Delta Airlines: Flying High in a Competitive Industry
Despite stiff rivalry in the airline industry, Delta consistently finds innovative ways to soar above the rest.
The US airline industry is known for its low margins and intense competition. In such a crowded, high-risk marketplace, alignment between business and operating models is essential. One company that has shown effectiveness in aligning these models is Delta Airlines.
Delta’s history illustrates all too well the risky, cutthroat environment of the airline industry. In 2005 Delta filed for bankruptcy protection, despite then being the 3rd largest airline in the United States. At the time, the industry faced eroding margins due to steep hikes in fuel prices and increased competition from low-fare carriers [i.] Emerging from bankruptcy, Delta needed to align its business and operating models in a way that would allow it to serve its customers while not repeating the same mistakes, such as high fuel and fixed costs, that led to its 2005 bankruptcy.
Fast-forwarding to 2015, Delta has become an industry leader. In 2013 the company boasted the highest net profit in the history of the industry, and is currently the world’s largest airline by passenger volume [ii.] Delta achieved this success through its business and operating model alignment. Delta’s business model focuses on attracting corporate travelers, a segment characterized by high margins and low price sensitivity. Delta also strives for a flexible business model that focuses on shifting their cost structure from fixed to variable costs as much as possible. Together, this model allows the company to scale up or down to meet demand, while maintaining higher margins than competitors.
Delta’s operating model supports its business model through four key activities: purchasing used aircraft, vertical integration, low-unionization of labor, and industry-leading customer service. Airlines are known for their high fixed costs, with many airlines opting to purchase expensive new aircraft that come with low maintenance costs but high acquisition costs. Delta’s strategy, however, has been to purchase used aircraft, which offer cheaper acquisition costs but higher maintenance costs. This model leaves Delta with lower fixed costs but higher variable (maintenance) costs, allowing them to quickly scale up or down to meet demand, while not being burdened by the same level of fixed costs of other airlines [iii.] This creates sustained competitive advantage and reduced operational risk in the event of rapid increases or decreases in volume.
Delta’s operating strategy also includes owning their own fuel refinery. Although fuel hedging and futures trading have become standard for airlines, Delta has taken this further by owning a source of low-cost fuel, protecting them from cost spikes [iv.] Through vertical integration Delta reduced its per-gallon fuel prices by $.10 in the first quarter of 2014 [v.] If fuel prices rise, Delta is positioned to respond to this pressure and maintain its competitive price advantage.
Delta’s Trainer Fuel Refinery
Delta’s operating strategy also translates directly into its workforce. Airlines are known for high unionization rates, with approximately 50% of airline employees unionized. Delta’s unionization rate is closer to 18%, allowing it to keep base wages lower [vi.] Instead of offering high fixed wages, Delta instead offers industry-leading profit sharing plans. This allows Delta to shift a portion of their labor costs from fixed to variable, allowing the airline to remain competitive even in market downturns, and reducing the risk of an employee strike. In 2014, Delta’s profit sharing program yielded nearly one month’s salary to each employee [vii.]
Delta’s business model also focuses on delivering high customer service to appeal to their core demographic, business travelers. Delta’s commitment to customer service is evidenced by their recent multi-billion dollar investment in enhanced training programs for customer service agents, designed to improve the customer experience. Delta’s commitment to customer service also led to their development of the first mobile bag tracking feature on smartphones [viii.] Delta has even focused on creating a more lighthearted atmosphere in-flight, finding ways to bridge safety and fun in recent in-flight videos seen below. These new changes have been well received by business travelers, leading to Delta’s #1 ranking by corporate clients four years in a row by Business Travel News [ix.]
Delta is a solid example of a company that learned from its previous mistakes. The 2005 bankruptcy served as a wake up call for the company to better align its core business and operating models. This new improvement in alignment and strategy has led to gaining competitive advantages with respect to fuel prices, labor, customer service, and greater operating cost flexibility. With this new strategy in place, Delta is well positioned to see its profits reach new heights.
Sources
[i.] http://money.cnn.com/2005/09/14/news/fortune500/delta/
[ii.] http://www.deseretnews.com/article/865601066/Delta-tops-list-of-most-profitable-airlines-in-2013.html?pg=all
[iii] http://marketrealist.com/2014/06/deltas-capacity-current-size-future-purchase-commitments/
[iv.] https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-airline
[v.] http://marketrealist.com/2014/06/deltas-unique-strategy-owning-refinery-contain-fuel-costs/
[vi.] http://marketrealist.com/2014/06/delta-airlines-margins-highest-among-peers/
[vii.] http://www.hrcapitalist.com/2014/04/how-delta-airlines-de-unionized-17000-employees.html
[viii.] http://www.airlinetrends.com/2012/06/08/innovative-airlines-2012-delta/
[ix.] http://news.delta.com/delta-named-top-airline-business-travel-news-readers-fourth-consecutive-year-1
As a Delta frequent flyer, the changes you highlight are evident in their day to day operations and their customer service. I remember when there was much debate about Delta purchasing their own refinery. Many analysts saw it as a risky move, but Delta was looking long-term, and saw the vertical integration as a potential competitive advantage. The customer service is also industry leading. I maintained loyalty to the program, and became less price sensitive as a result. Delta saw the value in the intangibles, and created value. Overall, very good choice for your project. This is a stellar example of a company whose operations are aligned with its core business strategy.
Great write-up Sam. I generally dislike domestic air carriers but Delta definitely stands out in terms of quality and service. Their fleet appears newer, flight attendants are friendlier, and their food/beverage service is superior among the U.S. carriers. Although I agree that focusing on business travelers is ideal, I wonder if recent competition in the industry is pushing Delta to adjust its strategy. Southwest Airlines is now a player for business travelers and the recent merger of American/U.S. Airlines has further increased the competition. With each airline focused on the profitable business segment, how does Delta continue to differentiate itself? In addition, does the traditional hub-and-spoke model result in greater operational efficiency (personally I think it leads to more inefficiencies)?
Sam – I enjoyed your post, and as a recent Delta convert, I was interested to read more about the business and operational efficiencies behind the scenes that seem to have led to a more pleasant flying experience. For business and personal travel, I have traditionally gone with other domestic carriers because of corporate alliances and geographic locations – but have recently been flying Delta more frequently and have been very impressed! Honestly, I was unaware of some of the vertical integration and ownership of the refinery – but I feel like some of the business efficiencies realized are parallel to some of the improvements in customer experience – and are all focused on delivering value through the whole experience by capitalizing on even the smallest of details. I agree that Delta has a business-traveler approach – but this replication for customer service for personal travel has greatly persuaded me to fly Delta for all types of flights. I think the company has done an amazing job, recovering from and rebranding the company following bankruptcy – and that they have been successful in business efficiencies, and am curious how they will continue to distinguish themselves in the future. As other carriers, such as Southwest and the recent USAir/American merger attempt to emulate some of their practices – will they be able to continue to differentiate themselves as both the carrier for business and personal travelers? I know I am committed to continuing to use Delta and am excited to see how they further reinvent themselves in the future!