Delta Airlines Business Strategy

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  • 1. - Analysis COMMERCIAL AVIATION IN U.S. - Leadership - Culture Helps Drive - $1.142 trillion in economic activity - Outlook - $346.4 billion in earnings - 10.2 million jobs - Business Model Contributes - Strategy - $692 billion/year to U.S. GDP - 5.2% of U.S. GDP - Customer Interface Traffic - Recommendations - 40,000+ daily commercial departures - 2 million US passengers dailyPratt Institute | DM 672 | Business Strategy AGENDA
  • 2. “Welcome Change. Welcome the new Delta.” KEY FACTSSince the founding of Delta Air Lines, our company has HQ in Atlanta, GA Founded 1928stood for safe and reliable air transportation, 52,386 Employees $22,697 Sales (in millions)distinctive customer service, and hospitality from $3.6 billion merger with NWA World’s largest airline (by traffic)the heart. COMPETITION American British AirwaysOur vision is for Delta to build on its traditions and United China Southern Continental Air Francealways to meet our customers expectations while US Airways AeroMexico Southwest Aeroflottaking service to even higher levels of excellence. America West Virgin Jet Blue Singapore AirlinesWe are a leader in a business we know best - airline ATA SAStransportation.Pratt Institute | DM 672 | Business Strategy
  • 3. - 9/11 COMMERCIAL AVIATION IN U.S. - Fuel Costs Helps Drive - $1.142 trillion in economic activity - Chapter 11 - $346.4 billion in earnings - 10.2 million jobs - Executive Management Contributes - Delta/NWA merger (Oct. 2008) - $692 billion/year to U.S. GDP - 5.2% of U.S. GDP - Capacity Cuts Source: FAA October 2008Pratt Institute | DM 672 | Business Strategy PROFILE
  • 4. Industry Airline Revenue Growth (adjusted for inflation) INDUSTRY FORCES Threat of New Entrants Power of Suppliers Power of Buyers Availability of Substitutes Competitive Rivalry OTHER FACTORS Labor Fuel Cost Weather Economy 9/11 RegulationSource: EIU/IATA Economic Briefing 2008Pratt Institute | DM 672 | Business Strategy OVERVIEW
  • 5. U.S. Airline Revenue Growth OUT OF BUSINESS (2008) MAXJet Big Sky Aloha ATA Skybus Eos Champion Air Midwest Vintage Props & Jets Gemini Air Cargo ExpressJet Chapter 11 FrontierSource: ATA Industry Review 2009 Sun Country Primaris Source: ATA Industry Review 2009Pratt Institute | DM 672 | Business Strategy OVERVIEW
  • 6. Income Statement (in millions) 2007 2008 Revenue Passenger Mainline 12,758 15,137 Passenger Regional affiliates 4,170 4,446 Top Expenses 2008 Cargo 482 686 Other 1,744 2,428 1. Fuel (23.7%) Total Revenue $ 19,154 $ 22,697 2. Impairment of intangible assets 3. Salaries Expenses Salaries 4,189 4,802 4. Carrier Arrangements Fuel 4,686 7,346 Depreciation 1,164 1,266 5. Depreciation Contract Service 996 1,153 Contract Carrier Arrangements 3,152 3,616 6. Aircraft Maintenance Landing Fees 725 839 Aircract Mantenance 983 1,169 Passenger Commission 933 1,030 NET Income Comparison for 2008 Impairment of intangible assets 0 7,296 Restructuring Charge 0 1,131 Continental $ (585 million) Other operating 15 1,363 American $ (2 billion) Operating Expense $ 16,843 $ 31,011 US Airways $ (2.2 billion) Delta $ (8.9 billion) Net Income $ 1,612 $ (8,922) Source: WSJ DAL Financial ReportsPratt Institute | DM 672 | Business Strategy FINANCIALS
  • 7. Balance Sheet (in millions) Assets 2006 2007 Cash/Investments 2,784 3,168 Accounts Receivable 936 1,092 Maintenance 192 273 OBSERVATIONS Flight Equipment 18,115 10,127 - 530% increase in Goodwill? Goodwill 227 12,104 Leasehold Rights 279 2,953 - Did Chapter 11 absolve pension? Other 2,911 2,706 - $20 billion “liabilities subject to Total Assets $ 19,622 $ 32,423 compromise”? Liabilities Accounts Payable 936 1,045 ...This amount represents the debtors Air Traffic Liabilities 1,797 1,982 Taxes Payable 500 320 estimate of known or potential pre- Accrued Salaries 405 734 Debt 8,012 9,000 petition claims to be resolved in Pension & retirement 0 3,867 connection with the Chapter 11 cases. Deferred Revenue 709 3,632 Other 20,856 1,730 Total Liabilities $ 33,215 $ 22,310 Total Equity $ (13,593) $ 10,113 Source: WSJ DAL Financial ReportsPratt Institute | DM 672 | Business Strategy FINANCIALS
