Delta and The Future of The Airline Industry

(Part 2)

 

II.Analysis of Delta’s Competitive Strategy and Position
In recent years, Delta Airlines has had to overhaul its overall strategy to compete in the dawn of the low-cost carrier revolution. As was typical of the industry, Delta once competed primarily on product differentiation, but in the last few decades it has been forced to compete with low-cost carriers (Rivkin 2). Realizing there may be separate segments for both legacy carriers and low-cost carriers to compete in, Delta has implemented two seemingly unrelated strategies. Leveraging its strong industry presence, Delta has maintained its position among legacy giants, while also taking on a low-cost strategy to compete within the low-cost carrier market.
While the legacy segment remains status quo, innovative firms like Southwest and JetBlue have been at the forefront of industry revolution, implementing lower cost structures and new technologies. Attempting to enter and succeed in the low-cost carrier market proved to be a significant strategic risk for several other legacy carriers, including Continental, United, and US Airways. Continental’s CALite, United’s Shuttle and US Airways’ MetroJet had all been flushed out of the market by 2002 (Rivkin 7). Although these failures demonstrated the struggle that Delta would face in competing against low-cost carriers, Delta proceeded to found its own ‘low-fare’ subsidiary, Delta Express (Rivkin 8). Delta implemented several strategic decisions including expensing aircraft maintenance to its mainline, allowing the subsidiary to report very low maintenance costs. Targeted marketing, a casual image, and different route options rounded out Delta Express. This has allowed Delta mainline to still compete on an overall product differentiation strategy, focusing on flight schedule, international options, quality, frequent flyer programs, and targeting less price-sensitive business travelers (Rivkin 3). Through having their firm in two separate markets, Delta has strived to establish an overall competitive advantage relative to firms competing in only one segment.
Delta Airlines boasts several key resources and capabilities that they have used to sustain a competitive advantage among legacy airlines and still compete with low-cost carriers. Delta utilizes their human resources for competitive advantage by rewarding its employees for productivity. Despite high compensation and benefits, Delta has remained a high-performer by employing a mostly nonunion workforce, resulting in less restrictive work rules and creating ‘a significant productivity advantage among flight attendants and ground crew’ (Rivkin 8). Further, Delta benefits from relatively strong financial resources, allowing them to invest tens of millions of dollars to find new ways to compete against low-cost carriers (Rivkin 9). Delta also leverages their strong brand name, representative of reliability and quality, to compete in the airline industry as well as take on new ventures such as Delta Express (Rivkin 8). Over the years, these resources have allowed the company to maintain its competitive advantage.
The sustainability of Delta’s competitive position is directly tied to both its overall strategy and the leveraging of their resources and capabilities. While factors such as human resources have allotted Delta advantages, rival firms Southwest and JetBlue have in many ways imitated Delta’s first mover advantages and have even found more innovative ways to motivate employees. While Delta’s strong financial position has allotted them the luxuries of flexibility and development, it is not very sustainable given the fact that firms like JetBlue also have hundreds of millions of dollars in capital funding (Rivkin 6). The brand name of Delta stands to give the firm its greatest sustainable advantage within the industry. Because of Delta’s strong presence in the Southeastern United States, flying Delta has become synonymous with air travel to many current and potential passengers (Rivkin 8). Combining its strong brand name with its other resources, Delta has at least partially succeeded in fulfilling its goal of competing in both the legacy and low-cost carrier industry segments.
III. The Future of for Delta
Like many other legacy carriers, Delta faces a seemingly turbulent future. The success of the company depends on uncertain factors such as inflation, fuel prices, employee compensation, union activity, and natural disasters (Rivkin 4). While Delta cannot control all of these harmful effects, management can still increase performance by focusing on improving the efficiency of their employees and their aircraft. In spite of these attempts, Delta very likely faces a losing battle moving forward within their current business model.
It is anticipated that the trend of low-cost models and increasing price-competition are likely to continue, despite ever-increasing operating costs. In his article, ‘Headed for a Crash Landing’ Lou Dobbs predicts surging fuel prices and increased competition from low-cost carriers, saddling Delta with the choice to increase ticket prices or reduce profitability (Dobbs 1).
Therefore, we anticipate Delta’s efficiency will be forced to improve if the company hopes to maintain profitability by adopting cost reduction tactics. Unfortunately, cost increases are outpacing efficiency gains and we feel that the company will follow a losing trend, which will be shared by other legacy carriers. However, history has shown that Delta possesses the necessary strategic vision, resources, and capabilities to find new avenues of business to counter rising costs and therefore boost profitability.
Although competing in a mature industry, there are still opportunities for Delta to exploit. Advances in technology are constantly opening doors for improvement and reaching new markets. In addition to offering flight reservations online, Delta can also use the Internet to reach customers on social networking sites such as Facebook (Delta.com). Further, the company can reduce its costs and improve customer service by encouraging customers to utilize paperless ticket options such as the iPhone Delta application. Delta can improve its customer satisfaction by offering tailored in-flight entertainment services (Bicknell 1). While international travel is not a core competency of Delta, the company may choose to turn its attention toward flying to international destinations. These longer flights yield a lower cost-per-available-seat-mile and are more attractive for employees (Rivkin 2). There is also less competition in this market due to the absence of low-cost carriers and the lack of substitute forms of travel. It is clear that while there are certain untapped opportunities, Delta will still very likely be forced to make fundamental changes to its business model if it wishes to compete moving forward.
