978-1259913747 Delta Air Lines Inc Case

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Structure of the Case

The case begins with Roberto Ioriatti, Vice President of Atlantic & Pacific Pricing and Revenue

Management at Delta Air Lines, appreciating the diversity of the Delta workforce at the annual Delta

Block Party. This is symptomatic of a shift toward a more diverse population in the U.S. The party leads

to a key question of the case:

• WhatshouldbeDelta’sstrategicresponsetothechangingdemographicsoftheU.S.,bothinterms

of products and services?

A secondary question which can also be discussed is this:

• HowshouldDeltarespondtoincreasedglobalcompetition,especiallytothethreatposedbyrapidly

expanding airlines from the Middle East such as Etihad Airways, Emirates, and Qatar Airways?

The case proceeds with a brief history of Delta Air Lines, which started as a crop-dusting company

inGeorgia.C.E.Woolmanpurchasedthefirmin1928,renameditDeltaAirServices,andexpandedits

operationstoincludepassengerflightsandU.Smaildelivery.Woolmanwasalsoresponsibleforestab–

lishingsuperiorcustomerserviceasoneofDelta’sprimarysourcesofcompetitiveadvantage.Inthe

1940s,DeltarelocateditsheadquarterstoAtlantaandcontinuedtoexpandandupdateitsfleet.During

1978,PresidentCartersignedtheAirlineDeregulationAct,effectivelyremovinggovernmentcontrol

overcommercialairlines’faresandroutesandpavingthewayforentryofnewairlinesintothesector.

TheU.S.economytankedin1982,hittingairlineshardjustastheywerestartingtoadapttothenew

regulatoryenvironment.Deltareporteditsfirstfinanciallosseverin1983.Asconditionsimproved,

Delta started the Delta Connection program, partnering with regional airlines to strengthen the

“spokes”orfeederconnectionstoitsmajor hubs.Deltareturnedto profitabilityin1985and subse–

quentlyexpandedtoAsia.Duringthe1990s,Deltaincurredhugecapitalexpenditureswhichledto

massivelosses,forcingittopruneinternationalroutesand15,000jobs.In2000,Deltateamedupwith

Air France, Aero Mexico, and others to form the SkyTeam alliance to counter the threat of other global

networks such as Star Alliance and Oneworld.

Delta Air Lines, Inc.

TEACHING NOTE

MHE-FTR-028

1259420477

REV:NoVEmBER8,2014

Teaching Note — Delta Air Lines, Inc.

of McGraw-Hill Education.

Worldwideeconomicrecessionscoupledwithrisingfuelcostsintheaftermathofthe9/11terrorist

attacksin2001provedtobetoomuchtohandleforeventhemajorairlines.DeltafiledforChapter11

bankruptcyinSeptember2005.Creditorsprovidedfinancingworth$2billionandthepilotsagreedto

changesintheirbenefitsandcompensationleadingtosavingsof$280millionannually,enablingDelta

tore-emergefrombankruptcyinApril 2007. Difficulttimes continued withthe2008–2009financial

recession,withalmostallmajorairlineslosingmillionsonfuelhedges.DeltaacquiredNorthwestin

2008tobecometheairlinecarryingthehighesttrafficintheworldatthatpointintime.

Thenextsection describes Delta’s currentsituation,includingitsleadership and structure.Delta

servicesinternationaland domesticpassengersfromseveralmajorhubs,withspokes connectingto

smallerdestinations.Since2010,Deltahasre-invested$2billiontoupgradeitsairportfacilitiesandthe

aircraft within its mainline fleet. Overall, Delta boasts more first-class seating and in-flight options than

