Despite the challenging financial circumstances, Delta Airlines distinguished itself by ensuring competitive salaries and job security for its employees, unlike other airlines that resorted to layoffs and bankruptcy filings. However, this practice was not consistently maintained during Ronald Allen’s tenure as CEO from 1987 to 1997. Specifically, in 1993 and 1994, human relations suffered significantly under his leadership. Nevertheless, Delta recognized the necessity for change and decided to part ways with Allen in order to repair these strained relationships with their employees. Since then, Delta Airlines has continued to prioritize human relations as they consider it essential for their success.
External Environment General The airline industry is experiencing rapid growth and demonstrating a strong growth rate. It is associated with numerous social and economic benefits and is becoming increasingly significant in the global inventory according to Whitelegg (2000). Business cycles have a profound effect on the airline industry; during economic recessions, air travel is perceived as a luxury, resulting in reduced travel expenditure and decreased prices. The industry not only provides direct employment but also generates opportunities within the travel and hospitality sector of the economy.
According to the Global Airline Industry Program (2011), jobs in hotels, resorts, restaurants, and car rental agencies are all influenced by the airline industry. The airline industry is a significant economic force and has effects on related industries like aircraft manufacturing and tourism. Airlines receive a great amount of attention from participants, government policy makers, and the media, making it one of the few industries that generates this level of intensity (Jacobson, 2004). Additionally, the airline industry has environmental impacts.
However, the airline industry has various environmental impacts that affect nearby residents and those living under flight paths. Over the past two decades, noise, air pollution, and their associated health effects have emerged as concerns (Whitelegg, 2000). The most notable impact in recent times was the 9/11 incident, which led to a global recession due to consumer insecurities. As a result, air traffic experienced a significant decline as safety and security concerns heightened.
With the recent emphasis on homeland security, the United States has experienced a state of turmoil in the airline industry. The terrorist attacks of 2001, a global recession, and anomalies like the SARS virus have all played a role in this. Furthermore, the industry suffered from loss of income due to higher operational costs, low demand, and increased insurance rates. As a result, many employees were laid off, contributing to further economic decline as spending decreased due to rising unemployment. Additionally, the social factors and travel habits of people have had significant implications for the airline industry.
The airlines must identify people from different income groups and provide services to them accordingly. If the clients belong to a low-income group, the airline should focus on satisfying their needs and understanding their habits. Balancing the clients and managing the marketing mix is crucial for the success of the airline industry (Airline Industry, 2010). Additionally, technological factors such as the increasing use of the Internet and advancements in technology have created numerous opportunities for airlines.
Many airline companies have implemented an internet-based service that allows customers to access unoccupied seats one week before the departure. Additionally, they offer various other online services such as ticketing, booking, flight information updates, baggage check-in, and handling customer complaints. As customer needs evolve and future generations have higher expectations, the airline industry must be prepared to meet these changing demands (Airline Industry, 2010). 5-Forces Analysis Potential entrants.
Entering the airline industry poses challenges, as it involves costly startup expenses and adherence to regulatory requirements, including landing rights and government rules. Securing landing rights in foreign countries is particularly problematic for new airlines. However, if borrowing costs are low, it may encourage more airlines to enter the market. Despite facing obstacles in the past, the airline industry remains lucrative, with high demand. As a result, new competitors constantly pose a threat to existing airlines.
As more airlines emerge, prices usually decrease due to competition among carriers. Delta cannot assume that its current market share is secure, considering the possibility of foreign competition. Brazilian Airlines Azul, Germany’s Lufthansa, Air France, and British Airways are exploring the option of offering regular flights from domestic cities in America to other American cities (Shepherd, 2008).
The strategic success of Delta will rely heavily on buyer preference as new competitors emerge. Brand recognition and frequent flier points are significant factors in the airline industry, often influencing customer choices even when prices are higher. Suppliers’ bargaining power is also high in this industry, largely controlled by Boeing and Airbus who dominate 92% of the aircraft design and construction market.
