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Academic Mind : Unpublished Papers : Business : Management : Delta Airlines: An Analytical View


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Written by Jason Baumwoll, Ben Howland, Josh Kruse, Sean Lamb, and Josh M. Shepherd
University of Colorado at Colorado Springs
June, 2008

Delta Airlines: An Analytical View

Recommendations to Succeed in the Airline Industry

I. Industry and Market Analysis

The airline industry is currently undergoing radical changes in how it operates. Nowhere is this shake-up more apparent than with Delta Air Lines and its competitors.
Company History and Background

The longest-running airline carrier, Delta Air Lines began in 1924 as a crop-dusting company called Huff Daland Dusters. Delta has since become a world leader in providing efficient, on-time air travel. Since 1941, the company has been based in Atlanta, where Hartsfield-Jackson International Airport serves as its largest domestic hub and primary base for flights to over 57 countries. The airline also operates four other hubs in major U.S. cities, notably Los Angeles which it has recently reestablished. Depending on which measure is used, Delta is either the second or third largest airline in the world.

Due to competition from low-cost airlines, the negative effects of 9/11 on travel and skyrocketing fuel prices, the company held over $20 billion in debt as of Sept. 2005 and declared bankruptcy. Delta was able to emerge from bankruptcy in 2007, achieving profitability that same year. In April 2008, Delta announced its intention to purchase Northwest Airlines; the two companies combined would create the world's largest airline.

Outlook for the Domestic Airline Industry

Delta competes in the increasingly unattractive airline industry. While there are many variables in the airline industry, it is also a business where the end product is essentially the same regardless of what airline provides the services. It does not matter whether you fly on a Delta or United jet; odds are in your favor that you and your baggage will arrive to the destination city in a reasonable fashion. This fact makes it imperative that each airline attempts to find those traits on which the other airlines may need improvements in and then trying to take advantage of the situation by setting yourself apart from your competitors.
Average Price per Ticket and Quality

One of the most obvious differences among airlines is the cost of the ticket. It does not matter if the trip is for business or pleasure; all entities are trying to stretch their travel budgets while receiving the level of service and quality they believe they deserve. The following structural analysis compares the average price of an airline ticket for the most recent year in which the data has been collected (2006) and compares it to the number of power circles (out of 5) received by JD Power and Associates (2007 rankings). JD Power and Associates is a survey company who gives out awards based on customer reviews and is known in many industries as an excellent guide of service levels.

US Airline Industry Circa 2006

Analysis: While Delta has some of the higher fares in the group, its travelers recognized the quality of its overall product was better than five of the seven similarly situated airlines, except Continental (which won the award with a perfect five out of five in the "Traditional Network" category). JetBlue, winner in the "Low Cost" division, also received five out of five. It may be incongruous to compare the two divisions, as they have different structures in terms of labor contracts and other operational differences, but the fact remains that they do compete for the same customers who need to fly regardless of the airline's status of traditional or low cost.

Ticket Price and Type of Airline Carrier

In the United States, there are generally two types of airlines: "legacy carriers," which are defined as airlines that specifically operated interstate routes prior to the Airline Deregulation Act of 1978, and "low cost" airlines that compete solely on the basis of offering the lowest price per ticket within the market in which they are operating.

Each airline must decide which regions to serve, based on their profit potential and competition in a given market. Almost all airlines in the United States fly domestic and international routes, excluding small commuter/regional carriers ComAir, SkyWest, and other similarly positioned carriers. The legacy carriers in the following graph (1) operate numerous routes to many different corners of the world. In contrast, the low-cost carriers operate a very limited schedule to foreign countries, with only a handful of destinations in Canada and Mexico and none outside North America.

The legacy carriers have a higher operating cost and operate in most domestic markets, regardless of their ability to create shareholder wealth by operating in these markets. The low-cost airlines have been more prudent in their expansion and do not compete in every market, but are more selective in deciding on where to compete against the legacy carriers that have more capital, and more brand recognition. The legacy carriers, like Delta, are not able to compete directly on price with the low-cost carriers, but must be comparable or exceed the service and quality of all airline competitors.

US Airline Industry Circa 2006

Analysis: It is the industry norm for a legacy carrier (in partnership with its code share network) to offer service to most popular destinations; Delta reducing routes to a similar schedule as the low-cost airlines is not an option in this multi-billion dollar industry. In order to gain market share from low-cost airlines, Delta must offer a better product in terms of service. Many customers will pay a premium if the level of service provided is higher than the low-cost, no-frills alternative. Delta can use its advantage in the amount of capital over the smaller, low-cost airlines by investing in more comfortable seats, better facilities, and an increase in customer service personnel. If Delta is able to pull customers from Southwest and other low-cost competitors, the competitors' margins may drop to unacceptable levels and they may pull out of a market-leaving Delta to reap the benefits of its legacy status. While many people travel on price alone, if Delta can gain brand allegiance among legacy carriers, it will benefit the whole Delta system.
Eight Forces that Affect Profitability, Risk and Strategy

In recent years, the airline industry in the international realm and in the domestic arena has seen its fair share of turbulence. With rising jet fuel prices and increased competition, the industry is as competitive as ever. Yet, with increasing consumer and business use of air travel, airlines are finding themselves scrambling for identification that will set them apart from the rest. The eight factors that influence and determine the returns an airline receives are represented by the competitive forces model. (2)
Direct Industry Competitors

