{"id":26699,"date":"2017-11-15T22:54:01","date_gmt":"2017-11-16T03:54:01","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/onwards-upwards-how-delta-air-lines-can-seize-supply-chain-digitalization\/"},"modified":"2017-11-15T22:54:01","modified_gmt":"2017-11-16T03:54:01","slug":"onwards-upwards-how-delta-air-lines-can-seize-supply-chain-digitalization","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/onwards-upwards-how-delta-air-lines-can-seize-supply-chain-digitalization\/","title":{"rendered":"Onwards, Upwards: How Delta Air Lines Can Seize Supply Chain Digitalization"},"content":{"rendered":"

Delta Air Lines is known for being the network leader in the highly competitive US airline industry. Factors such as fuel prices, the weather, labor and unions, the macroeconomic business cycle, and regulation all affect how airlines choose to operate. The digitalization of supply chains has many implications for Delta and the industry. The nature of the passenger aviation industry has from the very beginning required close tracking of movement of assets, the planes. However, there remains room for substantial improvement in the supply chain of airlines, particularly in the area of demand forecasting.<\/p>\n

 <\/p>\n

\"Digital<\/a><\/p>\n

Exhibit 1: Basic supply chain funnel for seat tickets [1]<\/p>\n

 <\/p>\n

Despite technology-enabled progress from a customer-facing standpoint (the delta.com user experience, mobile device applications, check-in kiosks, customer service applications, airport information displays and related initiatives [2]), Delta and the US airline industry as a whole have done little to innovate in the rest of their supply chains. Delta should care about this megatrend for two main reasons: intra-industry competition and inter-industry competition.<\/p>\n

 <\/p>\n

Intra-Industry Competition<\/strong><\/p>\n

Despite consolidation and increased fare segmentation, the airline industry remains highly competitive as seats are effectively commodities from the average consumer\u2019s point of view. An airline\u2019s schedule must be set a few months in advance by its scheduling team. These forecasts are based on factors such as historical demand, seasonality, and early indications of demand online. These long lead times arise from the need to coordinate with airports, set time schedules for pilots and flight attendants, and ensure matching aircraft availability. Thus, in the scheduling process, Delta can be relatively certain about its costs but relatively uncertain about the revenue it will generate. In addition, empty seats on a plane that takes off equates to revenue that can never be recouped. Better forecasting of demand will enable Delta to avoid the industry\u2019s historical tendency to over supply the market, engage in price wars, and lose money for investors [Exhibit 2].<\/p>\n

\"\"<\/a><\/p>\n

Exhibit 2: Global airline ROIC has historically been below WACC [3]<\/p>\n

Inter-Industry Competition<\/strong><\/p>\n

In recent years, money has been poured into developing alternative modes of transport: autonomous vehicles, Hyperloops [Exhibit 3], subscription-based short haul services such as SurfAir. Elon Musk believes the Hyperloop could shorten the trip from New York to D.C. to 30 minutes [4]. Short haul revenue could be taken away from Delta as these alternative modes of transport advance over time, achieve economic feasibility, and begin directly competing with certain airline routes.<\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

Exhibit 3: Hyperloop One\u2019s XP-1, which has achieved 192 mph during tests [5]<\/p>\n

 <\/p>\n

Delta\u2019s management realizes the importance of investing in the digitalization of its supply chain. It was the first major US carrier to introduce RFID tagging on customer baggage, an initiative expected to reduce lost items by 25% [6]. On a forward-looking basis, Delta is pouring \u201cmore than $1.5B in technology over next 4 years to improve operational reliability and grow digital footprint\u201d [7]. While the specifics of where that money will be deployed is unknown to the public, one can guess that a sizeable amount will go towards improving its direct digital channels, where an increasing number of tickets have been sold, leading to better customer experiences and reduced distribution costs [2].<\/p>\n