This situation creates a lack of competition and industry intensification, according to Shepherd (2008). The limited number of suppliers for aircraft results in high supplier power. As a result, airlines have limited ability to switch suppliers and doing so could be very costly. Domestic airlines may face restrictions in gaining suppliers from other countries, but commercial airliners in Europe offer cheaper costs compared to the U.S. This is something Delta could explore further.
The industry’s supply side is not anticipated to experience significant vertical integration. Airbus and Boeing have both indicated that their primary expertise lies outside of actual flying (Boeing, 2008). In contrast, airlines may opt for horizontal integration by collaborating with others to place bulk orders for airplanes, leading to greater discounts. Fuel expenses constitute a major cost for the airline industry, and OPEC holds considerable influence in determining its price without consulting the airlines.
Labor unions and buyers in the airline industry have contrasting negotiating power. Labor unions possess significant bargaining power, while buyers have very little. This discrepancy arises from the costly process of switching airplanes and the lack of consumer negotiation on ticket prices, which are determined solely by airlines. Nevertheless, the emergence of innovative ticketing websites like Travelocity and Kayak has strengthened buyer power by providing consumers with access to information from all airline websites. Consequently, consumers now wield greater purchasing power (Shepherd, 2008).
Most customers prioritize price over luxury amenities when searching for flights. In order to reduce costs, Delta Airlines has launched exclusive low fares that are only accessible on their official website, meaning customers must purchase tickets directly through the site. This lack of coordination among the majority of airline customers weakens their collective bargaining power. The ability of airlines to engage in price discrimination is influenced by factors such as the specific route and customer type.
Routes that are extensively used by multiple airlines have a higher likelihood of providing competitive prices due to the increased availability of alternative options. Conversely, flights that cover longer distances and have limited scheduling and hub connections may be subject to domination by one or two airlines, leading to higher prices for customers. The airline industry faces threats from substitute modes of transportation, such as railways, boats, and motor vehicles, which have become more efficient and increasingly popular alternatives to air travel.
The significance of these alternatives has greatly diminished over time. While it is relatively easy to switch between air travel and its substitutes, the relevance of substitutes can vary based on factors such as the specific route, time, cost, purpose of travel, and the type of customer. Considering the trade-offs between price and performance, ocean transportation is not as appealing due to its lack of speed in transatlantic journeys. This leaves railways and motorized transportation options within a country, including passenger buses and cars.
Both airlines and road transportation have long been seen as viable alternatives to air travel. However, the rising oil prices, especially the increasing costs of jet fuel, are making both options less attractive for both business and leisure travel. The travel industry now faces the challenge that consumers’ evaluation of cost-effectiveness and overall price elasticity within the industry have created a more complex situation. This is further complicated by recent developments in fuel-efficient vehicles and a wider range of choices offered by ground transportation companies (Shepherd, 2008).
The intensity of competition in the market is a major determinant of rivalry. Routes, airports, and hubs that are serviced by multiple airlines face intense competition. Profitable hubs are typically established in cities with high levels of air travel demand. Industries that are highly aggressive tend to generate low profits due to the high cost of competition. Therefore, airlines need to outperform their competitors by offering a greater number of flights with flexible schedules to various destinations in order to achieve profitability (Reals, 2010).
Some other factors that contribute to rivalry include high fixed costs, excess capacity, low differentiation, price wars, and readily available prices on the Internet. The airline industry is characterized by high fixed costs, which result in narrow net profit margins. These fixed costs include expenses for planes, fuel, pilots, flight attendants, high-tech computer systems, compliance with government regulations, and the need to hire experienced employees. To offset these fixed costs, airlines have implemented strategies such as raising ticket prices, charging for checked baggage, and increasing revenue per passenger mile.
The rivalry among airlines is intensified by the minimal differentiation among them and the high switching costs for passengers (Datamonitor, 2010). An example of a switching cost is the expense incurred when individuals or corporations switch airlines and lose the opportunity to accumulate frequent flier miles on a different airline. Switching to a new airline becomes a challenging decision as miles cannot be transferred between airlines. Despite being introduced to promote customer loyalty, frequent flier programs’ effectiveness has been reduced due to strategies adopted by low-cost airlines.
