Delta Airlines suffered a major IT systems failure in August 2016 that cancelled thousands of flights and damaged its customer service reputation. To rebuild trust, Delta needs to improve its international flights through a new IT system and better cabin experience. The document recommends Delta partner with Uber for airport transportation, hire a celebrity chef to improve food, and invest in a fault-tolerant IT infrastructure. Implementing these changes will cost an estimated $1.4 billion over 4 years but provide opportunities like happier customers and new partnerships. Risks include high costs, union issues, and competitive responses from other airlines.
1. DELTA AIR LINES:
SOARING TO NEW HEIGHTS
Zachary Graber
Bethany LaGrone
Marjorie Pritchard
Abigail Tankersley
Christopher Walker
Management 7160
22 November 2016
2. 1
Table of Contents
Page
I. Executive Summary 2
II. Strategic Audit 8
Current Situation 8
Strategic Managers 10
External Environment 10
General Environment 10
Industry Environment 15
Five Forces 15
Competitive Environment 19
Hypercompetitive Environment 21
Internal Environment 22
Corporate Structure 22
Corporate Culture 22
Corporate Resources 22
Value Chain Analysis 23
Strategic Analysis 30
Strategic Factors 34
Strategic Alternatives 35
III. Financial Analysis 36
3. 2
I. EXECUTIVE SUMMARY
Brief Diagnosis of Problem
On August 8, 2016, the world’s second-largest airline suffered a catastrophic systems failure that
crippled its world travel for four days. Delta Air Lines, which generally ranks among the highest in
timeliness and reliability ratings, had to cancel 2,300 flights worldwide. These flight cancellations
stranded thousands of passengers and costs over $150 million. While much of the news focused on the
economic impact and the need within the airline industry to overhaul outdated IT systems, the bigger
problem that Delta faced was how to rebuild its customer service reputation that had been crushed in one
fell swoop. Delta needs to rebuild its customer service reputation through a new IT system and an
improved cabin experience if it want to compete on an international scale.
Delta’s core competencies include having the largest international presence of any American
airline and providing leading inflight service offerings among the three major U.S. international carriers.
However, in order to rebuild its damaged reputation and consumer confidence in their reliable operations,
Delta needs to go above and beyond just an IT overhaul that is obvious. U.S. carriers tend to have the
lowest service ratings of major national airlines, and the highest service ratings come from Asia.
Analysis of the Problem
Delta Airlines is considered to be a three star airline. According to airlinequality.com, Delta ranks
higher than its American competitors United Airlines and American Airlines. However, the company
ranks much lower than foreign airlines such as Singapore. In fact, Delta Airlines does not rank in the top
ten business class or economy class airlines in the world. Due to the fact that Delta ranks poorly on an
international scale, Delta needs to focus on improving its international flights through a new IT system
and a better cabin experience. A good cabin experience increases customer loyalty in an industry with
almost no switching costs and fairly easy to implement even when profit margins are low. In addition, a
4. 3
new IT system will prevent crashes like the one that happened this past August that damage the
company’s customer service reputation.
Like other airlines, Delta’s computer system is several decades old. The system has had
patchwork upgrades, but the entire system desperately needs a fundamental overall as the computer crash
clearly demonstrated. Delta’s IT system controls everything from Flight dispatching to ticket sales and
any down time can have catastrophic effects. In 2016 crash, not only was Delta forced to cancel many
flights and send customers to rival airlines, but the company also faced a public relations backlash on
social media. In contrast to the usual average of 3,600 conversations about Delta on twitter, there were
43,000 conversations on twitter on the day of the outage. Overall, the company took a few days to return
to normal operations and lost $150 million dollars.
The second area where Delta can improve its cabin experience. For example, Delta needs to
improve its inflight meals and snacks. Airlines do try to accommodate different eating restrictions, but the
food is so unpalatable many people refuse to eat airplane food at all.
Another area where Delta can improve its operations is providing transportation to and from the
airport. In order to get to the airport, people must drive the car there and then pay a fee to park it for
however long they will be gone. Leaving the car also involves risking a break-in. When the customer
actually gets to their destination, they are stranded without a car and must find one to rent or find a taxi. It
makes sense that there should be some sort of transportation to and from the airport, especially for
business class flyers. Delta should partner with Uber to make complementary transport a part of business
class tickets.