Next, the case details the challenges faced by the airline industry, including volatile demand and

numerousexogenous shocksover thelast decade.Anothermajorproblemisthefierce,price-domi–

nated rivalry amongst competitors. Because of intense competition, the airlines almost reach marginal

costs in terms of prices and have to make profits through volume. To increase revenues, airlines have

adoptedsophisticateddynamicpricingmodelsandrevenuemanagementtools.Whilereal,inflation-

them vulnerable to economic conditions. Their main advantage lies in the international market where

there are a limited number of competitors and profits are protected by governmental restrictions. The

recent wave of consolidation in the airline industry is one way in which traditional carriers have been

able to manage their capacity and streamline their operations. Other cost-cutting measures include

flying larger and more fuel-efficient aircraft over longer distances, fuel price hedging, and backward

tracking, upgraded airplane and airport facilities, priority boarding, automatic upgrades, and in-flight

services. Booking services have not been used as a point of differentiation because of online travel

agencies and booking sites that eliminate information asymmetry.

Teaching Note —Delta Air Lines, Inc.

200aircraftonorder.Thesecarriershaveseveralstrategicadvantages,includingbeinglocatedwithin

6hoursof60percentoftheworldpopulation.Further,themiddleEasternandadjacentAsianecono–

mies are growing at a healthy pace, creating robust demand for international travel. Multiple agencies

measure and report the performance of carriers.

Lastly, the case provides information pertaining to the “demographic challenge” faced by Delta.

Customers can be segmented by personas (e.g., sky-warrior) as well as by generational cohorts. The

millennials(born1980–2000)spendwell,bookclosertodeparturedates,andchangeflightsoften.Baby

Suggested Answers

AnAlysis: Focus on internAl And externAl environment

1. Carry out a PESTEL analysis to identify the driving forces affecting the airline industry.

• Political/legal –National governmentsplayapivotalroleintheairline industry.IntheU.S.,the

AirlineDeregulationActof1978(http://www.econlib.org/library/Enc/AirlineDeregulation.html)

removed government control over commercial airline fares and routes and made entry into the

industry easier. The loss of revenue protection coupled with increased competition lead to an era of

bankruptciesandindustryconsolidation(http://money.cnn.com/infographic/news/companies/

• Economic–WhiletheU.S.economyisprojectedtogrowatasteadyrateofabout2percent,many

Teaching Note —Delta Air Lines, Inc.

of McGraw-Hill Education.

Demographically,GenerationXisnotabigspenderwhilethemillennialswillnotreachtheirpeak

spendingcapacityforanother5to10years.Alongwithprojectedslowgrowthratesindisposable

personalincome(http://www.bls.gov/emp/ep_table_410.htm),thisleadstoasqueezeonpotential

airline revenues in the near term.

• Sociocultural–TheU.S.CensusBureaupredictsthatinthenextfewdecadestherewillbenomajor–

ity population (http://www.census.gov/population/projections/data/national/2012.html). This

• Technological –Consumersareincreasinglybookingtickets,checkingintoflights,andbuyingancil–

• Ecological–  Pressureto reducecarbon emissions and noise pollution fromair travel will likely

increase, as shown by the European Union’s recent attempts. This will force airlines to upgrade

2. Conduct a Porter’s five forces analysis to identify the industry’s profit potential.

APorter’sfiveforcesanalysishelpsustoassesshowmuchofthegapbetweenValueandCostan

industry can capture. The airline industry low profit potential industry due to the intensity of all five

forces combined. Much of the following information has been pulled from the Marketline report on

theairlineindustry(http://advantage.marketline.com/Product?pid=mLIP1252-0026&view=d0e482).

• ThreatofEntry(moderate)–The 1978AirlineDeregulationAct openedthedoorfornewer and

smaller airlines to enter the market, including a host of LCCs like Southwest and JetBlue. Government

aircraft have a high resale value, making it easy to recoup their expenses.