  • 8. STRENGTHS “Although airlines will seek to recover - World’s largest mega carrier - Innovative business strategies (Song, Delta re-branding) the higher cost through...fare hikes and - Acquisition of Northwest Airlines higher fees, this will prove increasingly - SkyTeam alliance difficult in a weak U.S. economy.” - Industry-leading airport model (lobby re-design, self-service kiosks) WEAKNESSES - S&P, May 22, 2008 - Capacity cuts (20% capacity reduction) “Airlines have no choice but to pass on - Employee cuts (2,000 job cuts) the cost of fuel...and when passengers - Low on-time rating - Air transportation safety do begin to push back in significant - Operational costs numbers the airlines have no choice - Susceptibility to labor-related disruptions (employee strikes) but to slash capacity.” - Technology dependence for operations - No clear mission & vision - Rick Seaney, WSJ 2008 - DifferentiationPratt Institute | DM 672 | Business Strategy S.W.O.T.
  • 9. OPPORTUNITIES - Invest in new technologies INDUSTRY FORCES - New Presidential Administration Threat of New Entrants - Fuel alternatives Power of Suppliers - Reduce operational costs Power of Buyers - New sources of operating revenue Availability of Substitutes - Enhance the customer experience Competitive Rivalry - Renegotiate lease agreements (2012-Atlanta HQ HUB) THREATS OTHER FACTORS - Video Conferencing Technology Labor - Fluctuating Fuel Costs & Supply Chain risks Fuel Cost - Unionized Labor Strikes (17% of workforce is unionized) Weather - Disruptions/interruptions of service at hub airports Economy - Profit losses and adverse publicity from any aircraft accident incidents 9/11 - Government Regulation CO2 Emissions Regulation - Global Economic Recession - Customer reaction to new policies (baggage & food)Pratt Institute | DM 672 | Business Strategy S.W.O.T.
  • 10. INDUSTRY FORCES Threat of New Entrants Power of Suppliers Power of Buyers Now what!? Availability of Substitutes Competitive Rivalry OTHER FACTORS Labor Fuel Cost Weather Economy 9/11 RegulationPratt Institute | DM 672 | Business Strategy HORIZON
  • 11. U.S. Airline Revenue Growth - Chapter 11 - NWA Merger - Fuel Hedging Source: ATA Industry Review 2009 - Personnel Costs - Poor Economy Industry Airline Revenue Growth (adjusted for inflation) - Cutting Capacity & Jobs - New Revenue Streams Source: EIU/IATA Economic Briefing 2008Pratt Institute | DM 672 | Business Strategy REVIEW
  • 12. Income Statement (in millions) 2007 2008 Revenue Passenger Mainline 12,758 15,137 Passenger Regional affiliates 4,170 4,446 Top Expenses 2008 Cargo 482 686 Other 1,744 2,428 1. Fuel (23.7%) 2. Impaired intangible assets (23.5%) Total Revenue $ 19,154 $ 22,697 3. Salaries (15%) Expenses 4. Carrier Arrangements (11.7%) Salaries 4,189 4,802 4,686 7,346 5. Depreciation (4%) Fuel Depreciation 1,164 1,266 6. Aircraft Maintenance (3.8%) Contract Service 996 1,153 Contract Carrier Arrangements 3,152 3,616 Landing Fees 725 839 NET Income Comparison for 2008 Aircract Mantenance 983 1,169 Passenger Commission 933 1,030 Continental $ (585 million) Impairment of intangible assets 0 7,296 American $ (2 billion) Restructuring Charge 0 1,131 US Airways $ (2.2 billion) Other operating 15 1,363 Delta $ (8.9 billion) Operating Expense $ 16,843 $ 31,011 Net Income $ 1,612 $ (8,922) Source: WSJ DAL Financial ReportsPratt Institute | DM 672 | Business Strategy REVIEW