When looking at the model, several premises show through with an underlying explanatory analysis of a specific industry. Factors that include fuel, labor, costs, events, and even seasons influence the industry competition and how competition is rendered in the forces model. Identifying specific competitors can significantly reduce costs and increase a firm's focus on identified risks. Short of disruptive innovations, Delta Air Lines must recognize its need to grow in order to beat out its competition. Although the international airline industry is extreme in its efforts to price cut, the overall industry has very little motivation to tighten its return on sales. This paper has successfully identified, using composite total revenues, the closest competitors that can be close substitutes:

Delta Logo   American Airlines Delta Logo   Jet Blue
Delta Logo   Northwest Delta Logo   U.S. Airways
Delta Logo   AirTran Airlines Delta Logo   Southwest
Delta Logo   United Airlines Delta Logo   Continental Airlines


With Delta Air Lines in mind and the financial information referenced in Appendix A, four airlines were specifically identified as comparable competitive substitutes. As seen in the following chart, United Airlines, American Airlines, Continental Airlines, and (perhaps soon to be a part of Delta) Northwest Airlines all displayed similar characteristics that drove them to directly participate in domestic and international air travel:

Industry Competitors of Delta Airlines

Threats from Substitutes

The technological advancements in the past fifty years have been astronomical in creation of new, highly efficient tools that range from medical advances to space exploration innovations. Inside of this ever-growing journey of technological advances is transportation. With increased efficiencies in modes of transportation, greater threats to the airline industry present themselves. In order to fully understand what types of substitutes pose a threat to the airline industry, one must first screen possible substitutes to each prospect in the transportation trade. The main modes that could present themselves include railway, oceangoing vessels, and motor vehicles. With price-performance tradeoffs in mind, ocean transportation is limited in its appeal, as it lacks the advantage of speed in transatlantic crossings. This leaves railways and motorized transportation, which includes passenger buses and cars. These two modes have always been options that are easily substituted for air travel. With oil prices increasing at a regular rate and even more so jet fuel costs increasing, both airlines and road transportation seem increasingly unattractive for business or pleasure travel. From Greyhound buses to Enterprise Rent-a-Car, companies are trying to differentiate in the travel industry and all competing against the same negative factor: fuel. With innovations in fuel-efficient motors and increased options from ground transportation companies, the travel industry is facing the hard realities that consumers' price-performance evaluation and the industry wide price elasticity have led to a more complex travel industry.

Potential Entrants

Although the airline industry has seen better times, the market is still hot and demand is still high. Because of this, new entrants are always a threat to existing airlines. The more airlines there are, the lower prices will be-due to competitive forces that drive prices down. It would be damagingly na´ve for Delta to assume that the market share it currently holds with other airlines is relatively safe. With this in mind, a few airlines are making an attempt to enter the American domestic air travel industry. One surprising firm that wishes to expand its small operations out of Florida to a mainstream, national consumer base is Disney (3). With guidance from Disney's already successful travel lines (including cruise ships), there is no reason Disney should not be able to encroach on the commerce sector of airline transportation. Many foreign competitors to the United States' international airlines are starting to look into the possibility of extending flight operations on American soil. These airlines include Brazilian Airlines Azul and Germany's Lufthansa; there have also been talks of Air France and British Airways making regular flights from domestic cities in America to other American cities. With new entrants into the marketplace, buyer inclination to specific airlines will increasingly become important to the overall strategic success of Delta.

Suppliers Power

The airline industry has seen few additions and changes to its suppliers market. The two main suppliers that supply to the majority of the airlines are Boeing and Airbus. These suppliers control almost 92% of the entire market of aircraft design and construction. This situation creates little rivalry and a lack of industry intensification. Because supplier power is greatest when they are few in numbers, the supply side of aircraft is somewhat set in stone. The ability for an airline to switch suppliers is limited and could incur extreme, bank-breaking costs.

Although domestic airlines are relatively restrained from gaining suppliers across borders (due to current instability of the U.S. dollar), costs for commercial airliners in Europe are lower; Delta could look into this further. With focus on the supply side of the industry, Delta must look at the possibility of vertical integration with Boeing or Airbus. Although Airbus and Boeing openly state that their core competencies have no infusion with actually flying (4), Delta still needs to consider all options for any type of integration, whether vertically through suppliers or horizontally through consolidation.

Buyers and Buyers Bargaining Power

The overall bargaining power presented to airline passengers is weak to moderate. This is due to many factors. First, costs incurred in switching one's ticket from one airline to another is fairly high. Second, airlines set ticket prices without allowing consumers to barter on price. However, the principle of threat credibility in buyer power force comes into play with the innovative ticketing websites that have been introduced in recent years. Websites such as Travelocity and Kayak receive ticket information from all airline websites. Rather than searching by luxury amenities (such as fully reclining seat-backs), nearly all consumers search on price. To lower costs, Delta has introduced low fares that can only be found on its website-requiring customers to buy tickets direct.