• Power of Suppliers (strong) – Two firms–Boeing and Airbus–manufacture the majority of large

aircraftutilizedbytheairlineindustry,givingthemsubstantialpowerassuppliers(http://www.

economist.com/blogs/economist-explains/2014/02/economist-explains-5). Suppliers of smaller

Teaching Note — Delta Air Lines, Inc.

of McGraw-Hill Education.

aircraft (e.g., Embraer, ATR, and Bombardier) are also highly concentrated. So far, aircraft manu-

facturers have not displayed an interest in forward integration, nor have airlines been in a position

to start manufacturing their own planes. Other factors that contribute to strong supplier power

are the importance of aircraft quality (safety and efficiency), the lack of available substitutes, and

the fact that aircraft purchase agreements typically consist of long-term contracts that are costly to

break. Staffing costs (pilots, flight attendants, mechanics, etc.) are likewise high; unionization further

increasesthenegotiatingpowerofairlineemployees.Fuelcostsrepresentroughly31percentofan

airline’soperatingexpenses,makingfuelanothercriticalinput.Therearerelativelyfewfuelsuppli–

ers, but airlines can partially counteract their power by fuel hedging and backward integrating into

the refinery business.

• Power of Buyers (moderate)–Buyersconsistofdisaggregatedindividuals,butpricesensitivityis

• Threat of Substitutes (high, at least for short-haul) –otherformsoftransportationsuchastrains,

buses, and cars provide a viable substitute for air travel over shorter routes (readily available, conve-

nient, and reasonably priced). The trade-off between time and cost increases with distance, however.

In some cases, video-conferencing may be a viable substitute for business travel.

• Rivalry Amongst Existing Competitors (strong)–Domesticrivalryconsistsoffourrelativelybal–

anced large competitors (American/US Airways, Delta/Northwest, United/Continental, and

Southwest) alongside more numerous regional carriers. At the international level, the entry of

3. Assess Delta’s resources, capabilities, and competencies using the VRIO framework.

From the following VRIO analysis, Delta might be able to leverage its existing resources and capa-

bilities to create and sustain a competitive advantage. Airport hubs are costly to imitate, and given

thatthemajorityofnewdemographicsareresidingincities,thisisastrongadvantage.International

Teaching Note —Delta Air Lines, Inc.

4. Does Delta possess any core competencies that would enable it to achieve a (sustainable)

competitive advantage? Explain.

oneofDelta’scorecompetenciesistheabilitytodevelopalliancesandjointventurestoprovide

an end-to-end experience for the international traveler. Given that domestic markets are getting more

andmorecompetitive,theinternationalroutesareapromisingsourceofsustainedprofits.However,

inordertoextractvaluefrominternationalroutes,anairlinerequiresgatesinthemajorinternational

FormulAtion: Focus on Business,

corporAte or GloBAl strAteGy

5. Based on the five forces analysis, what is Delta’s strategic position? Can it be improved? How?

Competition is increasing on the domestic front with the entry of LCCs and smaller, regional air–

lines. At the same time, the entry of new global carriers from the Middle East has led to increased

rivalryoverthemorelucrativeinternationalroutes.Delta’sabilitytoformalliancescanhelpmitigate

both challenges. Domestically, Delta has forged partnerships with ExpressJet, Chautauqua Airlines,

Giventhatfuelcostscompriseroughly30percentto40percentofanairline’soperatingexpenses,

fuel suppliers exert considerable power over the airline industry. Most air carriers invest in hedging

strategies to try to control fuel costs, but economic fluctuations are difficult to predict and can lead to

significant losses as well as gains. After its purchase of the Trainer Refinery, Delta is in a unique posi-

Teaching Note — Delta Air Lines, Inc.

Inmanyways,Delta’spaststrategicactions(alliancesandrefinerypurchase)havepositioneditwell

6. What type of strategic move is Delta’s entry into the refining business? Was it a good move?

Explain.

Delta entered the refining business in order to better control the costs of fuel, which has been a

source of considerable financial uncertainty. It is a form of related, vertical diversification, in particular

backward integration along the industry value chain.

