10.29

7.52

8.49

4.31
1.21

2.7
2.16

2.16
0.98

3.03
1.3

Services
Advertising & promotions
Other services
Aircraft and facility rental
Depreciation & amortization
Rentals
Food
Maintenance and other materials
Landing fees
Other
Total
Income per available seat mile (0)
Average stage length (miles)

0.11
1.74

0.29
1.65

0.37
1.16

0.24
1.26

0.88
0.77
0.29
0.51
0.17
0.42
10.41
-0.68
747

0.44
0.89
0.05
0.22
0.21
0.84
9.43
0.86
533

0.25
1.16
0.05
0.16
0.25
0.16
6.69
0.83
985

0.49
0.55
0.03
0.19
0.22
0.23
7.53
0.97
515

2.
Why have all of the low cost subsidiaries of legacy airlines,
including Delta Express, failed?

3.
Based on the information available to you, what
course of action would you recommend to Deltas board?
Establish the new LLC division.
As Florida represents 30% of Delta revenues, it is important to continue
operating there but considering reputation damage and poor employee
morale as related to Delta Express, my recommendation would be to modify
Delta Express operations by structuring it as a separate company under a
new brand name with low fixed and labour costs, focused on the business
professional audience and target markets where competitive LCC are not
present by combining core capabilities of both SW and Jet- Blue. Creating a
new structure would require high capital investment but allow for decreased
labour costs under a non-union agreement focused on providing high quality
customer service to passengers and flexible work hours for employees.
Paperless operations, online booking and electronic tickets would also lead to
cost reductions. Entering into an alliance agreement with Delta would allow
this LCC to outsource a significant portion of operations through sharing
passenger terminal facilities, maintenance and administrative operations and
information technologies used in flight scheduling and joint procurement as
well as sales/marketing organizations. As the Delta Express was only focused
on providing low cost airfare for Florida holiday travellers, the target
audience of the Delta Express New should be: 1) Senior executives in key
regional business routes of Washington DC, Boston, Pennsylvania, New York
2) Leisure travelers between Washington DC and North Carolina, and Florida.
By scheduling in strategic business routes, Delta Express New can
differentiate itself by offering a service in the unserved locations by SA and

JB. It can also provide combined benefits of extra leg space and in-flight
perks adopted from JB and no seat assignment, frequent departure timing
and set fares adopted from SA. In-flight perks could include newspapers, soft
drinks, alcoholic beverages and branded cookies.. Analyzing the industry
dynamics, my overall recommendation for Delta would be to focus on buying
regional airlines in California and West Coast to continue its diversification of
fleet to a lower regional grade that can consistently produce higher load
factors and lower CASM. Keeping these subsidiaries under their own
management would allow for a common mission among employees and
decreased salary expenditures.
Use hub-and-spoke strategy and work with LCC airlines.
The hub-and-spoke strategy means that airlines bring passengers in small planes
from lightly travelled
Cities (so called spokes) to a hub in major cities, and then transfer them
to their final destinations. Delta has the advantage of airline network in most
major cities. It can focus on its operation in those hubs, and cutting the
service and cost in those spokes by working with the LLC airlines that have
more advantages in those secondary cities. One very good potential partner
is Southwest airline which didnt use the hub -and-spoke strategy. If this
relationship could be build, Delta could have a more efficient system than
now. Delta could have more long distances flights which reduce the total
cost. And it could have a higher load factor, because its partner could help
transporting all the passengers that have different departure city but share
the same destination to an intermediate airport then go to their final
destination by Delta airline.

4.
What is your logic of Deltas Song initiative, Will it
succeed?
Logic behind Deltas Song Initiative:

Delta had launched Delta Express to compete with the low cost carriers like
Southwest and JetBlue. It allowed Delta to compete effectively with the large
number of los cost carriers serving Florida. But the problem here was that
Delta Express or any LCC subsidiary of a legacy carrier was not considered as
a different unit of the parent company. LCC subsidiaries didnt work because
they were not low cast. The parent company often hid the true expenses in
their financials. The resources were often shared between the parent and the
child. There were a few similarities or linkages between the parent and the
child companies. Taking cues from above, the logic behind Song was to make
a new sub company which has its own resources, own management team
which focuses on being low cost and profitable. Song was launched to make
a subsidiary with no ties with the Delta Airlines. Delta wanted to make a
company which ate, lived and breathed low costs.

Will the Song initiative succeed?


Song was launched as a different product at a low cost. But, in the airline
industry, the ticket prices, safety, reliability and convenience were the
factors driving the ticket booking. Although choosing women as a target
group, based on the research done by Delta, was a good decision but, the
ticket purchases are majorly driven by ticket prices and safety. Because of
this, I believe that the consumers will still look for the least priced option for
air travel. So due to this, the Song initiative will not succeed.