With the rise of online price comparisons, competition in the airline industry has significantly intensified. However, profitability has remained low ever since the Airline Deregulation Act of 1978 was introduced. This act resulted in lower airfares and increased opportunities for new companies to join the market, which posed financial challenges for these newcomers. Presently, escalating fuel prices are causing industry-wide difficulties as they impact flight schedules, ticket prices, and overall service.
In order to survive, airlines must reduce expenses and increase revenue by charging passengers for checked bags. To save money, airlines are cutting costs in various areas of their services. Following the events of September 11th, when demand was low and fuel prices were affordable, airlines were able to lower ticket prices and enhance their in-flight offerings to attract more customers (Reals, 2010). However, even with full flights, airlines continue to struggle with the expensive cost of fuel. Merging with other airlines or consolidating routes may be limited options that force airlines to operate independently and hope for a decrease in oil prices.
The consolidation of competing airlines into a few large conglomerates is crucial for the future of the airline industry. However, this can negatively impact consumers as certain routes may be discontinued and competitive air fares could disappear. Additionally, reduced competition might lead to a decline in service quality (Reals, 2010).
Following the 9/11 attacks, regional airlines underwent restructuring due to increased fuel costs and reduced flight numbers, leading some of them to declare bankruptcy. Despite continuing operations post-bankruptcy, airlines do not always have control over consumer fares. The bankruptcy board now holds authority over pricing, flight schedules, and even destinations, with decisions made by individuals not directly affiliated with the airlines (Shepherd, 2008).
President Barack Obama’s proposal for a high-speed passenger rail system is causing concerns for the regional airline industry. The plan seeks to promote clean and energy-efficient transportation, leading airlines to invest in environmentally-friendly aircraft (Reals, 2010). As a result, the outlook for the airline industry appears bleak.
While it is improbable for the entire airline industry to face bankruptcy due to the consistent demand for air travel, external factors heavily impact its future. Anticipated in the future are additional mergers and bankruptcies, although the specific timing and airlines involved remain uncertain. United Airlines and Southwest Airlines are prominent players in this sector. Established as Varney’s in 1926, United Continental Holdings, Inc., now operates under the name of United Airlines and provides commercial air mail services.
United Airlines, originally named in 1931, has its headquarters and main hub located in Chicago O’Hare. It also has additional hubs in Denver, San Francisco, and Washington. Currently ranked as the second-largest airline after Delta Airlines, United Airlines aims to merge the strengths of both United and Continental under United Continental Holdings. Their objective is to deliver exceptional customer service, achieve substantial profitability, and provide long-lasting value to shareholders.
United Airlines aims to become the leading performer in its industry, with the goal of increasing market share and enhancing shareholder payouts. By merging with Continental Airlines on December 31, 2010, United Airlines brought together the second and third largest airlines. Consequently, once final data for 2010 is released, United Airlines is projected to surpass Delta Airlines in terms of occupied seats for the year. Until they receive a merger certificate, which is expected to be granted in late 2011 or early 2012, both companies will continue their separate operations.
Competitor analysis, objectives. United’s goals are to maintain growth in market share by offering the lowest fares whenever possible (United Airlines Company Information, 2011). The performance of United Airlines is heavily influenced by the condition of the US economy. Business travelers have been exploring alternatives to physically attending company meetings, including virtual meeting spaces like Second Life and video/teleconferencing. The economic recession of the past two years, along with worries about job security and a lackluster stock market, have resulted in many families choosing not to travel by plane to their vacation destinations.
Despite experts stating that the US economy is starting to rebound, families who have suffered income loss or job loss are experiencing a slow recovery. The stock market’s recent strength provides evidence of this recovery, but many Americans still face high levels of uncertainty. United Airlines, along with other companies in every sector, is hopeful for a positive turnaround in the economy. As a result, United will persist in seeking opportunities to lower costs and manage them effectively. This includes competitor analysis and maintaining their current strategies. United Airlines’ main objective is to ensure customer satisfaction.
