Running head: Delta Airlines Case Study 1

Delta Airlines Case Study

Name

Institution
Delta Airlines Case Study 2

Delta Airlines Case Study

Section one: current situation, background strategy

Delta's roots could be traced back to what was, in 1925, the world's largest privately

owned fleet of aircraft, Huff Deland Dusters' 18 crop-dusting planes. C.E. Woolman, the

principal founder of Delta Air Lines, led a movement in 1928 to buy Huff Deland, rename it

Delta Air Service, and begin passenger service in 1929. Delta operated primarily within the

Southeast until its merger with Northeast Airlines in 1972, which gave it access to routes from

New York and New England to Florida (Belleghem, 2012). After its merger with Western

Airlines in 1987, Delta became the third-largest domestic passenger carrier as measured by

operating revenue. The acquisition of transatlantic routes from failing Pan Am in 1991 gave

Delta global reach. In 2002, Delta was the third-largest passenger carrier in the world regarding

revenue, and the second-largest concerning passengers were flown.

The carrier enplaned over 100 million passengers annually, primarily through its hubs in

Atlanta, Cincinnati, Dallas, and Salt Lake City. After deregulation, Delta was the most

profitable—or least unprofitable— of the Big Three legacy carriers (American, United, and

Delta). The company had avoided bankruptcy in the wake of September, 11 but incurred an

operating loss of $1.6 billion in 2001 (Belleghem, 2012). In nearly a century since the Wright

brothers’ historic flight, the U.S. airline industry had grown huge, transporting more than 620

million passengers and collecting over $81 billion in fares in 2001.4Size, however, had not

brought profitability. Since deregulation in 1978, airline margins were persistently well below

the average for U.S. industries.5 For each of the five largest carriers, the average return on

investment over the 1990s was below its cost of capital.6 The terrorist attacks of September 11,
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2001, brought tragedy to an already troubled industry. In the wake of the attacks, demand for air

travel declined sharply, sending industry profits into a tailspin.

For 40 years before 1978, the U.S. airline industry had existed within a predetermined set

of operating rules under the structure imposed by the Civil Aeronautics Board.7 The CAB

assigned a mix of high- and low-density routes to each carrier, with lucrative routes subsidizing

unprofitable ones. The board controlled fares and mostly passed cost increases along to

customers, allowing airlines a reasonable profit (Chorafas et al., 2007). Protected by cost-plus

pricing, airlines regularly assented to labor union demands. Salaries and benefits increased

steadily, supplemented by strict work rules that reduced labor flexibility. Airlines strove to

differentiate themselves by improving service offerings, introducing meals and movies to flights,

and adding capacity to offer a variety of flight times.

The resulting combination of high costs and excess capacity led the major airlines to

charge prices roughly twice as high as did their unregulated, intrastate counterparts for flights of

comparable lengths.8 with the regulated system increasingly inefficient; President Carter signed

the Airline Deregulation Act in 1978. The act phased in freedom of pricing and route entry and

exit. Fares dropped almost immediately, and by 1980, 22 low-cost airlines were attempting to

unseat the incumbents.9. (Chorafas et al., 2007)

Section two: challenges and major problems

Despite sky-high profits as of late, airlines are facing a host of problems that could

weigh on future performance. For one, federal regulators are exploring concerns that the

biggest airlines violated competition rules. Meanwhile, workers at Southwest

Airlines (LUV, -0.29%) and Delta Air Lines (DAL, -0.13%) have been battling with upper
Delta Airlines Case Study 4

management for better pay, rejecting recent labor contracts. On top of that, investors are

losing faith that the airlines can weather the upheaval, sending stock prices into a tailspin

(Chorafas et al., 2007).

At the same time, there’s a lot going right for airlines right now. Low oil prices since

mid-2014 have helped bolster the bottom line, and earnings for U.S. airlines collectively hit

over $8 billion in the first half of 2015 alone, reported the Wall Street Journal. But, the

dollar sum taken in for each passenger flow a mile–what’s called the unit revenue–has

steadily fallen this year, primarily due to lower ticket prices (DePamphilis & Dawsonera,

2012). The unit revenue is the metric investors are fixated on and are concerned that the tide

won't turn until at least next year. Luckily airlines have been benefiting from low-cost

tailwinds, but as soon as oil prices go back up or labor costs increase, airlines will need to

get customers spending more money–and that could be a challenging sell.

Section three: corporate objectives and mission vision statement mission statement

As a major American corporation, the following profile and background facts about Delta

Air Lines provides company and business information for research and general interest including

business address and telephone details, business industry, company description, slogan, Delta Air

Lines mission statement and or Vision statement and whether Delta Air Lines appears in the

Fortune 500 company listing - all useful business information. Mission Statements and Vision

Statements are written for customers and employees of corporations.

A Mission Statement can be defined as a sentence or short paragraph was written by a

company or business which reflects its core purpose, identity, values and principle business aims.
Delta Airlines Case Study 5

The definition of a Vision Statement is a sentence or short paragraph providing a broad,

aspiration image of the future. Delta Air Lines Mission Statement: "We—Delta's employees,

customers, and community partners together form a force for positive local and global change,

dedicated to bettering standards of living and the environment where we and our customers live

and work." (DePamphilis & Dawsonera, 2012). The definitions related to a company, like Delta

Air Lines, businesses and corporations - all useful business information. A company is a form of

business organization in which ownership is established through the issue of shares.