Complementors

Complementors are crucial to the advancement of Delta's services. When a specific advantage or product enhancement affects the overall demand for another product, it can be referred to as a complementary force. Specifically for Delta, complementors can make or break whether a customer chooses to fly with them or another airline. This is where safety can be exploited by Delta in order to gain increased demand from the general public. If and when Delta develops a safety standard that utilizes the most technologically advanced safety materials and computers, demand will most certainly increase ticket sales. In-flight media and entertainment could also contribute to Delta's demand. If technology in satellite and other media services were to become cheaper to transmit by a source (i.e., DirectTV, Dish Network, etc.) and was implemented by Delta Air Lines as a standard in all of their consumer aircraft at little additional cost, demand could and most likely would increase dramatically.

Market Change: Growth

Only firms that are willing to adapt and enhance change are going to survive in the long-run. Change is an ever-evolving force in the airline industry. New and advanced innovations are always needed and usually accepted by the most progressive, revolutionary airlines. When this is achieved, market growth will occur. "Growth starts with the introduction of an innovative product that addresses a latent need (5)." Delta has pioneered several innovations that have contributed to overall growth of the airline industry. In the late 1990's, Delta introduced the idea of separate check-in located in a completely different check-in line-the e-ticket kiosk. The kiosk allowed patrons to purchase tickets and use a simple ticket voucher as a boarding pass. This significantly decreased lines at regular ticket counters and associated staffing costs-an innovation quickly copied by other airlines. The example of the e-ticket kiosk is a subtle yet key addition to the airline industry. It also could be identified as a disruptive form of market change. When growth occurs, it is usually due to an increase in buyers (in Delta's case, an increase in passengers) attributed to a seasonal influx of air travelers. When Delta introduced its frequent flier program, flights from existing customers increased due to the draw of free flying after attaining a certain mileage. This is another example of a non-disruptive change in market growth. Disruptive change, as mentioned earlier, could indeed be harmful to the overall structure of the airline industry were it to come from another form of transportation (6).

Market Change: Turbulence

When turbulence occurs in the airline industry, it is usually in the sky and not in the trade itself. When customer demands evolve and are not met by reactive (preferably proactive) changes by companies, the rate of return diminishes greatly. Customers' changing expectations and partialities are measured by market turbulence. This force may also include changes in technologies and efficiencies that lead to an advantage over another competitor. One change that has stirred up the entire airline industry is the increasing fuel prices and reactively increasing ticket prices. Rather than trying to find the cheapest option, some consumers are choosing to stay home.

In an industry where costs of travel are "flying," barriers to imitation become extremely important to the overall success of an airline. Delta has successfully created economies of scale in all of the United States, specifically the Midwest and South regions. Competitive advantage cannot be stressed enough in any form of business. This is even truer in the cutthroat airline business. When strategic modeling for financial, market, and competitive analysis is needed, the eight forces model allows for a comprehensive analysis of specific markets and competitors.
Financial Analysis of Delta and Competitors (7)

Financial data (Appendix A) has been taken from the past five years for Delta and its four major competitors: United, American, Northwest and Continental. Data for Southwest is also included, to benchmark these figures against the low-cost industry leader. As the table shows, the data has been broken down into three charts to analyze and compare the financial situation of Delta to its competitors. The three charts that will be discussed are the following: net income, return on assets ratio, and debt-to-equity ratio. These figures will be analyzed to give a comparison of Delta's financial situation to its industry.
Return on Assets (ROA)

Definition: Return on assets (ROA) is "an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings (8)." This is an important ratio analysis to compare Delta's ROA to its competitors to tell how Delta has used their earnings from invested capital.

ROA of Delta Airlines

Analysis: Starting in 2003, the ROA for Delta was negative 0.06 which shows that they had a terrible return on their assets but ended third compared to the industry. In 2004, they had an even greater loss on their return and ended last compared to industry at negative 0.22. In the following year, they were able to improve their return slightly but still were getting a negative return of 0.18 and ended third. Once again they took another hit in 2006 on their return and ended in last place at a loss of 0.31. This was their worst return out of the five-year analysis. Finally, in 2007, they were able to have a positive return on their assets at 0.07 which indicates that the company was finally making earnings on their assets. In that year they ended second only to Northwest, who had a return of 0.11.

Conclusion: As the data indicates, Delta was able to turn their negative return on assets around in 2007 to start making earnings on their assets. They were able to improve their position to second. Delta had the worst average overall, compared to the industry's average.

Debt to Equity

Definition: The debt to equity ratio is used to measure the financial leverage of a company. "A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense (9)." Having a high debt to equity ratio is good for the shareholders, who would benefit from it. "However, the cost of this debt financing may outweigh the return that a company generates on the debt through investment and business activities and become too much for the company to handle (10)."

Delta Airlines Debt to Equity

Analysis: In 2003, Delta's debt to equity ratio was devastating at 40.99, which put them in last compared to the industry. They were able to greatly improve this ratio in the following year to negative 4.76, which put them in third place. They continued to improve their debt to equity in 2005 to negative 3.03 and they stayed in third place. For the first time in the past few years of analysis, Delta's debt to equity ratio was positive at 0.59 but even still, they ended in last place to the industry. Finally, in 2007, they continued improving their ratio to 1.17 and were in third place which gave the shareholders the greatest benefit compared to the previous years in the analysis.

Conclusion: As seen in the table, Delta was able to go from a negative 40.99 ratio to a positive 1.17 over the five years which greatly increased the benefit to the shareholders and also were able to increase their earnings. Note that the average of American is an outlier in this case, and therefore increases the grand mean for the industry. Even taking this into account, Delta is way below the industry's average with an average of negative 9.40.