Despiteanalysts’skepticism,investorsrespondedpositivelytonewsofthepurchasein2012and

Delta’sstockpriceincreasedbymorethantwo-foldin2013.Anotherpositiveindicatoristhattherefin–

Sources:

http://www.nytimes.com/2012/05/01/business/delta-air-lines-to-buy-refinery.html

7. Describe Delta’s strategic position in the U.S. domestic market versus its global presence. How

does Delta’s domestic strategy differ from its global strategy?

Delta is facing stiff competition from LCCs in the domestic market. It has twice tried (unsuccess-

Teaching Note —Delta Air Lines, Inc.

of McGraw-Hill Education.

partners with regional airlines for the same purpose). Competition from the LCCs has nevertheless led

to a decreased market share for Delta within the U.S.

In the international market, Delta faces threats from other legacy and global carriers, especially the

newmiddleEasternairlines.Delta’sinfrastructureandcontrolofgatesatmanymajorU.S.citiesgives

it a competitive advantage over its rivals. These facilities can be leveraged to develop alliances with

implementAtion: Focus on recommendAtions

And How to execute tHem:

8. What short term objectives should Delta pursue, given the following challenges?

• ThechangingAmericandemographic(domesticU.S.market):

In the short-term, Delta should focus on increasing revenues by differentiating its ancillary products

and services while matching the LCCs on base price. Understanding the features that are attractive

• Theemergingofglobalcarriers(internationalmarket):

Delta should maintain its strength in the U.S. market while continuously expanding its footprint

in high-immigration and high-travel centers abroad. It should buy more gates and develop ground

infrastructure at such cities, converting them into regional hubs. For example, the company has

recently expanded its presence in Seattle as a gateway for international flights to Asia (http://

www.forbes.com/sites/greatspeculations/2014/04/14/delta-is-expanding-in-seattle-to-target-the-

Teaching Note — Delta Air Lines, Inc.

of McGraw-Hill Education.

At the same time, Delta should also develop and fine-tune its offerings for Millennials, who will

hit their peak spending in the next five to ten years. Delta needs to understand this segment and

its aspirations better in order to provide services they value. For an article on Millenial business

versus leisure traveler segments, please see the following: http://www.hvs.com/article/6737/

segmenting-millennial-travelers-business-vs-leisure/.

9. Using a SWOT analysis, assess the considerations Delta’s executive team should keep in mind

moving forward (utilize the analyses in questions 1, 2 and 3 above).

Recent Updates

1. Deltaprovidesupdatednewsandstatisticsat:http://news.delta.com/Stats-Facts.

2. AnnualreportsandotherSECfilingsareavailableat:http://ir.delta.com/stock-and-financial/sec-

filings/default.aspx.

3. YahoofinancepageaboutDelta:http://finance.yahoo.com/q?s=DAL.

4. GoogleFinancepageaboutDelta:https://www.google.com/finance?q=dal&ei=NdQyVJjHodG3

8gas1IGwDg.

Additional Resources

1. DeltaAirlines’website:http://www.delta.com/.

2. ‘SpiritofDelta’videoabouttheemployee-contributed767jetliner(11:06min):https://www.

youtube.com/watch?v=2pD4SzJJjLm

3. Forabriefhistory,watchthemovie:“ThisisDelta.”Anexcerptfromthemovie(2:06min)is

providedat:https://www.youtube.com/watch?v=gG1p06W1SY4.

4. Delta CEO Richard Anderson discusses strategies, union issues, and fuel prices and their impact

onDeltainthefollowingclip(7:46min):https://www.youtube.com/watch?v=CLoCX3rp-og.

Teaching Note —Delta Air Lines, Inc.

ExHIBIT TN-1 VRIO Analysis of Delta Airlines, Inc.

Delta’s Resources and Capabilities

… are they?

Valuable

Rare

Costly to

Imitate

Organized to

capture value

Teaching Note — Delta Air Lines, Inc.

ExHIBIT TN-2 SWoTAnalysisofDeltaAirlines,Inc.

Strengths

Weaknesses

Opportunities

Threats