United Airlines offers 13 different features or programs to attract business travelers, such as Corporate Plus, Group Plus, Pass Plus, Perks Plus, and Reward Miles. These initiatives are aimed at accommodating the needs of their customers and are listed on their website at www.united.com (United Airlines Company Information, 2011). United is dedicated to providing the lowest fares possible and ensuring the safe and timely arrival of their passengers to their destinations. In fact, they achieved the highest on-time performance in 2009 and the first half of 2010. Moreover, United Airlines leads the way in environmental responsibility by being the first U.S. airline to power their aircraft with synthetic fuels, thus reducing greenhouse emissions. They also demonstrated their commitment to humanitarian efforts by being the first domestic airline to conduct relief missions in Haiti. United Airlines is fully committed to corporate responsibility and actively participates in it.
United, like all airlines, is actively seeking cost reduction strategies and financial management techniques in response to the current economic downturn. Fuel and maintenance expenses are considerable and unavoidable for any airline company. United operates a diverse fleet of 13 distinct aircraft models, necessitating a substantial inventory of parts and a comprehensive knowledge base. Competitor analysis and assumptions are also factors that play into this.
United Airlines remains a member of the Star Alliance, which is a global network comprising 27 members. Collectively, Star Alliance members operate 21,000 flights daily, serving 916 destinations across 181 countries. This extensive network enables United Airlines to provide assistance to its customers traveling to destinations not currently served by the airline. Continental Airlines, having completed its merger with United Airlines on October 1, 2010, is also a member of the Star Alliance (United Airlines Company Information, 2011). In terms of hub cities, both United and Continental currently have ten in the United States and one internationally. These cities include Chicago, Cleveland, Denver, Houston, Los Angeles, Newark, San Francisco, Washington, Guam, and Narita International Airport in Tokyo, Japan. It is noteworthy that United Airlines was a founding member of Star Alliance, and Continental became a member prior to the merger in 2010.
This membership allows United customers to access flights to destinations they do not fly directly to through their partner members. United Continental Holdings, Inc. is known for having the most extensive route network among domestic airlines (United Airlines Company Information, 2011).
- 371 Destinations (airports)
- 223 Domestic destinations (airports)
- 148 International destinations (airports)
- 59 Countries served
- 5,811 Daily flights
- 144 Million passengers per year (Continental and United combined)
- 86,852 Employees
- 1,254 Aircraft Competitor financial analysis.
Southwest Airlines is a leading low-fare passenger carrier in the industry. Unlike American, Delta, and United, it operates on a point-to-point system instead of a hub and spoke system (Datamonitor, 2010). The company’s mission is to provide the highest quality of Customer Service with warmth, friendliness, individual pride, and Company Spirit (Company, 2010). According to Gary Kelly, CEO of Southwest Airlines, the employees are the company’s greatest strength and will maintain their competitive advantage in the long run.
Competitor analysis, objectives. The objectives of Southwest Airlines are to maintain their position as the leading domestic industry provider of point-to-point, affordable fares. They also aim to gain market share from their competitors that operate on a hub and spoke model. Achieving these objectives relies on the improvement of the United States economy to encourage both business and leisure travelers to fly again. In addition, Southwest will actively search for opportunities to diminish or handle expenses. Competitor analysis, current strategies.
Southwest Airlines focuses on minimizing costs to maintain their position as the domestic airline industry’s low-cost leader. By exclusively using the Boeing 737 aircraft, they can effectively manage inventory and maintenance expenses (Company, 2010). To further reduce costs, they enforce a rigorous purchasing system and maintain loyalty to suppliers who aid in cost reduction, enabling Southwest to pass on the savings. Additionally, Southwest curtails expenses by omitting certain amenities and services that other airlines provide, like first class seating and in-flight meals.
Southwest is expanding its services into Mexico, marking its first direct international location. Unlike other flights that require a partner, Southwest’s expansion into Mexico shows its growth in territory. The airline emphasizes its love for its culture, focusing on the development, improvement, and refinement of the originality, individuality, identity, and personality of a given people (Company, 2010). In addition to low-cost fares to various cities, Southwest offers more through programs like “Southwest Cares” where they provide monetary and in-kind donations. The airline’s employees actively participate in volunteering activities within their communities.