Recommendations
Delta must improve their customer service by two means: Information Technology and Cabin
Experience. Delta needs to recreate and introduce customers to a brand new Delta experience. Building
partnerships outside the airline industry is a must. Delta’s partnership with Airbnb is on the right path.
5. 4
However, further steps need to be taken. That is why we suggest Delta partner with Uber. Offering
concierge services with Uber to all SkyMiles members shows that Delta is willing to take care of their
customers. Moreover, Delta can offer SkyMiles members the opportunity to rack up points when they
choose to take an Uber.
Moreover, Delta can partner with celebrities to improve their food menus. Celebrity chefs, such
as Anthony Bourdain could redesign the food menu promoting more health conscious items. Additionally,
Delta should look towards renovating the cabin ambiance, such as having starlit cabins when it gets dark
or seat dividers can further improve the customer experience. Such an ambiance will have people talking
about why people should fly with Delta again.
On the IT side, Delta should invest in technology systems that have a “fault tolerance” system.
These types of systems presume that at any given moment any module within the system could crash, and
for this reason in particular each level of the network has numerous ready reinforcement measures. While
Amazon and Google experience servers failing on a regular basis, they have hundreds of thousands of
servers on standby whenever the need arises. The case for Delta should not be any different. Ed Bastian
once stated that millions of dollars were invested in Delta’s technological infrastructure over the past
three years. Still, as everyone observed from the crash on August 8th
, the amount spent to update the old
information systems was just not enough.
The overhauling and revamping an outdated IT system comes with risks and high costs, but for
the long term, it is a necessity that needs to be taken into consideration. The implementation of this
overall should take place in various stages so as not to shut down the entire system. Avoiding such the
risk is no longer an option. Delta has to take on the costs of restructuring its IT systems. Consider the
opportunities and threats of choosing to upgrade.
6. 5
Opportunities Threats
● New system that is more efficient and has
more capacity than older legacy systems.
● Happier customers because of more
efficient systems (i.e. rebuilding customer
service reputation).
● New beneficial partnerships.
● Lower risk of future system crashes.
● High costs to taking on project and
training employees on new system.
Implementing this new strategy will take time, and we shouldn’t expect it to wholly take place
within the next year. Implementation of the new systems should be done in stages. We expect there to be
four stages of implementation that will cost approximately $250,000,000 with a 70% probability of it
being completed in the next four years. The risk value of this investment will be $700,000,000 or about
$175,000,000 a year. The customer experience will cost around $700,000,000 to implement. We expect
the planes to cost about $2,000,000 to revamp or about $360,000,000 for the international fleet.
We expect unions to get involved. For example, the more complicated the food is, the more
preparations that stewardesses will have to make. Moreover, competitors like United and American will
quickly try to match Delta’s experiences, by adding an ambiance to the cabins and improving food
quality. United and American will also try to partner with Uber’s competitor Lyft. Taxi companies will
fight having Uber drivers near airports; however, because Delta is one of the biggest airlines in the U.S.
Industry and in the world, we expect it to be a partnership that will shift how regulation regards Uber
granting Uber more visibility at airports, especially when working alongside Delta and the Delta Skymiles
members. However, American and United will not likely match Delta’s IT initiative due to the high cost.
Once properly installed, Delta will could use the new IT systems to their advantage to discover more
customer desires. Delta could face a setback when financing such a large project; however, Delta isn’t the
only airline that faces financial trouble and should be able to get the financing required for such a project.
7. 6
Innovation when building such a project will mean that Delta will need help and should look to partner
with a company such as Apple or Google when building a new IT system. Delta should only gain by
building this new IT infrastructure despite high costs.
Action Plan
Program Objective: To improve customer service through an updated IT system and through
operations.
Program Activities:
1. Upgrade IT system
2. Improve Operations
a. Inflight Amenities
b. Transportation
Actions Steps Responsibility Start-End
A. Meeting with corporate leaders and IT team
B. Meeting with finance department to determine budget
C. Hire a company to design new IT system
D. Start Using new IT system
E. Negotiate contract with Netflix
F. Hire a chef to design new inflight meals
G. Negotiate contract with Uber
8. 7
II. STRATEGIC AUDIT
Overview of Delta Air Lines1
Although incorporated in 1967, Delta Air Lines had its humble beginnings in 1924 as an aerial
crop dusting operation called Huff Daland Dusters. Now, headquartered in Atlanta, Georgia, Delta serves
as an air transportation company for both passengers and cargo, helping over 160 million travelers every
year in six continents.2
The company operates through segments; its Airline segment is responsible for
transporting both passengers and cargo while its Refinery segment provides gasoline, diesel and jet fuel
used in its airline operations.
