Delta Air Lines: The Low-Cost Carrier Threat

Recently the delta airlines are facing tough competition from the low-cost carriers like
southwest airlines and JetBlue as a response to this competition delta airline is considering
the possibility of introducing its own low-cost airlines subsidiary. So the major challenge is
to stay ahead of the competition while providing low-cost services in the midst of the
challenging conditions of the airline industry.

The Airline Industry in the united states

US airline industry is more than 620 million passengers and has revenues over 81 billion in
fares in 2001. Since the deregulation in U.S industries, five of the major largest carriers return
on investment is below their cost of capital.

The airlines' margin since the deregulation in 1978, was below the average margin. Airlines
average return on the investment was less than the cost of the capital. Most of the airlines
operated under the regulation and civil aeronautics board were responsible for managing the
routes of each carrier and since it was managing the operation, the profitability was high.

However, being protected by the –cost-plus pricing, airlines companies, commonly agreed to
the demands of the labour union. Due to the industry’s environment during the regulation, the
airline companies used to charge higher prices for the tickets that were double than what they
used to charge in the deregulated environment in order to compensate the costs.

Moreover, the airline companies incurred very high fixed cost in terms of maintaining the
rouets and operations in addition to the expensive labour. Due to this, they started finding
ways to improve profitability while exposing other routes exploiting customer loyalty and
decreasing the cost. Further, after deregulation, they developed the system to increase the
load factor and reduce the turn around time which can earn them the higher returns than the
cost of capital.

Along with these problems, the airlines have to compete with the low cost carries like
southwest airlines and jetblue. They were gaining the market share very rapidly. The
deregulated U.S. industry was suitable for low-cost airlines and price-sensitive customers. So
that none of the five largest airlines earned the returns higher than the cost of capital.

Low-cost carrier competition

Southwest Airlines and JetBlue have differentiated themselves with low-cost positioning.
Which allow them to earn high margins from the customers despite of the tough social and
 Delta Air Lines: The Low-Cost Carrier Threat

economic environment. They focused on low-fare and point-to-point carrier with the highest
frequency to the customers in order to maintain their growth in the industry. The factor that
plays an important part in the success of these two low-cost carriers is the direct competition
with the other means of travelling. This helps Southwest Airlines and JetBlue to gain
profitability despite the heavy completion from the large airline carriers.

The Southwest Airlines target customers are those who use cars, buses and coaches while on
the other hand, Jet Blue offers low fares that are attractive to the bankers, fashion models,
finance officers as well as brokers.

However, Southwest Airlines and JetBlue did not compete directly with the larger airlines
and focused on the airports that are not served by larger airlines. These factors have played a
significant role in the success of Southwest Airlines and JetBlue. So to gain the customers
from the rials southwest has set the price fo the fare very low to increase the customer base
and which intern increased their load factor, which resulted in the high profitability for the
both southwest airline and Jetblue.

Furthermore, the strategy of Southwest Airlines and JetBlue is to compete with other means
of travelling and which gave them the sustainable competitive advantage over the five big
airlines Because of this, both carriers survived the tough completion and the worst
environment because of their low-cost leadership and differentiation with the five major
airlines while five airlines are making significant-high losses in the industry. Other airlines
are focuses on the hub and spoke model while southwest and Jetblue focused on the point to
point service which made them successful. Also, it made them compete with other travelling
alternatives.

Several events like deregulation and the 7/11 terrorist attack of 2001 worsen the social
environment of the U.S and people were reluctant to travel in the airlines. It impacted the
growth and profitability of all airlines including the southwest airline and Jetblue.

Southwest Airlines and JetBlue have established themselves as the low-cost carriers

 They are focused on the point to point model and low turn around time to increase the
flight frequency to serve customers
 Delta Air Lines: The Low-Cost Carrier Threat

Southwest Airline JetBlue Airline

Competes outside the Air industry like cars, Target customers bankers, fashion models and
buses, coaches finance officers

Yield 12.48 Yield 9.78

Load factor 68% Load factor 76.9%

The income per avg seat mile 0.97 The income per avg seat mile 0.83

Work closely with the labour union and profit No- labour union operating with few work rules
sharing and flexible work rules

Absence of meals Absence of meals but snacks available

A low-cost subsidiary of the largest carriers

 CA Lite – Complicated logistics and confused passengers. They were not able to
clearly differentiate the differences in the offerings of the business and economy
classes

 Shuttle - Ununionized labour was the driving factor for a low cost. But, due to
unionization, this differentiation no longer exists

 Metro jet – Received significant wage concession from the pilots and hoped to offset
the remaining cost differential with the strength of US Airways’ frequent flyer
program

The low-cost subsidiary doesn’t work because they are not low-cost carriers and their parent
companies hide the true expenses in the balance sheet.

Failure of the low-cost delta airline

 Express operated older Boeing 737-200s, each with 119 coach seats, and it served
only light snacks

 Major cost savings were lower labour costs and higher aircraft utilization
 Delta Air Lines: The Low-Cost Carrier Threat

 Low labour cost – significant concessions were obtained through negotiations with
the pilot’s union, resulting in a 32% pay cut

They mainly focused on the low cost and high utilization of the aircraft which they achieved
initially, but after 4 years of operations due to the salary hike and demand from the unions
with the management, it failed. Employee enthusiasm and flexibility was essential for low-
cost airlines to remain profitable. Delta personnel lacked the clear vision of the company and
required the same benefits from the low-cost airlines which were not acceptable.

Further by inspecting all the low-cost carrier from the largest carriers, they did not operate as
the separate low-cost entity but as the small business unites of the large company. The
centralized control of the management complicated the operations and logistics. Another
main reason is that the low-cost carriers weren’t able to control labour unions, and because of
that cost differential was eliminated in the long run.

Strategic option available with the delta airlines

 1. Maintain the status quo.

 2. Modification in Delta Express or Reintegrate with the parent brand, Delta.

 3. Launching a new low-cost subsidiary.

The final recommendation to the Delta Airlines

 Delta Express should be reintegrated with the primary brand Delta.

 One unified strategy – to be a profitable legacy carrier

 Operate between busy airports, Flexible working hours, Enhanced services to

customers

 Increase the load factor – focus on safety, reliability and convenience

 Delta Air Lines: The Low-Cost Carrier Threat

 A differentiated strategy like the theme of love, family holidays, emotional appeal
promotion
 Maintain a good relationship with the employee and labour unions and also with the
customers
 Create loyalty programs for the customers and brand devotion
 Come up with the holiday packages and facilities to their loyal customers
 Provide lucrative online offers that will encourage the customers to travel frequently
and they will able to see the other promotions and packages
 provide attractive promotions for the consumers like frequent flyer program, mileage
cards, membership card with special benefits