Benchmarking of Industry Leader (Southwest Airlines)

Southwest has been very successful as a low-cost regional (now national) leader in the airline industry, which is why we decided to use them as an outlier in our table to compare to Delta. Over the past five years, Delta has lost an average of 2.9 billion in net income, while Southwest has been able to sustain an average profit of 489 million. On average, the return on assets (an important measure of how profitable the firm is doing) was negative 0.14 for Delta and a positive 0.05 for Southwest, which indicates that Southwest has been very successful in providing a return on its assets. The average debt to equity ratio for Delta was negative 9.40, which shows that they have an extremely low financial leverage compared to Southwest having a much better financial leverage at positive 1.35. Even though Southwest is a much smaller company, they have been able to continuously excel in the airline industry because of their efficiencies.
II. Company Strengths and Weaknesses

Delta Air Lines draws on a number of solid strengths in the company's efforts to compete in the airline industry. Many of these are based on its historic competencies, and others have been developed in recent years.
Company Strengths and Competencies
Employee Loyalty

With Delta's long history spanning over 80 years as a carrier, the company has instilled a sense of history into its brand. Delta's employee loyalty was legendary and only made more prominent when in 1982, while Delta was suffering from financial troubles, its employees took a voluntary pay cut. The company used the proceeds to purchase the company's first 767, its largest plane at the time, which was then called "Spirit of Delta." Following this time, Delta was once again profitable for several years.

Code-Sharing

Delta Air Lines also played a big part in the broadening use of code-sharing between various airlines. Code-sharing is an agreement between carriers, wherein a flight operated by an airline is jointly marketed as a flight for one or more other airlines. Currently, Delta Air Lines is in the code-sharing SkyTeam Alliance with Continental and Northwest airlines as well as various others throughout the world.

Technology

When first looking at Delta Air Lines, many different things stand out pertaining to how the company differentiates itself from the rest of the airline industry. The types of technology employed within the aircraft are substantial, ranging from audio and video entertainment within all of their aircraft (excluding MD-88's), to their idea of implementing a feature for passengers to being able to dock their Apple iPod portable music and video players, allowing them to both charge the device as well as display the contents onto their own personal TV's. Outside of the aircraft, Delta has innovated in the way of implementing airport kiosks; at the time, a significant innovation in the industry.

Main Hub Location

The most traveled airport in the world is Hartsfield-Jackson Atlanta International Airport, flying more than 994,000 aircraft and accommodating more than 89.4 million passengers annually. Hartsfield-Jackson Atlanta International Airport is also one of Delta Air Lines' main hubs within the US. Because Delta controls three of the six concourses outright, as well as having other major gate access within the remaining concourses, Delta Air Lines flies 56% of the passengers from the airport. This gives the company a distinct advantage over its competition, since it would be harder for other airlines to come in and control a vast majority of the flights like Delta currently does.

Delta also is the leader in world destinations, serving over 300 countries. It is also the leading carrier across the Atlantic, with 37 destinations-including Delta being the only major US carrier that flies to Africa.

Luxury

Luxury and amenities for passengers are sought-after in the airline business, and Delta Air Lines looks after everyone who decides to fly with them. For its First and Business classes, new seats are being installed on all of its major aircraft, including new Recaro seats with a built-in massage feature and their new sleeper suite product for international flights. Economy class seats are getting revamped too, with the addition of a half moon design and a staggered formation of the chairs to allow more privacy and easier rest as well as add two more inches to its current legroom.
Evaluation of Core Competencies
Luxury

Ability to gain access to wide variety of markets: Luxury in this case doesn't help Delta get into various other markets.

Provides a perceived added benefit to the end product for customers: Luxury has always added benefit to the end product, but in this case it is especially true when used in conjunction with long flights where comfort is essential to staying happy.

Difficult to imitate: Within the airline industry, luxury can easily be duplicated by competition, making it only a short-lived amenity before becoming a staple throughout the various carriers.

Technology

Ability to gain access to wide variety of markets: The technology used by Delta Air Lines has helped it establish the brand as an industry leader in some aspects, including Delta Air Lines becoming a founding partner in Orbitz. This allowed Delta to share information more readily with the public as well as work with hotels, car rental companies and full-on vacation packages to initiate flights to destinations.

Provides a perceived added benefit to the end product for customers: The technology Delta has used throughout the years has added perceived benefit in that customers could now use the airport kiosks to help expedite the ticketing process. Also within the planes, the Apple iPod docking feature will enable users to readily access their stored movies/music, giving them more options on what to do during the duration of the flight.

Difficult to Imitate: Technology within the airline industry does not stay proprietary for very long, meaning that all carriers soon adopt the new method to stay competitive with one another.

Employee Loyalty

Ability to gain access to a wide variety of markets: Although employee loyalty within the company may separate Delta from other airlines, it does not enable them to access a wider variety of markets because of it.

Provides a perceived added benefit to the end product for customers: Faith within the company is a big part of customer loyalty and when one sees that the employees take voluntary pay cuts or refuse to unionize, that shows that the employees are committed to the company they work for.

Difficult to Imitate: Employee loyalty is very hard to imitate since it is a perception rather than a physical thing that a competing firm can reproduce.