Delta has a system of hubs and international gateway airports. These are located in Boston,
Tokyo, Seattle, Salt Lake City, Paris, New York JFK, New York LaGuardia, Minneapolis, Detroit,
Cincinnati, Atlanta, and Amsterdam.3
Current Situation
Delta has seen a drastic improvement since it filed for bankruptcy in 2005. A large part of this should be
attributed to the leadership of Richard Anderson who served as CEO from 2007 to 2016. Anderson
slashed costs, orchestrated a well-planned and executed merger with Northwest Airlines in 2008, and
added more profitable international routes to turn Delta into a high-performing airline company.4
1
https://www.delta.com/content/www/en_US/about-delta.html
2
http://www.reuters.com/finance/stocks/companyProfile?symbol=DAL
3
http://money.cnn.com/quote/profile/profile.html?symb=DAL
4
http://www.bloomberg.com/news/articles/2009-05-14/how-delta-climbed-out-of-bankruptcy
9. 8
Anderson also oversaw purchases of ownership stake in Virgin Atlantic and an oil refinery. Anderson
was replaced by Bastien. Delta is about the same size as American Airlines and United Airlines, but has a
much higher market capitalization than both – nearly $30 billion. 5
Current Performance6
Delta has seen stable financial performance for the most part. Its consolidated passenger unit
revenue (PRASM) declined 6.5% for the month of October 2016 which also saw stabilizing of close-in
domestic yields.7
Revenue by Segments:8
Mainline Passenger 77.82 % of total Revenue
Regional Affiliates
Passenger 14.83 % of total Revenue
Total Passenger 92.7
%
of total Revenue
Cargo 1.89 % of total Revenue
Other 5.46 % of total Revenue
Strategic Posture
Delta’s mission statement is “We—Delta's employees, customers, and community partners together form
a force for positive local and global change, dedicated to bettering standards of living and the
environment where we and our customers live and work."
They have what is referred to as “Rules of the Road” that define what the company is and makes up the
foundation for Delta’s culture. 9
Their core values are to:
- Always tell the truth (Honesty)
- Always keep your deals (Integrity)
- Don’t hurt anyone (Respect)
- Try harder than all our competitors—never give up (Perseverance)
- Care for our customers, our community and each other (Servant leadership)
5
https://skift.com/2016/10/11/delta-air-lines-chairman-resigns-effective-immediately/
6
https://skift.com/2016/02/03/delta-air-lines-ceo-anderson-who-led-turnaround-announces-retirement/
7
http://ir.delta.com/news-and-events/news/news-release-details/2016/Delta-Reports-Financial-and-Operating-
Performance-for-October-2016/default.aspx
8
http://csimarket.com/stocks/segments.php?code=DAL
9
http://www.delta.com/content/dam/delta-www/pdfs/policy/delta-rules-of-the-road.pdf
10. 9
Delta considers following as the most important company behaviors:
Listen closely and communicate openly, honestly and directly
Encourage change and innovation
Promote broad employee involvement
Embrace diverse people, thinking and styles
Treat each other with dignity and respect
Debate constructively, decide definitively and support actively
Set clear roles, responsibilities and expectations
Demand and accept responsibility
Follow through with clear, consistent consequences
Develop and leverage deep customer insights
Be courageous and optimistic
In recent years, Delta’s strategies and objectives have been to adjust in response to new market realities
by adding scale, expanding geographic reach, strategic mergers and partnerships with both U.S. and
foreign companies, an overhaul of fleet and airport operations and pricing model. Additionally, Delta
believes it should focus on strengthening culture by using an employee profit-sharing program and
focusing on vertical integration.10
Delta also choose to directly own and control its reservations systems,
making it the only U.S. airline to do so, as well as buying its own oil refinery which was a bold move.