  • 13. STRENGTHS WEAKNESSES - Acquisition of Northwest Airlines - Low on-time rating - World’s largest mega carrier & flight network - Operating costs - Pacific & Atlantic Ocean flight routes - Susceptibility to service disruptions - Employees - Technology dependence for operations - SkyTeam & SkyMiles alliance - Differentiation - Airport model - Merger consolidation - Brand & History OPPORTUNITIES THREATS - Reduce operational costs & capacity - Alternatives - Streamline operations & supply chain - Competition - New value-for-money strategies - Increased regulation - Enhance the customer experience - Market environment - Customer retention initiatives - Economy - Invest in new technologies - Fuel costs - Renegotiate lease & labor agreements - Crashes/TerrorismPratt Institute | DM 672 | Business Strategy S.W.O.T.
  • 14. The Huff Daland Dusters founded Begins operating as Chicago and Southern W.T. Beebe becomes (pre-Delta) Delta Air Lines Air Lines merger Chairman and CEO 1924 1934 1953 1971 1928 1945 1966 1978 Merger: Huff Daland Official corporate name Delta founder C.E. The Airline Dusters + Delta becomes Delta Air Woolman dies. Charles Deregulation Act Airlines. Renamed Lines, Inc. H. Dolson named CEO passes Delta Air Service Source: Delta website - Delta Through the DecadesPratt Institute | DM 672 | Business Strategy LEADERSHIP
  • 15. Western Airlines Delta declaresDelta celebrates its merges-becomes 4th Leo F. Mullin is named Bankruptcy. Richard H.50th year of service largest US carrier President and CEO Anderson becomes CEO 1979 1987 1997 2006 1981 1991 2001 2008 Delta launches Pan Am Merger U.S. airspace closed Merger with NWA Frequent Flyer for two days after Program terrorist attacks on Sept. 11th Source: Delta website - Delta Through the DecadesPratt Institute | DM 672 | Business Strategy LEADERSHIP
  • 16. The Work Environment - Delta has always been family oriented but changed with the times - Committed to maintaining corporate culture, committed to employee and customers satisfaction. Anderson demonstrates this through: 1. Employees: Profit sharing & Stock Options 2. Emphasis on customer service 3. Providing compensation packages - Employees believe culture changed, but Anderson understands both cultures of Delta and NW - Delta is non-union, NW is unionized (pilots)Pratt Institute | DM 672 | Business Strategy CULTURE
  • 17. Facts & Updates Industry Airline Revenue Growth (PROJECTIONS) 10 - Profitability in 2009 due to: 8 Spending for Airline Industry Change in % of Consumer 6 4 1. Lower fuel costs 2 0 2008 2009 2010 2011 2012 2013 -2 2. Capacity Discipline Text -4 -6 -8 3. Merger synergies -10 YEAR - Reduction of Domestic Capacity "Theyre definitely taking - Delta and NW Traffic updates capacity down probably more than what people thought they would be doing," Helane Becker, airline analyst at Jesup & Lamont SecuritiesPratt Institute | DM 672 | Business Strategy OUTLOOK
  • 18. Industry Airline Revenue Growth (PROJECTIONS) 10 US Personal Consumption 8Spending for Airline Industry Change in % of Consumer 6 expenditures for US airlines 4 are expected to grow at an 2 annual compounded rate of 0 2008 2009 2010 2011 Text2013 2012 5.9% between 2008 and -2 2013. -4 -6 -8 Consumer Spending on airline -10 travel Growth Slows and Flattens. YEARPratt Institute | DM 672 | Business Strategy OUTLOOK
  • 19. INVESTMENT OUTLOOK 22 CONTINENTAL AMERICAN US AIRWAYS US Personal Consumption 20 expenditures for US airlines are expected to grow at anNUMBER OF IRPs 18 annual compounded rate of 16 TAM DELTA UNITED Text 5.9% between 2008 and 2013. 14 CHINA SOUTHERN 12 CHINA EASTERN Consumer Spending on airline travel Growth Slows and 4.0 3.5 3.0 2.5 2.0 SELL HOLD BUY Flattens. Source: WSJ DAL Financial Reports FEB. 2009Pratt Institute | DM 672 | Business Strategy OUTLOOK