The largest threat Delta faces is very similar to what it has been for nearly three decades: the low-cost revolution. JetBlue and Southwest have put a great deal of pressure on legacy carriers. Due to these low-cost options, slight increases in fuel prices or union worker compensation can decrease profitability for Delta. Delta also faces additional cost threats from their labor force, which if unionized could spell disaster for the firm (Rivkin 8). Further, terrorist attacks anywhere in the world could also discourage domestic air travel. Finally, the growth of smaller, regional firms are increasing market share by providing less popular flights.
Because the future of Delta’s success is dependent on many of the above-mentioned factors, the firm faces significant strategic issues moving forward. At the highest level, Delta must decide if it is going to compete on low-costs or a differentiated product. Unfortunately, the company’s differentiation strategy of providing the most extensive flight offerings has become a weakness of the firm due to decreased demand, increased fuel costs, and excess capacity (Rivkin 8). Delta has also struggled with industry high compensation and benefits, which if coupled with unionization would force a complete overhaul of the carrier’s strategic approach to efficiency. Escalating variable costs and increased competition round out the major strategic issues Delta must address.
IV. Recommendations for Delta
While certain differentiation strategies such as international flights and technological innovations do exist, the greatest opportunities to improve Delta’s competitiveness center on cost reduction. The first option is to continue operating Delta Express as is and also revamp mainline Delta by reducing its costs. By reducing its industry high compensation and benefits, Delta may reduce its bottom line but may also lose its competitive advantages in efficiency. Another option within mainline Delta is to reduce excess capacity by limiting flight options to high demand locations and consolidating its fleet size. Undertaking such a strategy may be risky and suggest a lack of confidence in the company’s current direction. On the other hand, Delta may improve its competitive advantage by fully entering the low-cost carrier market by forming an entirely new Сtrue’ low-cost subsidiary. This could potentially harm Delta’s mainline and would also require a major capital investment in the form and tens of millions of dollars (Rivkin 9).
If Delta is to simply adjust its mainline competitive position, an overall consolidation and reduction of flight destinations may prove the most feasible. Reducing its compensation and benefits would likely anger employees and may lead them to unionize. However, if Delta consolidates, large competitors will purchase their old jets and potentially gain market share. Depending on the degree of consolidation, Delta may risk moving into the low fare airline segment and lose loyal business patrons. If successful, competitors may adopt similar approaches and reignite unsustainable price competition. If a consolidation strategy was adopted, the firm should slowly introduce it over a five to ten year period as opposed to a sudden overhaul to provide Delta with opportunities to modify their strategy and reassure investors.
Conversely, Delta can create a low cost subsidiary to compete with carriers like Southwest and JetBlue. In order to be successful, this subsidiary must remain independent of the Delta mainline while operating under a new name. The subsidiary would benefit from hiring nonunion workers and eliminating the hub-and-spoke system as well. A nonunion strategy will provide the company with cost reductions, flexibility, and hiring leverage. Also, isolating resources from its parent will ensure that the company remains independent. This strategy is necessary to achieve transparency and deter management from disguising Delta’s mainline costs. Other suggestions for this subsidiary would involve flying only one model of aircraft, limiting capacity, and emphasizing technology-based communication. Profitability in the new company may cause low-fare competitors to temporarily drop ticket prices and drive the young firm out of business. In addition, competitors may imitate cost saving strategies and reduce relative cost savings.
As Delta enters its 87th year of business, management should reassess the firm’s current business model and core competencies. After analyzing the firm and direction of the entire airline industry, a reduction of Delta’s mainline and a long-term commitment to a new, independent subsidiary may be the best strategy. This may require the firm to reduce destinations and relax flight schedules. However, consolidation will reduce excess capacity and improve declining profitability. An independent subsidiary will offer Delta an opportunity to compete with Southwest and JetBlue. We feel these strategies are necessary to remain a viable airline carrier in the future.
Works Cited
Bicknell, David. ‘Now that’s Entertainment’. Travel Times. 20 October 2006. Business Source Complete.22 March 2011 .
Dobbs, Lou. ‘Headed for a Crash Landing’. US News & World Report. 6 December 2004. Business Source Complete. 22 March 2011 .
Delta.com. ‘Corporate Information’. 2011. 4 April 2011. .
James, Barclay. ‘Business-level Strategies’. Louisiana State University. Feb. 10, 2011.
Koenig, David. ‘Sources: Continental, United, Expected to Merge’. MSNBC.com. 29 April 2010. 27 March 2011. .
Maynard, Micheline. ‘US Airways and America West Plan to Merge’. New York Times.com. 20 May 2005. 27 March 2011. .
Reed, Dan and Marilyn Adams. ‘Justice Department Approves Delta-Northwest Airlines Merger’. USAToday.com 29 October 2008. 27 March 2011. .
Revkin, Jan W. and Laurent Therivel. ‘Delta Air Lines (A): The Low-Cost Carrier Threat’. Harvard Business School. Jan 25, 2005.
Smallen, Dave. ‘3rd-Quarter 2010 Airline Financial Data; Network, Low-Cost and Regional
Airlines Report Profits: Table 1′. 17 March 2011. 4 April 11.
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