OVERVIEW OF THE CASE
In 2002 Delta airlines faced the unfortunate realization that the competition from low cost carriers like Southwest and JetBlue was becoming a serious problem. Even though Delta had been looking at this problem for a long period of time, the business model of Delta Airlines was organized by function and their solutions generally focused on individual aspects of the firm. For example, the marketing department provided marketing ideas, the customer service department offered customer related solutions etc. Delta realized that they did not have a comprehensive solution to dealing with the low cost carriers in the market. One of the simplest solutions proposed by Delta ...view middle of the document...
The airline industry was encouraged to improve service offerings – such as meals and inflight movies, greater capacity and more flexible flight times. As a result of these regulations, the major carriers faced high operating costs and excess capacity. Consequently, they started to charge prices that were approximately twice as high as their unregulated counterparts (i.e. the low cost carriers) for similar flights. When it was realized that the regulations were inefficient and putting pressure on the industry, the Airline Deregulation Act of 1978 was signed, and by 1980, the low cost airlines had become a major threat to the major carriers.
Following deregulation, the average airline companies profits depended on the fraction of its flown seats that were occupied by its paying customers (also known as the “load factor”). Costs were generally measured by the cost per available seat mile (CASM) – which reflected the cost to fly one seat, occupied or empty, for one mile. The returns or yield calculated by dividing total passenger revenues by the number of revenue passenger miles (RPMs). Daily utilization, depended on how quickly an airline could turn its aircraft and prepare them for takeoff and Southeast airlines was the leader in that area with a 27 minute turn time. Also, since most cost items did not generally depend on the flight’s length, cost per available seat mile were low for airlines that flew long distances.
As a consequence of these factors, most major airline companies developed a system to ensure high load factors. They shifter operations to hub-and-spoke models, where flights on small planes from lightly traveled cities (called “spokes”) would feed passengers into “hubs” in major cities and eventually take them to the desired destinations. This system enabled major airlines to achieve high load factors, and therefore, higher profits. By the year 2002, most of the major airlines had shifted to this business model.
As far as competition was concerned, on routes shorter than 600 miles, the airlines industry had competition from automobiles, buses and railroads, and for routes longer that that – the competition was strictly internal. The industry as a whole was classified into three groups based on revenue – major meant over $1 billion in revenues, national meant between $100 million to $1 billion and regional referred to the companies that earned less than $100 million. In 2002, there were only ten major carriers within the United States and they were Alaska, America West, American, American Trans Air, Continental, Delta, Northwest, Southwest, United and US Airways.
While there were a variety of customers, the primary factor behind choosing a carrier was ticket price. Emphasis on lower prices had forced the industry to offer reduced fares by nearly 45% at that time, and the idea of raising prices was considered impossible. However, in addition to prices, passengers also decided on airlines based on safety, reliability and convenience,...