A corporation, termed as a limited company in the UK (Ltd.), is legal entities separate

from the persons that form it. A company or corporation is recognized by the law to have rights

and responsibilities like actual people. The names of companies are the names by which

corporations are identified, such as Delta Air Lines. The word "company" may refer to a

partnership or to a sole proprietorship so the names of many business corporations end with

"Ltd.","Inc." or "Plc" reflecting the Limited Liability if companies or businesses fail, in which

case neither the shareholders nor the employees are held liable for debts (Morschettet al., 2010).

Public companies are listed on the Stock Exchange, and their shares are available for the public

to invest in.

Corporate objectives

At Delta, sustainability is defined as “meeting the company’s financial goals of growth

and profitability over time, through business practices that minimize the environmental impacts

of Delta operations and promote the health, welfare, and productivity of the individuals and

communities we employ and serve.” (Morschettet al., 2010) To meet this definition, Delta does

more than merely satisfy its legal obligations. Delta's stakeholders - investors, customers, Sky
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Team partners, employees, non-governmental organizations (NGOs), governments and

communities - have come to expect Delta to produce sustainable and responsible positive

financial results, invest in healthy populations, maintain a robust workforce and protect natural

environments (Morschettet al., 2010). Collectively, these expectations drive Delta’s approach to

sustainability and social responsibility.

The "low-cost environment" appeared only to be intensifying as the cross-functional task

force convened in Delta's headquarters. JetBlue, for instance, flew on routes that provided 6.5%

of Delta's revenue, and the team knew that that figure might rise substantially in the future.

Leading the task force were Balloun of corporate strategic planning, Karnik of network and

revenue management, and Jim Whitehurst, senior vice president, and treasurer.

Section four: competitors

On routes shorter than 600 miles, airlines competed with automobiles, buses, and

railroads, 11 while competition on long routes was almost exclusively internal to the industry.

The industry was segmented by annual revenue into major (over $1 billion), national (between

$100 million and $1 billion), and regional (less than $100 million) carriers. In 2002, ten major

passenger airlines operated in the United States: Alaska, America West, American, American

Trans Air, Continental, Delta, Northwest, Southwest, United, and US Airways.

Customers were a varied lot, but many selected a carrier primarily by ticket price. By one

estimate, the price was the "overriding" concern of one-third of all passengers.12 Emphasis on

lower prices had reduced fares by nearly 45% in real terms since deregulation13 and had made at

least one legacy carrier desperate enough to try to fix prices. In 1982, after years of fare wars in

Dallas, Robert Crandall, American's CEO, placed a call to Howard Putnam, president of Braniff
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Airlines. “Raise your fares by 20%,” he said, “and I’ll raise mine the next morning.”

(Morschettet al., 2010), rather than comply, Putnam recorded the conversation and reported

Crandall to the Justice Department.

Beyond price, passengers choosing an airline focused on safety, reliability, and

convenience, with other factors such as service quality, amenities, entertainment, and food also

influencing the purchase decision (Nolan, 2005). Airlines encouraged loyalty among frequent

travelers through branded frequent-flyer programs and attempted to differentiate themselves

through a variety of service offerings, frequent departures, and distinctive cultures. Business

travelers were far less price sensitive than leisure travelers; in one survey, business “road

warriors” rated an airline’s schedule as more important than price in the purchase decision and

the airline’s frequent-flyer program as slightly less important than price.14

The Department of Transportation (DOT) required that airlines regularly submit a variety

of reports. Information on safety, reliability, capacity, and profitability metrics was

supplemented with statistics on market share and traffic in specific geographies and city pairs.

Armed with such information and competitive fare data, airlines could deploy flights to

profitable routes and respond quickly to competitor prices. By the late 1990s, widespread access

to airline fares and schedules via Internet reservation systems allowed consumers to compare

tickets efficiently and become more aware of low-priced alternatives.

Section five: recommendation

The challenge of low-cost competition from carriers like Southwest and JetBlue had been

building for years. We had been looking at the problem for a long time, but because Delta is

organized by function, solutions focused on individual parts of the company. The marketing

organization provided marketing ideas, the customer service organization offered customer
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service ideas, and so forth. We didn’t have a comprehensive response to low-cost carriers

[LCCs] across functions, and pressure from the board made it clear: we needed one. We

promised the board we would propose an LCC strategy at their July meeting.2. With four months

left before the board meeting, the task force considered Delta's options. Among the options on

the table was the possibility that Delta would launch its low-cost subsidiary.

Nearly all of the major airlines, including Delta itself, had launched such subsidiaries in

the recent past. Although airlines rarely revealed the financial results of their subsidiaries,

industry observers thought the low-cost efforts launched to date were either failed experiments or

unsustainable over time (Nolan, 2005). “We’ve never seen a high-cost carrier transform it into a

low-cost carrier,” said Darrel Jenkins, director of the Aviation Institute at George Washington

University. “They’ll still be a high- cost carrier selling cheap seats.”3 With or without a low-cost

subsidiary, Delta would have to find a way to deal with LCCs and do so in the midst of the most

challenging conditions the airline industry had faced in decades.

References

Belleghem, S. V. (2012). The Conversation Company: Boost Your Business Through Culture,

People, and Social Media. London: Kogan Page.

Chorafas, D. N., & Chartered Institute of Management Accountants. (2007). Strategic business

planning for accountants: Methods, tools and case studies. Oxford: CIMA.

DePamphilis, D. M., & Dawsonera. (2012). Mergers, acquisitions, and other restructuring

activities: An integrated approach to process, tools, cases, and solutions. London:

Academic Press.

Morschett, D., Schramm-Klein, H., & Zentes, J. (2010). Strategic international management:

Text and cases. Wiesbaden: Gabler.

Nolan, H. L. (2005). Airline without a pilot: Lessons in leadership. Atlanta, Ga.: Target mark

Books.