  • 20. FUEL CUSTOMER TECHNOLOGICAL NEEDS CHANGE LABOR ECONOMY COMPETITION REGULATION ENVIRONMENTPratt Institute | DM 672 | Business Strategy MARKET FORCES
  • 21. LABOR COMPETITION ENVIRONMENT REGULATION ECONOMY TECHNOLOGICAL FUEL CUSTOMER CHANGE NEEDS Turbulent Market Forces Inbound Outbound MarketingSuppliers Procurement Operations Developement Service Customers Logistics Logistics & SalesExcess Capacity Lower Demand& Supply & SpendingPratt Institute | DM 672 | Business Strategy VALUE CHAIN
  • 22. Network & Operations Market & Customers (Behind the scenes) (Perception) PARTNER NETWORK CUSTOMER RELATIONS Producers, Suppliers, Partners, Employees Service (CSR), Employees, Sales, PR RESOURCES ACTIVITIES VALUE PROPSITION CHANNELS CUSTOMERS Fuel Logistics Air Transportation Distribution Operations Cargo Delta.com Labor Development Passengers Entertainment Internet (Vacation, Transfer, Business, Elite) Airports Brand Management Food Phone Travel Agents Content Sales & Marketing SkyMiles Terminal e-commerce Support Strategy Training & Consulting Partner Airline Advertisers Maintenance IT Advertising In-flight Service Planes Service Content Costs Margin Revenue (HR, R&D, Finance, Development, Purchasing, HUBS, etc.) (Revenue - Costs) (Passengers, Baggage, Entertainment, Food, Advertising) $31 billion $22.7 billion Creating Value -$8.9 billion Capturing Value Model created by Alexander Osterwalder, ArveticaPratt Institute | DM 672 | Business Strategy BUSINESS MODEL
  • 23. Network & Operations Market & Customers (Behind the scenes) (Perception) PARTNER NETWORK PARTNER NETWORK CUSTOMER RELATIONS Producers, Suppliers, Partners, Employees Producers, Suppliers, Partners, Employees Service (CSR), Employees, Sales, PR RESOURCES ACTIVITIES VALUE PROPSITION CHANNELS CUSTOMERS RESOURCES Fuel Logistics ACTIVITIES VALUE PROPSITION Air Transportation Distribution Operations Fuel Logistics Cargo Delta.com Air Transportation Passengers Labor Development Entertainment Internet (Vacation, Transfer, Business, Elite) Distribution Airports Operations Brand Management Food Cargo Phone Travel Agents Content Sales & Marketing SkyMiles Terminal Labor Support Development Strategy Entertainment e-commerce Training & Consulting Partner Airline Advertisers Airports Maintenance Brand Management IT Advertising Food In-flight Service Planes Service Content Content Sales & Marketing SkyMiles Support Strategy Training & Consulting Maintenance IT AdvertisingRevenue Costs Margin (Passengers, Baggage, Entertainment, Food, Advertising) Planes Service (HR, R&D, Finance, Development, Purchasing, HUBS, etc.) (Revenue - Costs) Content $31 billion $22.7 billion Creating Value -$8.9 billion Capturing Value Model created by Alexander Osterwalder, ArveticaPratt Institute | DM 672 | Business Strategy BUSINESS MODEL
  • 24. Network & Operations Market & Customers (Behind the scenes) (Perception) CUSTOMER RELATIONS PARTNER NETWORK CUSTOMER RELATIONS Producers, Suppliers, Partners, Employees Service (CSR),(CSR), Employees, Sales, PR PR Service Employees, Sales, RESOURCES ACTIVITIES VALUE PROPSITION CHANNELS CUSTOMERS Fuel VALUELogistics PROPSITION Air Transportation CHANNELS CUSTOMERS Distribution Operations Cargo Delta.com Labor Air Transportation Development Entertainment Internet Passengers (Vacation, Transfer, Business, Elite) Airports Brand Cargo Management Food Delta.comPhone Travel Agents Sales & Marketing Content SkyMiles Terminal Passengers e-commerce Support Entertainment Strategy Training & Consulting Internet Airline Partner (Vacation, Transfer, Business, Elite) Advertisers Maintenance IT Food Advertising Phone In-flight Service Travel Agents Planes Service Content SkyMiles Terminal e-commerce Training & Consulting Partner Airline Advertisers Costs Advertising Margin In-flight Service Revenue (HR, R&D, Finance, Development, Purchasing, HUBS, etc.) (Revenue - Costs) (Passengers, Baggage, Entertainment, Food, Advertising) Content $31 billion $22.7 billion Creating Value -$8.9 billion Capturing Value Model created by Alexander Osterwalder, ArveticaPratt Institute | DM 672 | Business Strategy BUSINESS MODEL