10
https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-airline
11. 10
Board of Directors,11
Executive Board, and Top Management
Delta’s Board of Directors has seen some recent changes in top leadership with Edward Bastien
taking over as CEO, Frank Blake becoming Non-Executive Chairman, and Daniel Carp stepping into a
Director position: all of which has occurred in 2016. Other board members added are also relatively
recent with the longest stint going to Shirley Franklin who has served as Independent Director since 2011.
Delta’s Executive Board and other key people are quite long.
With operations on six continents, Delta relies on strong leadership with a keen sense of the
current environment and the business savvy to take appropriate action. The leadership board is
predominantly male with only two females serving on the Board of Directors; Delta’s executive board is
also biased in favor of males. The boards do have an international presence but this could be developed
further than its present state. Delta’s top management does include a female presence, but things are still
heavily weighted in favor of male leadership.12
GENERAL ENVIRONMENT
Demographic Environment
Opportunity: Baby boomers spend an excess of 120 billion dollars a year on leisure travel while
traveling four to five times a year.13
Baby boomers are the most affluent generation. Airlines should target
baby boomers for extra services.
Opportunity: Millennials as a group are wanting to travel more. This demographic is an opportunity;
however, it depends. Millennials tend to spend more too on flights. Millennials will likely pay for
amenities such as extra legroom or pay for wifi than other generations. For business tickets, Millennials
will spend about 13% more than other generations on their plane ticket.14
Opportunity: In 2014, Hispanics made up 17.4% of the population in the United States.15
This number
has risen steadily and is expected to continue growing. Many still have family in their home countries. Air
travel will be a necessity to visit family.
Opportunity: The Asian community tends to be among the most educated and highest earning
demographic in the United States. It is also among the fastest growing demographic groups in the United
States. According to the Pew Research Center, Asians earned approximately $66,000/yr, over $16,000
more than the General Public earned in the 2010. According to the US Census Bureau, the average
income for Asians has increased to around over $72,000/yr.16
11
http://ir.delta.com/governance/board-of-directors/default.aspx
12
http://quotes.wsj.com/DAL/company-people
13
http://www.travelmarketreport.com/articles/Baby-Boomers-A-Billion-Dollar-Market
14
http://marketrealist.com/2014/09/travel-preferences-of-the-millennials-versus-non-millennials/
15
http://www.pewresearch.org/fact-tank/2015/06/25/u-s-hispanic-population-growth-surge-cools/
16
http://www.pewsocialtrends.org/asianamericans-graphics/
12. 11
Opportunity: As Delta is one of two carriers who operate in all six inhabited continents, Delta should
look at the remaining foreign nationals who are not part of the Hispanic and Asian demographics.
Foreign-born Europeans make up about 5% of those nationals. 17
17
https://www.census.gov/newsroom/pdf/cspan_fb_slides.pdf
13. 12
Opportunity: More than eight million Americans live outside the United States with majority living in
South Central Asia and the Western Hemisphere. This number does not include the military. This
American diaspora is equal to the populations of Chicago, Los Angeles, and Philadelphia combined.18
Sociocultural Environment
Opportunity: Today, approximately 36% of Americans hold a passport. There are many more outside the
United States who desire to travel as well. In particular, Delta should look at backpackers. However,
backpackers could forego air travel for other modes of transportation such as train or automobile.
Opportunity with a minor threat: Business travelers rely on air travel to get them from point A to point
B. Millennial business travel is expected to grow by 50% by 2020. However, baby boomer business travel
is expected to decrease by 13% in the same time period. The airline industry has to shift their focus to
attracting millennial business travelers.
Additionally, the middle class in the United States has seen growth. The median income grew 5.2% in
2015 to approximately $56,500/yr. An increase in salary paired with falling oil prices will encourage the
American middle class to travel more.
Political/Legal Environment
The airline industry is heavily regulated by the Department of Transportation to prevent monopolies from
emerging and to protect consumer interests. However, Delta along with American, United-Continental
and Southwest control 85% of the American Airline Industry.
Technology Environment
Opportunity: Airlines are always looking for more gas efficient airliners. Boeing released the 737 MAX
8 which performs exceptionally well using 20% less fuel.19
Maintaining a gas efficient fleet will result in
lower costs for airliners.