Conclusion

This analysis shows that Delta currently has no core competencies; the company must differentiate itself further to be successful in the competitive airline industry.
Company Weaknesses
Subsidiaries

Over the years, Delta Air Lines has spent a lot of valuable time and money in search of a successful low-cost fare competitor to that of JetBlue and Southwest. Delta Express was started in 1996, but was not successful and thus shut down in 2003 to make way for Song. Started as a direct competitor to JetBlue, Song only last three years before folding under a low-fare, high-cost structure that only increased Delta's debt. None of these attempts at a low-fare subsidiary have been entirely successful, and have detracted from-rather than contributed to-Delta's overall success as an airline. Presenting the various fronts for Delta may be confusing for the flying public. These repeated attempts to enter the low-fare market detracted a significant amount of focus from Delta's core business.

Bankruptcy

In September 2005, Delta made a voluntary filing with the U.S. Bankruptcy Court for Chapter 11 bankruptcy. Chapter 11 allows the airline to continue to conduct its normal operations while it undergoes corporate restructuring. Delta's transformation plan is focused on "developing and implementing a plan to make Delta a simpler, more efficient and cost-effective airline (11)." Delta cited high labor costs and record-breaking jet fuel prices as factors in its filing, which, at the time, had $20.5 billion in debt, $10 billion of that accumulated since January 2001.
III. Current Company Strategy
Generic Strategy: Differentiation

The extensive flight service and brand legacy of Delta Air Lines is recognized throughout the airline industry as unique. Evidence of this can be found in the recent merger proposals from U.S. Airways, United and Northwest, each of those companies publicly acknowledged that the "combined company" would take on the Delta name.

However, Delta has also made some missteps in its differentiation strategy including its attempts to launch a low-cost airline brand, its many route eliminations, and some announced services not yet implemented (i.e. iPod docking). Overall, the brand image of Delta has fared well despite the negative publicity generated by its bankruptcy.

Company Strategies and Objectives

Delta has specific strategies that comprise its overarching competitive strategy.
Customer Satisfaction and Rewards Strategy

The foundation of Delta's differentiation is its customer service throughout the travel experience, premium in-flight offerings and rewards programs for frequent flyers.

In 2007, J.D. Powers and Associates judged eight airlines in its "traditional network" category ("low-cost airlines" competed separately) (12). Delta Air Lines ranked second in Overall Satisfaction of these carriers, following only Continental. This overall rating was based on Delta's strong showing in seven of the eight categories: Check-In, Boarding/Deplaning/Baggage, Aircraft Condition/Cleanliness, Flight Crew, In-Flight Service and Overall Cost. The only measure where it lagged competitors was Flight Reservations/Scheduling. Clearly, Delta strives to deliver a superior customer experience in all points of contact with the company.

In the "Best of Business Travel Awards" from Business Traveler Magazine (January 2008), Delta was again recognized in three categories: Best Frequent Flyer Program, Best Airport Lounges and Best Airline Web Site (14). These rankings spotlight key differentiators that Delta offers to business travelers, who often look for more than simply the lowest cost in choosing a corporate travel partner.

Employee Retention and Rewards Strategy

Delta Air Lines employs over 55,000 personnel as of 2007, with approx. 17% represented by unions. This is in contrast to other legacy airlines, where all employees are unionized. Delta has a history of high employee morale and loyalty-even through its recent bankruptcy proceedings. During a hostile takeover bid from U.S. Airways, Delta staff supported management in rejecting the offer despite claims of benefits to Delta personnel. Employees launched a grassroots campaign called "Keep Delta My Delta" which featured buttons, petitions and statements explaining why Delta should reject U.S. Airways' proposed merger (the offer was withdrawn in early 2007.) Conversely, the recent support of Delta's pilots union for the Northwest merger should ensure a smooth transition to a new global airline, pending approval of government regulators. On May 28, 2008, Delta employees voted to reject a representation offer from the Association of Flight Attendants in favor of retaining direct relationship with Delta management (15).

The airline industry is highly labor-intensive, and it is vital for Delta to keep its workforce motivated and satisfied. Overall, Delta's employee strategy is to retain its employee base by providing above-average compensation and open communication-more so than in typical union-run airlines. Delta offers extensive benefits to its employees, including full medical coverage, 401(k) savings plan, and, of course, free travel (16). One primary reason that Delta has long pursued a merger with Northwest Airlines is that few staff positions would be affected by such a move, due to only 1% overlap in the routes served by the two carriers. Upon its launch, Delta is also offering employees a 4% equity stake in the new global airline.

Marketing and Promotion Strategy

The airline industry continues to be in a state of upheaval, as the importance of price continues to trump other consumer considerations. As an airline founded on differentiating itself through service, Delta has struggled to find a concise and compelling way to tell its story. Fragmented audiences and channels have led to consumers who tune out traditional advertising, and Delta has largely discontinued such typical tactics.