 <\/p>\n

We can learn from the rise of web-enabled direct to consumer businesses the immense value of owning the customer relationship. For the business, it could enable a leaner and more flexible asset base, reduced distribution costs, and more control over its brand. For the consumer, it often results in a better and more personalized experience. Under agreements with online travel agencies (OTAs) such as Priceline, Delta gets no visibility into the actions leading up to the purchase of the e-ticket. Rather than forfeit control of distribution and discovery to OTAs and other middlemen, Delta has taken efforts to be the primary distributor of its product. OTAs\u2019 share of e-ticket revenue is down 2 percentage points, to just 25%, during the period from 2013-2015, reflecting this shift [8].<\/p>\n

 <\/p>\n

Concurrently, Delta should develop in-house teams solely devoted to demand forecasting and the productive use of this information. Currently, operating teams that deal with information technology are largely treated as discrete entities: revenue management, marketing, and fleet management are separately managed departments within the airline. Delta should integrate these teams so that the work they do is visible across the chain and their collective findings can be translated into more prudent demand forecasting. The true value-add will come from learnings between the layers of knowledge.<\/p>\n

 <\/p>\n

It is easy to hype the power of big data. One major constraint to better digital supply chains is talent: Who will execute when skill in this area is desirable across industries? It is up to us to cultivate interest in this area for the current and next generations.<\/p>\n

(Word Count: 787)<\/p>\n

References<\/strong><\/p>\n

[1] \u201dImportance of digital supply chain in airline industry\u201d by Abishek Singh, Infosys. https:\/\/www.tnooz.com\/article\/airline-industry-digital-supply (accessed November 2017)<\/p>\n

 <\/p>\n

[2] 2016 Annual 10-K Report, Delta Air Lines. http:\/\/s1.q4cdn.com\/231238688\/files\/Annual%20Meeting\/2017\/2016-Annual-10-K-Report.pdf (accessed November 2017)<\/p>\n

 <\/p>\n

[3] \u201cAirline profitability: airlines can no longer afford to be the poor relations of aviation,\u201d Center for Aviation. https:\/\/centreforaviation.com\/insights\/analysis\/airline-profitability-airlines-can-no-longer-afford-to-be-the-poor-relations-of-aviation-117521 (accessed November 2017)<\/p>\n

 <\/p>\n

[4] \u201dElon Musk says he has \u2018verbal govt approval\u2019 for D.C.-to-New York Hyperloop\u201c by Michael Laris and Brian Fung, Washington Post. https:\/\/www.washingtonpost.com\/local\/trafficandcommuting\/musk-says-he-has-verbal-approval-for-dc-to-new-york-hyperloop\/2017\/07\/20\/0754628e-6d62-11e7-b9e2-2056e768a7e5_story.html?utm_term=.41584ed8c1af<\/p>\n

(accessed November 2017)<\/p>\n

 <\/p>\n

[5] \u201cHyperloop One Unveils XP-1,\u201d Hyperloop One Media Gallery. https:\/\/hyperloop-one.com\/media-gallery (accessed November 2017)<\/p>\n

 <\/p>\n

[6] \u201cGroup highlights Delta, makes case for industry-wide RFID bag tracking\u201d by Ashton Morrow, Delta. http:\/\/news.delta.com\/group-highlights-delta-makes-case-industry-wide-rfid-bag-tracking (accessed November 2017)<\/p>\n

 <\/p>\n

[7] Deutsche Bank Global Industrials and Materials Summit Presentation, Delta. http:\/\/s1.q4cdn.com\/231238688\/files\/Conferences\/2017\/Delta-Air-Lines-8th-Annual-Deutsche-Bank-Global-Industrials-Materials-Summit.pdf (accessed November 2017)<\/p>\n

 <\/p>\n

[8] \u201cReport: Airlines\u2019 limits on OTA fare listings add costs: by Danny King and Kate Rice, Travel Weekly. http:\/\/www.travelweekly.com\/Travel-News\/Airline-News\/Report-Airlines-limits-on-OTA-fare-listings-add-costs (accessed November 2017)<\/p>\n","protected":false},"excerpt":{"rendered":"

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