Threat: While Delta’s use of e-tickets have become an opportunity, Delta’s aging IT infrastructure has
become a liability. Delta’s IT infrastructure was brought to the forefront in August 2016. Delta lost
between eight and ten million dollars as a result. With mergers leaving Delta, United, American, and
Southwest with 85% of the domestic capacity and Delta’s IT systems breakdown in August, consumers
are left wondering if Delta and other carriers can carry the burden using IT systems from the 90’s.20
These
infrastructures control everything from loyalty programs to ticket sales to pilot schedules.
18
<https://www.aaro.org/about-aaro/6m-americans-abroad>
19
<http://www.dallasnews.com/business/airlines/2015/12/09/boeing-introduces-its-most-powerful-fuel-efficient-
plane-yet-the-737-max>
20
http://www.wsj.com/articles/delta-air-lines-says-computers-down-everywhere-1470647527/>
14. 13
Economic Environment
Opportunity: Low fuel prices have afforded the airlines to lower the ticket prices for passengers. The
drop in price is even bigger for airlines like Southwest or JetBlue. Cheaper tickets will allow consumers
to travel more. Furthermore, the economy is fueled by a growing middle class which has seen its income
increase.
Global Environment
The airline industry is growing more competitive each day and airline companies are forced to meet a lot
of demands in the global environment that can be threats; however, there are plenty of opportunities as
well.
When U.S. President Barack Obama and his Cuban counterpart, Raul Castro announced a detente in
American and Cuban relations, a new opportunity opened up for Delta. Delta was approved by the
Department of Transportation in early July 2016 to have flights between Kennedy National Airport in
New York and Jose Marti International Airport in Havana. While consumer travel is still technically
prohibited, Delta needs to look at ways to boost travel between the two countries. There are an estimated
15. 14
two million Cubans in the United States, and with the ease of restrictions, Cuban-Americans can visit
more often.
21
Opportunity with a possible threat: However with the election of Republican Donald Trump to the US
presidency, this could be a threat to American and Cuban relations. It remains to be seen what will
happen. Trump has threatened to reverse Obama’s policies if certain conditions are not met. However as
airlines have already established agreements, this threat may not come to pass without compensation or
being grandfathered-in by the U.S. Government.22
Threat: Moreover, Delta and other airlines must consider terrorists actions abroad. After 9/11, the United
States wrote new regulations that put a heavy burden on the airlines. Delta struggled greatly in the years
after. However abroad, terrorists attacks have caused and could continue to cause travelers to opt out of
traveling and staying home instead. Terrorist attacks in France and Belgium, in which an airport was
targeted, mixed with an AirAsia flight being shot down over the Ukraine are growing concerns for the
European market. The disappearance of AirAsia MH370 in 2014 also puts great and unwanted scrutiny on
the airline industry. Terrorism abroad has severe consequences for Delta. It is estimated that about 10% of
Americans canceled their trips because of the attacks in Paris in 2015. This results in nearly an 8.2 billion
dollar loss in travel spending.23
21
<http://www.pewhispanic.org/2015/09/15/hispanics-of-cuban-origin-in-the-united-states-2013/ph_2015-09-
15_hispanic-origins-cuba-01-2/>
22
<http://www.miamiherald.com/news/nation-world/world/americas/cuba/article114076713.html>
23
<http://www.marketwatch.com/story/how-the-terror-attacks-will-impact-the-holidays-2015-11-20>
16. 15
INDUSTRY ENVIRONMENT: FIVE FORCES
Five Forces:
Threat of New Entrants Low
Bargaining Power of Suppliers High
Bargaining Power of Buyers Low
Threat of Substitutes Moderate
Rivalry Among Existing Firms High
Threat of New Entrants: Low
Threat of New Entrants Overall: Low
Economies of Scale High
Product Differentiation High
Capital Requirements High
Switching Costs Low
Access to Distribution Channels High
Government Policy Moderate
Jay Mouawad summed up the threat of new entrants in a 2012 New York Times article very
nicely: “Why would you ever want to start a new airline?” asked Michael Boyd, an aviation consultant
with the Boyd Group International. “The business is very capital-intensive, the returns are rotten and the
track record is terrible. Plus, there’s simply no market for a new carrier today.”