For a legacy carrier, Delta has been surprisingly savvy in establishing a presence on the internet. In 2007, building on its employees' own grassroots campaign, Delta launched a website called "Keep Delta My Delta" which featured e-mail petitions and other means for consumers to engage in the company's "battle" against U.S. Airways. In 2007, Delta created a legitimate YouTube hit with its new in-flight safety video-viewers online dubbed the video's featured flight attendant "Deltalina" and the exposure increased traffic to Delta.com. Delta recently designed-in just 60 days-a website called NewGlobalAirline.com (presumably with input and endorsement from Northwest). The slick website, including a profile on the social networking website Facebook, contains details on how the proposed merger will benefit consumers, communities, and employees of the combined airlines (17). Delta has wisely realized that typical billboard-and-TV advertising is on the way out, and that innovative channels with rich information must be developed for today's digital consumers.
IV. Strategy Implementation
Organizational Structure
Machine Bureaucracy

Though previously operated under other organizational structures (i.e. simple structure), today a machine bureaucracy drives the company-wherein standardization of work is its key means of coordination, and the company's technostructure (i.e. legal and financial staff) is viewed as a key part of the organization.

Board of Directors

The ten voting members of Delta's Board of Directors include leaders of reputable companies and Delta CEO Richard Anderson. Currently serving as Chairman of the Board for Delta, Daniel Carp was formerly Chairman and CEO of Eastman Kodak Company. To ensure input from Delta's pilots, a non-voting member (former pilot Kenneth Rogers) sits on the board as their representation.

Key Committees

The Board of Directors is assisted by four key committees, also run by outside directors from reputable companies. These committees meet throughout the year and formulate recommendations regarding vital policies: auditing, corporate governance, personnel and compensation, and finance.
Management Style

Any company in the airline industry must achieve a careful balance between hard-line management practices (driven by cost reduction) and benefits offered to its pilots, flight attendants and support staff. Delta management has tended to rely on achievements that may result in short-term gains, rather than long-term results-such as its attempt to launch a low-cost airline. Such publicity ploys have not endeared management to employees (who prefer a stable, defined strategy) nor to the investing marketplace. However, Delta has long been known as an advocate for its employees-who have chosen multiple times to reject union representation and instead rely on direct negotiation with management.

Current Systems and Processes
Airline Routes

The destinations map of Delta is based on the hub-and-spoke system, which the airline has used to maximize its reach. Because it is relatively easy to add a "spoke" to an existing hub, Delta now covers most points in the continental U.S. through four major hubs and its emerging hub based in Los Angeles.

Capacity Allocation

In the past two years, Delta has strategically restructured its hubs. The company has decreased its available seat miles (ASM) through its five hubs, and subsequently increased its revenue per available seat mile (RASM).

SkyTeam Alliance and Code-share Agreements

Though the One Alliance (American Airlines) and Star Alliance (-) preceded the SkyTeam international alliance, Delta is now recognized as the world leader in offering international travel. The company's Atlanta hub, which flies to five continents, is a key part of this strategy. Overall, Delta flies to 461 destinations in 96 countries. Another unique aspect of SkyTeam is Delta's domestic alliance with Northwest and Continental; Delta recognizes that code-sharing with these carriers ultimately increases the options offered to its customers.
V. Recommendations and Conclusions
Proposed Strategic Changes
Capacity Reallocation: International Expansion

As Delta has proven that international expansion is a more profitable opportunity than adding domestic flights, the company should pursue this market. This strategic move builds on Delta's current lead position in international travel, and it avoids low-cost competition from Southwest (the airline continuing to expand into and dominate domestic markets). According to Delta's plan of reorganization filed in December 2006 (18), Delta plans to diversify their international capacity. The company plans on having a domestic/international capacity mix of 60 to 40 in 2009. Currently, the mix is 70 to 30. By planning to expand specifically in the Asia/Pacific, Latin America, and Africa/Middle East/India regions, Delta is on-track to sustain profitability in the airline industry.

Marketing Promotion: Back to 1924

At Delta Air Lines, customer satisfaction is and always has been top priority. Delta believes that the firm can make flying an experience like no other! One recommendation deals directly with Delta's past-the fact that this airline is the longest-running, founded in 1924. In the 1930's and 40's, flying was a privilege, an event that often required a patron to dress up. At that time, airlines ran almost 100% on-time and customer satisfaction was part of the purchased ticket. We propose that Delta Air Lines return to its heyday and make flying an extravagant event to be experienced. This attitude change would not need to affect ticket prices by any noticeable margin. It could essentially start out in business class, and work its way to regular coach as a short-term (10-18 months) promotional investment. With focus back on the "class" of flying, patrons that fly Delta Air Lines will feel as if they are living in opulence when they fly and will be reminded of the pleasures of taking flight in the skies! This strategy will require some employee training in proper etiquette, to ensure the portrayed brand image lines up with the experience of customers.
Conclusions

The future of Delta Air Lines appears to be bright. There has been a great deal of turbulence within the domestic airline industry during the last decade, but Delta has weathered the storm with the most success compared to their competitors. Delta has been an innovator of several customer-friendly features (self check-in kiosks) and has not hesitated to use their bankruptcy proceedings to take a more defined look within the organization with regards to their strategy, route structure and other business practices.

While rising fuel and labor costs may be cause for financial concern, these are market factors felt throughout the entire industry. Despite the limited ability to control these costs, Delta should able to continue differentiating itself to the flying public by continuing the legacy of superior customer service at a comparable rate.

Management's vision to see potential growth on the international stage with an anticipated increase in overseas market share, and the pending acquisition of Northwest, give a feeling of excitement, anticipation, and hope that has not been widespread in the airline industry for a long time.