Southwest is committed to being an engaged community partner where they operate. They aim to set themselves apart from competitors by actively contributing to the betterment of the communities they are a part of. The company believes that this approach will not only help increase their market share but also result in higher revenue and profit. Southwest will also exert pressure on competitors through their fare pricing strategy, particularly benefiting from their ability to offer lower fares compared to larger airlines like Delta. Conducting competitor analysis and assessing capabilities, Southwest maintains its edge by offering convenient direct and nonstop flights.
Delta Cargo has introduced new core U.S. based shipments called DASH, DASH Heavy, and Standard. The goal is to create the “best in class” product and rates by combining the strengths of both carriers. Whether you are shipping within or outside the United States, or have special items to ship, Delta Cargo has a product for you at an affordable price. They also offer specialized services such as Delta Cares for safe transport and protection of human remains, live animals, perishables, dangerous goods, and high value items. Firearms can also be transported upon request (Delta Cargo, 2011).
Despite significant challenges in the industry, including revenue decline and fluctuating fuel prices, Delta is in the best position among network carriers to navigate these economic conditions (Smith, 2009).
The decrease in passenger revenue was $2 billion, which is equivalent to a decrease of 25% compared to the previous year. This decline was primarily caused by the global economic recession, with an estimated impact of $125 million to $150 million from the H1N1 virus and a 7% reduction in capacity. Passenger unit revenue (PRASM) experienced a decline of 20%, driven by a 19% decrease in yield. Cargo revenue also saw a significant decline of $200 million, equivalent to a decrease of 54%, due to lower volume and yield resulting from the recession.
Delta Air Lines Reports (2009) states that Delta’s freighter capacity decreased by 50% compared to the previous year, in line with its plan to discontinue all freighters by the end of 2009. However, other net revenue increased by 15%, equivalent to $123 million. This growth can be attributed to higher baggage fee revenue and improved terms from Delta’s affinity card agreement with American Express. Delta’s headquarters in Atlanta operates a mainline fleet of over 700 aircraft. Additionally, as a founding member of the Sky Team global alliance, Delta is involved in the industry’s prominent trans-Atlantic joint venture alongside Air France-KLM and Alitalia.
Delta, together with its partners, provides customers with over 13,000 flights every day. Their hubs are located in New York-JFK, Cincinnati, Amsterdam, Memphis, Atlanta, Detroit, Minneapolis-St. Paul, Paris-Charles de Gaulle, Salt Lake City, and Tokyo-Narita. Delta is dedicated to investing more than $2 billion until 2013 to improve airport facilities, global products, services, and technology for a better customer experience both in the air and on the ground (Corporate Information, 2011). Image. “Delta is firmly committed to our environment, safety, and social responsibility.”
We show our commitment in numerous ways every day around the world by collaborating with our employees, vendors, customers, civic, and non-profit organizations to have a positive impact on the communities where we live and operate. Many of our initiatives have received recognition and set industry standards, however, our motivation stems from our belief in doing what is morally correct” (Anderson, 2011).
Delta utilizes the following programs to enhance their image:
- Making the communities around the world better
- Advancing global diversity Improving global wellness
- Improving the environment
Promoting arts & culture: “The spirit of giving embodied by Delta employee volunteers symbolizes the heart and soul of Delta people worldwide. It’s because of them that our company is recognized as more than just an airline. We are a leader in corporate social responsibility.” (Scarlet Pressley-Brown, Director-External Affairs & Community Relations and Delta’s Force for Global Good, 2011).
Internal politics: Human diversity is about recognizing, appreciating, respecting, and leveraging diversity.
Delta considers various aspects of diversity, including cultures, languages, ethnicity, gender, race, age, sexual orientation, education, religion, work experience, family status, capabilities, political views, geographic/regional identification, values, personalities, skills, education (formal and life), citizenship status, socio-economic background, community membership and communication styles. Diversity showcases a company’s perspective and the principles upheld by its employees on embracing and utilizing the substantial benefits that diversity brings.
