With the challenge of a low-cost subsidiary, the management of Delta Air Lines must come up with an effective strategy in dealing with such a threat. The airline is planning on its own low-cost subsidiary launching. The company is also looking for other better options.
Jan W. Rivkin; Laurent Therivel
Harvard Business Review (704403-PDF-ENG)
January 20, 2004
Case questions answered:
- Carry out PESTEL Analysis to identify the driving forces affecting the airline industry, including Delta Air Lines?
- Conduct Porter’s 5 forces analysis to identify the industry’s profit potential?
- Based on the 5 forces, what is Delta’s strategic position? Can it be improved? How?
- Asses Delta’s resources, capabilities, and competencies using the VRIO framework?
- Does Delta possess any core competencies that would enable it to achieve a sustainable competitive advantage? Explain
- What type of strategic move is Delta’s entry into the refining business?
- Describe Delta’s strategic position in the US domestic market vs. its global presence. How does Delta’s domestic strategy differ from its global strategy?
- . What short-term objectives should Delta pursue given the following challenges? Changing American demographic (domestic US market)? The emergence of global carriers (international market)?
- Using SWOT analysis asses the considerations Delta’s executive team should keep in mind moving forward (utilize the analyses in questions 1 to 5 above)
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Case answers for Delta Air Lines (A): The Low-Cost Carrier Threat
1. Carry out PESTEL Analysis to identify the driving forces affecting the airline industry, including Delta Air Lines?
Deregulation Act: Deregulation Act of 1978 paved the way for new potential entrants in the market. This increased competition in the market to which Delta Air Lines belong. This led to a considerable reduction in pricing power, which led to an increase in bankruptcies.
This resulted in airlines creating larger networks to sustain themselves and to get back the pricing power. This can be seen in mergers between Delta and Northwest, Southwest and AirTran, United and continental, American and US Airways and Alaska Airlines, and Virgin America.
9/11 terrorist attack: The terrorist attacks that happened on September 11 led to the closure of US airspace and also later affected travel by large amount with security being raised nationally and internationally. This resulted in financial losses for Delta Air Lines, and it was forced to rationalize flights and to decrease their employees by 15 percent.
The airlines that thrived post 9/11 were the low-cost carriers. So Delta introduced their own low cost (budget airline Song, which they later had to merge to the main airline, three years later). This also led to innovation at Delta Air Lines to come up with a better passenger check-in model, redesigning of lobbies, and an increase in the number of kiosks.
Economic recession: Delta Air Lines could use bankruptcy protection in the US by filing for bankruptcy.
Worldwide recession: The major carriers in the airline industry were not able to sustain the combined effects of the worldwide recession, an increase in fuel costs, and the 9/11 terrorist attacks. Delta filed for bankruptcy, and they had to sell off Atlantic Southeast Airlines. They also had to take a $2 billion financing deal from creditors to emerge from bankruptcy.
Unpredictable fuel costs: As fuel costs account for 30-40 % of operating expenses of airlines, the unpredictability of fuel costs led to fuel hedging strategies to mitigate the risk of erosion of profits. But the airline industry suffered huge losses because of a quick decline in jet fuel prices because of the global recession. As a result of this, Delta Air Lines switched to another approach of buying a refinery.
Threat of competitors offering lower fares: Gulf carriers offer higher quality, better customer experience at lower fares. New entrants in this field are offering very low fares for transatlantic flights. This kind of competition in this industry will drive down the fares of flights, which will benefit the consumers.
Growth in the industry: The Federal Aviation Administration has projected growth of the airline industry at 2.9% for the next 20 years. Future growth can be seen in the Asian market as one-third of world air traffic involves Asian countries. Delta Air Lines is dependent on partnerships with China Eastern Airlines and Jet Airways of India.
There is a fear of safety after 9/11.
There is a demand for new services like ”Childfree” zones, which will be appealing to millennials. The millennium generation travels with families and friends, which increases ethnic diversity.
Delta Air Lines is also creating wider aisle seats as there is a obesity (1/3 population in the United States is obese).
There are fewer travel agencies as more and more people are doing online booking, using mobile applications or a kiosk. People are also using e-boarding instead of printed boarding passes. People are also doing self-check-in using kiosks, mobile check-in and are also using self-drop baggage mechanism. People are also tracking baggage using mobile tracking. People are also using remote seat allocation using websites and mobile apps. Even during flights, people are using Wi-Fi or watching movies.
People are using price comparison search engines like Expedia or Kayak to find the lowest price, which has resulted in the unbundling of services to offer the lowest base price.
Delta Air Lines had developed quantitative pricing analytics and revenue management tools to improve revenue generation amongst difficult economic conditions.
The ecological care of the planet has to be taken as the population is growing. Airlines are moving towards more fuel-efficient planes that consume less fuel to decrease the pollution and carbon footprint.
People are also using e-boarding instead of printed boarding passes, which reduces the use of paper and saves the environment by saving trees.
Increased regulation: Department of Justice was against the merger of American Airlines and US Airways because of anti-competition. They were made to sell 34 slots at LaGuardia Airport and 86 slots in Reagan National Airport for $381 million. Low-cost carriers could only take these slots as per the Department of Justice to put a check on the oligopoly of traditional carriers of this market.
2. Conduct Porter’s 5 forces analysis to identify the industry’s profit potential?
Airlines are a highly competitive industry, and Delta Air Lines are facing strong competition from new ultra-cost entrants, government-funded gulf airlines, and price comparison websites.
Bargaining power of suppliers
There is strong bargaining power of suppliers as there are just two manufacturers for manufacturing standard, reliable aircraft – Boeing and Airbus.
Fuel suppliers have to sell fuel as per international prices. Since this varies, a lot of Airlines like Delta used to hedge the risk. But since they lost millions during the economic recession, Delta Air Lines bought a refinery in Pennsylvania, which provides them with a huge amount of fuel hedging capabilities and coordinates with its fuel partners, Philips 66 and BP.
Gulf airlines trio can get long-range, wide-body aircraft, whereas carriers in Delta and other US airlines are aging. Moreover, Emirates, Etihad, and Qatar airlines bought more than 600 airlines, whereas Delta Air Lines has…