With the changes and plans previously outlined in this paper, Delta Air Lines has been cleared for takeoff back into the black. but investors beware, you may want to keep your seatbelt securely fastened as the airline industry as a whole appears to be headed for a very bumpy ride.

Appendix A: Financial Data for Delta and Competitors
Year 2007 (millions of USD) Delta United American Northwest Continental Southwest
Total Revenue 19,154 20,143 22,935 12,528 14,232 9,861
Operating Income 2,311 1,037 965 2,655 687 791
Net Income 1,612 403 504 2,093 459 645
Total Assets 26,755 24,220 28,571 24,517 12,105 16,772
Total Liabilities 22,804 21,802 25,914 17,140 10,555 9,831
Total Equity 3,951 2,418 2,657 7,377 1,550 6,941
Cash from Operating Activities 1,359 2,134 1,935 1,376 1,133 2,845
Ratios            
ROA 0.07 0.02 0.02 0.11 0.04 0.04
ROE (0.33) 0.18 0.49 (6.82) 0.48 0.10
Current 0.79 0.76 0.85 1.23 1.03 0.92
Quick 0.58 0.56 0.66 0.93 0.77 0.63
Debt to Equity 1.17 1.11 1.10 1.43 1.15 1.71
EPS 5.42 2.80 1.78 15.58 4.18 0.84
Year 2006 (millions of USD) Delta United American Northwest Continental Southwest
Total Revenue 17,532 19,340 22,563 12,568 13,128 9,086
Operating Income (6,148) 23,381 1,060 (2,425) 468 934
Net Income (6,203) 22,876 231 (2,835) 343 499
Total Assets 19,622 25,369 29,145 13,215 11,308 13,460
Total Liabilities 33,215 23,221 29,751 21,206 10,961 7,011
Total Equity (13,593) 2,148 (606) (7,991) 347 6,449
Cash from Operating Activities 993 1,539 1,939 1,245 1,058 1,406
Ratios            
ROA (0.31) 1.02 0.01 (0.22) 0.03 0.04
ROE 0.53 (1.95) (0.22) 0.42 1.20 0.08
Current 0.93 0.79 0.81 1.11 1.04 0.90
Quick 0.62 0.62 0.67 0.84 0.78 0.69
Debt to Equity 0.59 1.09 0.98 0.62 1.03 1.92
EPS (31.58) 196.80 0.98 (32.48) 3.30 0.61
Year 2005 (millions of USD) Delta United American Northwest Continental Southwest
Total Revenue 16,191 17,379 20,712 12,286 11,208 7,584
Operating Income (2,001) (219) (93) (919) (39) 820
Net Income (3,818) (21,176) (861) (2,533) (68) 548
Total Assets 20,039 19,342 29,495 13,083 10,529 14,218
Total Liabilities 29,934 44,902 30,973 18,711 10,303 7,543
Total Equity (9,895) (25,560) (1,478) (5,628) 226 6,675
Cash from Operating Activities 175 1,079 1,024 (437) 457 2,229
Ratios            
ROA (0.18) (1.06) (0.03) (0.19) (0.01) 0.04
ROE 0.49 1.27 0.84 0.58 (0.28) 0.09
Current 0.85 0.81 0.74 1.07 1.01 0.94
Quick 0.54 0.51 0.58 0.66 0.73 0.72
Debt to Equity (3.03) (1.76) (20.96) (3.32) 45.59 1.13
EPS (23.75) (182.30) (5.18) (29.36) (0.97) 0.60
Year 2004 (millions of USD) Delta United American Northwest Continental Southwest
Total Revenue 15,002 16,391 18,645 11,279 9,744 6,530
Operating Income (3,308) (854) (144) (505) (229) 554
Net Income (5,198) (1,721) (761) (862) (363) 313
Total Assets 21,801 20,705 28,773 14,042 10,545 11,337
Total Liabilities 27,597 28,385 29,354 17,129 10,279 5,813
Total Equity (5,796) (7,680) (581) (3,087) 266 5,524
Cash from Operating Activities (1,123) 99 717 271 373 1,157
Ratios            
ROA (0.22) (0.08) (0.03) (0.06) (0.03) 0.03
ROE 1.61 (0.24) 2.84 0.34 (0.69) 0.06
Current 0.61 0.61 0.71 0.80 0.87 1.01
Quick 0.42 0.35 0.54 0.65 0.62 0.73
Debt to Equity (4.76) (3.70) (50.52) (5.55) 38.64 1.05
EPS (41.07) (15.30) (4.68) (10.32) (6.25) 0.27
Year 2003 (millions of USD) Delta United American Northwest Continental Southwest
Total Revenue 13,303 13,724 17,440 9,510 8,870 5,937
Operating Income (786) (1,360) (844) (265) 203 483
Net Income (773) (2,808) (1,228) 248 38 442
Total Assets 26,356 21,979 29,330 14,154 10,649 9,878
Total Liabilities 27,015 27,895 29,284 16,165 9,857 4,826
Total Equity (659) 21,979 46 (2,011) 792 5,052
Cash from Operating Activities 453 1,001 601 375 342 1,336
Ratios            
ROA (0.06) (0.26) (0.08) 0.04 0.01 0.09
ROE 2.35 (0.26) (53.39) (0.25) 0.10 0.17
Current 0.75 0.66 0.71 0.93 0.90 1.34
Quick 0.51 0.43 0.52 0.76 0.66 1.16
Debt to Equity (40.99) 1.27 636.61 (8.04) 12.45 0.96
EPS (6.40) (27.40) (7.75) NA 0.41 0.46