Delta is committed to promoting diversity in all aspects of its global operations, and is proud to support a wide range of activities that cater to different lifestyles and perspectives (Our Global Reach, 2011). In terms of market segments, Delta generates revenue through its air transportation division, which consists of two major units: passenger and cargo (Datamonitor, 2010). Among US passenger airlines, Delta Cargo stands out as one of the largest cargo carriers in terms of revenue generated.
The company generates cargo revenues in both domestic and international markets by utilizing cargo space on regularly scheduled passenger aircraft. Delta Cargo is a proud member of SkyTeam Cargo, which is the largest global airline cargo alliance. This partnership ensures that cargo customers have access to a consistent international product line. Additionally, the partners collaborate to enhance their efficiency and effectiveness in the marketplace. Delta offers two main market segments for its passengers: those who are primarily looking for basic air transportation (leisure or economy class) and those who desire high performance and luxury (business class).
According to Delta Air Lines Reports (2009), the business class is the more profitable segment, while the economy class is the less profitable one. These two segments can be further categorized based on the average length and frequency of trips, as well as whether the travelers are international or domestic. For Delta airlines, business travelers are particularly lucrative due to their tendency to purchase tickets at higher prices and lack of flexibility in changing flights. Moreover, their busy schedules often prevent them from opting for alternative means of travel.
Business travelers are willing to pay a higher price for the convenience and luxury that comes with their travel. In terms of economics, this price is not easily affected by changes in demand. Delta caters to business travelers by providing them with a wide range of services and amenities that are not typically offered to leisure travelers. These include extra workspace, phone and Wi-Fi connections so that business class passengers can continue to work while onboard. Additionally, the preferences of a large number of business travelers often determine the flight routes offered, with a preference for non-stop flights rather than the hub and spoke system. Traditional airlines prioritize these routes as they are the most profitable for them due to the added value they provide to business travelers.
Leisure travelers, who are more inclined to change flights and transportation methods based on prices, are considered less profitable. They belong to a price elastic market segment that demands a cost leadership approach. Unlike traditional airlines such as Delta, Southwest airlines and other budget carriers are well-equipped to compete in this segment. With their low fixed cost structures, budget airlines are likely to dominate this market and potentially push out traditional carriers like Delta (Shepherd, 2008).
Delta Airlines implements two distinct strategies to cater to different market segments. While business and international travel segments tend to generate higher profits, Delta aims to reduce costs while offering differentiated services. On the other hand, budget airlines primarily dominate the leisure traveler segment by providing lower service standards and prices. Delta Airlines historically adopted a differentiation strategy, aiming to stand out from competitors. Their emphasis on customer service set them apart from others in the industry.
Delta Airlines was the pioneer in the 1940’s by introducing stewardesses in their cabins. They also provided passengers with additional amenities, including meals, complimentary drinks and snacks, spacious and comfortable seats, ample leg room between rows, and airport lounges. This approach set Delta apart from competitors like Southwest Airlines, which focuses on selling seats at the lowest possible price to gain market share and boost revenue. Notably, Delta incurred its first operational loss in 1983.
During this time, management of Delta made the decision to maintain the higher wages they were paying instead of cutting them to reduce labor costs, thus keeping their no-layoff policy. Although this strategy kept the employees satisfied, it negatively impacted the company’s financial position. Delta faced another challenging period in 1993 and 1994, prompting the new CEO Ronald Allen to introduce the Leadership 7.5 program. This program aimed to decrease the average cost per available seat per mile flown from 9.59 cents to 7.5 cents (Anthony, et al., 2010).
This program had the positive effect of reducing costs and improving the balance sheet. However, it had a negative impact on the long-standing relationship between Delta employees and management that had been nurtured over the course of 50 years. Additional changes occurred at Delta during this period. The company began transitioning to a mixed cost/differentiation strategy. It required the elimination of their policy of no layoffs for nonunion employees, reduction of wages, conversion of full-time staff to part-time staff, and scaling back on the amenities provided to passengers. All of these measures were implemented in order to restore profitability.