Warren Buffett had this to say about the airline industry: “Here a durable competitive advantage
has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been
present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down”
(Mouawad, 2012)
17. 16
I. Economies of Scale
Economies of Scale is difficult to achieve for airlines, especially new airlines
looking to break into the industry. According to Jay Mouawad of the New York Times,
“High oil prices these days mean carriers must fly full planes to turn a profit, and smaller
airports just do not provide enough passenger traffic.”24
Plus, the airplanes themselves are
very expensive the airline must make enough money to pay them off.
II. Product Differentiation
Finding ways to differentiate one airline from another is fairly difficult.
Amenities, prices, and frequent flyer miles are basically the only tools that airlines have
to differentiate themselves and attract customers. It is especially difficult to find a balance
between amenities and prices. Amenities cost money and airline have few methods of
increasing their revenue. So, airline have resorted to taking away as many amenities as
they can to help their bottom lines25
.
III. Capital Requirements
Entering the airline industry requires significant capital investment. Firstly, the
planes themselves are very expensive and usually require large loans from investors such
as banks in order to be bought. Secondly, fuel can present a major barrier to new airlines
depending on oil prices. Fuel is the largest variable cost for airlines and can drive up
costs rapidly if fuel prices are high26
.
IV. Switching Costs
Switching costs are low for consumers. Consumers are free to purchase tickets
from a different company every time they fly with few consequences. As a result, airline
companies created the concept of frequent flyer miles in order to give consumers an
incentive for loyalty.
V. Access to Distribution Channels
It can difficult for new airlines to find airports that will give them gates to
operate from because the current airlines are so entrenched in their hubs. The airline
industry has gone through so many mergers that only a handful of airlines control most
the hubs in the United States. However, there are a handful of airlines that have been
successful at entering the market by carving out a niche in areas where the major airlines
don’t operate. For example, California Pacific is start-up airline that plans to run small
routes between California cities such as Sacramento and Oakland.27
VI. Government Policy
The airline industry was officially deregulated in 1978 with the Airline
Deregulation Act. Prior to that piece of legislation, the government controlled routes and
prices through the Civil Aeronautics Board, which regulated airlines like a public utility.
24
http://www.nytimes.com/2012/05/26/business/start-up-airlines-face-big-obstacles.html
25
http://www.nytimes.com/2012/05/26/business/start-up-airlines-face-big-obstacles.html
26
http://elliott.org/the-navigator/should-airlines-be-re-regulated/
27
http://www.nytimes.com/2012/05/26/business/start-up-airlines-face-big-obstacles.html
18. 17
The decision was made by Congress to deregulate airlines because it kept prices high and
prevented airline companies from being as efficient as possible. The move toward
deregulation was actually opposed by the airline companies at the time because they
didn’t want to lower prices and they worried that the industry would be destabilized.
They were right to be concerned because many airlines, such as Pan Am, Eastern Air
Lines, and Braniff International, were unable to compete price-wise and forced out of the
market.28
Although the industry is officially considered to have been deregulated, there are
still a large number of government regulations on the airline industry such as safety
regulations and licenses. However, many people are currently debating whether the
airline industry should be re-regulated again as a public utility. According to Christopher
Elliott, consumer advocate and journalist, “The days of a freewheeling, lightly regulated
airline industry, in which a carrier can charge whatever fees and fares it pleases, may be
nearing an end” (2015). Travel agencies and traveler advocacy organizations are
currently lobbying Washington to do something about the ability of airlines to charge
what many people consider to be unfair fees. For example, the Business Travel Coalition
has asked the US government to look into the practice of fuel surcharges. Despite the fact
that gas prices have been dropping, airlines haven’t dropped their tickets prices, which
violates a 2012 guidance that the fuel surcharges must match the actual price of fuel.29
Bargaining Power of Suppliers – High
According to Teresa Cederholm of Yahoo Finance, “The air transport supply chain consists of
aircraft manufacturers, lessors, air navigation service providers (or ANSPs), travel agents, and freight
forwarders. The supply chain also includes providers of other services such as computer reservation
systems (or CRS), catering, ground services, and maintenance, repair, and overhaul (or MRO)” (2014).
These suppliers tend to earn a much higher profit than the airlines themselves, but the amount of profit
depends on the supplier. For example, computer reservation services providers, travel agents and freight
forwarders are very profitable and can earn double their capital. The supply of the actual airplanes is
dominated by Boeing and Airbus, so there’s not a lot of competition among suppliers in this area and their
bargaining power is high.30
Bargaining Power of Buyers – Low
The bargaining power of buyers is basically non-existent in the airline industry because
consumers do not have the power to negotiate prices. However, consumers do have the ability to go
online and look for the best available price.