Net Income Comparison
Net Income (millions of USD) 2003 2004 2005 2006 2007 AVG
United (2,808) (1,721) (21,176) 22,876 403 (485)
American (1,228) (761) (861) 231 504 (423)
Delta (773) (5,198) (3,818) (6,203) 1,612 (2,876)
Continental 38 (363) (68) 343 459 82
Northwest 248 (862) (2,533) (2,835) 2,093 (778)
Southwest 442 313 548 499 645 489
Grand Mean (701)




ROA Comparison
ROA (millions of USD) 2003 2004 2005 2006 2007 AVG
United (0.26) (0.08) (1.06) 1.02 0.02 (0.07)
American (0.08) (0.03) (0.03) 0.01 0.02 (0.02)
Continental 0.01 (0.03) (0.01) 0.03 0.04 0.01
Southwest 0.09 0.03 0.04 0.04 0.04 0.05
Delta (0.06) (0.22) (0.18) (0.31) 0.07 (0.14)
Northwest 0.04 (0.06) (0.19) (0.22) 0.11 (0.06)
Grand Mean (0.03)




Debt to Equity Comparison
Debt to Equity (millions of USD) 2003 2004 2005 2006 2007 AVG
American 636.61 (50.52) (20.96) 0.98 1.10 113.44
United 1.27 (3.70) (1.76) 1.09 1.11 (0.40)
Continental 12.45 38.64 45.59 1.03 1.15 19.77
Delta (40.99) (4.76) (3.03) 0.59 1.17 (9.40)
Northwest (8.04) (5.55) (3.32) 0.62 1.43 (2.97)
Southwest 0.96 1.05 1.13 1.92 1.71 1.35
Grand Mean 1.67




Airline Revenue Comparison
Airline revenue (millions) 2008 2007 Change
AMR (328) 81 (409)
AirTran (35) 2 (37)
Alaska (36) (10) (26)
Continental (80) 22 (102)
Delta (290) (130) (160)
JetBlue (8) (22) 14
Northwest (222) (292) 70
Southwest 34 93 (59)
UAL (537) (152) (385)
US Airways (236) 66 (302)
Total (1,738) (342) (1,396)




Sources

    1. "Airline Data Project," Massachusetts Institute of Technology, 30 May 2008 http://web.mit.edu/airlinedata/www/Revenue&Related.html

   
2. Olson, Eric M. and Stanley F. Slater (2002), "A fresh look at industry and market analysis," Business Horizons, 45 (January-February) p. 15-22

    3. "New Airlines: Azul's Livery Revealed," Jaunted.com, 29 May 2008, http://www.jaunted.com/story/2008/5/29/112433/343/travel/New+Airlines:+Azul's+Livery+Revealed (30 May 2008)

    4. "U.S.-EU Aviation Talks Bring Prospect of Broader Markets," News Blaze, 28 May 2008, http://newsblaze.com/story/20080528073914tsop.nb/newsblaze/WORLDNEW/World-News.html (30 May 2008)

    5. "Boeing: About Us - Culture," Boeing.com, 2008, http://boeing.com/aboutus/culture/index.html (30 May 2008)

    6. "Creative destruction and globalization," Goliath - Business Knowledge on Demand, 1 January 2008, http://goliath.ecnext.com/coms2/gi_0199-3894486/Creative-destruction-and-globalization.html (30 May 2008)

    7. Morningstar Data Figures, http://www.morningstar.com (30 May 2008)

    8. Return on Assets" definition, Investopedia.com, 2008, http://www.investopedia.com/terms/r/returnonassets.asp (30 May 2008)

    9. Ibid. 8

    10. Ibid. 8

    11. "Delta Air Lines - Plan of Reorganization," Delta.com, 19 December 2006, http://images.delta.com.edgesuite.net/delta/pdfs/speeches_pres/investor.pdf (30 May 2008)

    12. "2007 North America Airline Satisfaction Study," JDPower.com, 2007, http://www.jdpower.com/travel/ratings/airline-ratings/traditional-network (30 May 2008)

    13. "Best in Business Travel Awards," Business Traveler Magazine, January 2008, http://www.btusonline.com/article.php?a=1&id=177 (30 May 2008)

    14. "Delta Air Lines, Inc. 2007 Annual Report," Delta.com, 31 Dec 2007, http://images.delta.com.edgesuite.net/delta/pdfs/annual_reports/2007_10k.pdf (30 May 2008)

    15. "Delta Flight Attendants Reject AFA Representation," Delta.com, 28 May 2008, http://news.delta.com/article_display.cfm?article_id=11078 (30 May 2008)

    16. "Join the Delta Crew," Delta.com, 30 May 2008, http://www.deltajobs.net/travel_and_benefits.htm (30 May 2008)

    17. "Delta-Northwest Create the Press Release of the Future," HBR Blog, 16 April 2008, http://conversationstarter.hbsp.com/2008/04/communication_deltanorthwest_c.html (30 May 2008)

    18. Ibid. 11



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