  • 25. Delta Air Lines Overview HUBS - Cincinnati - Atlanta - JFK - Salt Lake City - *Minneapolis Marketing Customer Retention - SkyMiles - Inconsistent Message - SkyTeam - Crown Room Club - Does not speak to the customer experience Subsidiaries - Comair - Compass Airlines “Welcome Change, Welcome the new - Delta Shuttle Delta” Approach - Delta AirElite - Mesaba Airlines - Northwest Airlines (3 business’) - Multiple agencies do work for them over the years Destinations - 461 destinations in 96 countries - The Merger is a new opportunity - More than any other U.S. airline - Delta has 1,534 flights per day - Delta Connection: 2,533 daily - Delta + Alliance: 6,795 dailyPratt Institute | DM 672 | Business Strategy STRATEGY
  • 26. planning airport security baggage airport follow-up reservation check-in boarding service de-boarding trip arrival check-in claim departure & memory Delta DeltaAwareness Awareness Continues customer experience mapping Pratt Institute | DM 672 | Business Strategy CUSTOMERS
  • 27. US Airways Virgin Atlantic Continental Delta British Airways American Southwest United JetBluePratt Institute | DM 672 | Business Strategy CUSTOMERS
  • 28. Creating Value - Reduce costs, capacity, and increase efficiency - Focus on domestic vs. international - Evaluate and streamline suppliers - Renegotiate contracts - Evaluate and divest noncore business units & programs - Monitor competition and borrow ideas from international market Capturing Value - Transparent & effective MarComm - Maintain & revitalize marketing & customer retention initiatives - New & enhanced value proposition opportunities - Charge for EVERYTHINGPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 29. Ideas... - Enhance the customer experience - Technology (RFID & ICT) - Sell more Advertising (Captive audience who you know all about) - Trade content for passenger feedback, information, & marketing - Monitor passenger content interaction & improve offerings - Sales training for Flight-Attendants (the new sales force in the sky) - Investigate alternative food, beverage, & service models - Recycling and waste reductionPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 30. Maximize value by Charging for a better Customer ExperiencePratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 31. Technology Content, Access, & Information Games, Movies, Messaging, & WiFi....Pratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 32. Advertising Connect Advertisers to Customers John Smith age 40 race white geography NYC status Married children 2Pratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 33. Service Your sales force in the sky... ...can I interest you in a glass of wine?Pratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 34. Technology RFID baggage tracking Industry could save $650 million to $1 billion annuallyPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 35. WASTE more than 2 million plastic cups dailyPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 36. Experience Simulation & VisualizationPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 37. Experience VisualizationPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 38. Experience VisualizationPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 39. RE-Imagine your Business Model ...Charge for EVERYTHINGPratt Institute | DM 672 | Business Strategy RECOMMENDATIONS
  • 40. RE-Imagine your Business Model ...Skydiving anyone?Pratt Institute | DM 672 | Business Strategy Q&A