28
http://aviationweek.com/blog/law-changed-airline-industry-beyond-recognition-1978
29
http://elliott.org/the-navigator/should-airlines-be-re-regulated/
30
http://finance.yahoo.com/news/low-entry-barriers-intensify-competition-221134980.html
19. 18
Threat of Substitutes – Moderate
Common Substitutes Threat
Cars Moderate
Trains Low
Boats Low
Video Conferencing Moderate
The threat of substitutes is moderate in the airline industry. To some extent, consumers can
choose other methods of transportation such as cars, trains, and boats. Choosing between flying or other
modes of transport is mostly relevant for domestic flights and depends on how much time and money the
consumer has. For instance, a consumer might to choose to drive from Memphis to Chicago if the price of
driving is cheaper and the driver doesn’t view the distance as being too far. However, international travel
basically leaves the consumer with no choice but to fly.
Video Conferencing is a technology serves as a threat to airlines sometimes. In the past, business
people had to travel to have meetings with people who work in different parts of the country or world.
Although face to face communication is preferable and sometimes necessary, many companies are opting
for video conferencing as a way to reduce their costs and reduce the amount of time that employees spend
outside the office.
Rivalry Among Existing Firms- High
There is an abundance of competition between airline companies. They compete on price as well
as amenities and frequent flyer miles. However, the rise of mergers has decreased competition to some
extent by reducing the number of competitors. According to Teresa Cederholm of Yahoo Finance, “The
six major airlines in the United States, including Delta Air Lines, Inc. (DAL), United Continental
Holdings Inc. (UAL), Alaska Air Group, Inc. (ALK), JetBlue Airways Corporation (JBLU), Southwest
Airlines Co. (LUV), and American Airlines (AAL), account for 94% of market share by capacity” (2014).
20. 19
COMPETITIVE ENVIRONMENT
Competitive Environment Delta
Airlines
American
Airlines
Southwest
Airlines
United
Continental
Holdings,Inc.
Weight Score Rating Score Rating Rating Score Rating Score
Customer Loyalty/
Frequent Flyer
Programs
.15 3.5 .53 3 .45 4 .60 3 .45
Competitive Pricing .10 3 .30 3 .30 4 .40 3 .30
Financial Standing .10 3.5 .35 2.5 .25 3.5 .35 3 .30
Marketing and
Advertising
.10 3 .30 2.5 .25 3 .30 3 .30
Market Share .15 3.5 .53 3 .45 4 .60 2.5 .375
Number of
Destinations
.10 4 .40 2.5 .25 2 .20 3 .30
Strategic Alliances/
Partnerships
.10 3.5 .35 3 .30 2.5 .25 4 .40
Fleet Size .10 3.5 .35 3 .30 3 .30 4 .40
On-Flight Services .10 3.5 .35 2.5 .25 4 .40 3 .30
Score 1.00 3.46 2.8 3.4 3.13
Delta is very competitive in the industry. Its financial standing, strategic partnerships, and
customer loyalty programs sets it apart from the rest of its competition. However, Southwest is right
behind Delta, but it is held back a smaller fleet and lack of partnerships. Delta could strengthen its
position by partnering up with hotels as Southwest currently does.
21. 20
HYPERCOMPETITIVE ENVIRONMENT: FOUR ARENAS ANALYSIS &
COST/QUALITY ARENA
Amongst the big three, Delta’s fares are competitively priced with United and American, but
usually offers a higher quality service than those carriers. However, Southwest offers higher quality
service and cheaper airline prices compared to Delta. Delta will occasionally slash prices to compete with
Southwest.
Timing and Knowhow Arena
First Movers Follower
Winner ● In-flight mobile
devices
● Frequent Flyer
Program
● Strategic Alliance
Loser ● Low-cost airline
22. 21
Strongholds Arena
Delta holds the biggest market cap in the industry at 37.1 billion dollars, but puts them in second
for the market with Southwest holding the top spot with 18.2%. Delta has 17% of the market.31
However,
Delta’s strategy has also put them among the top carriers in the world as they travel to all six inhabited
continents which only eight other carriers do, United being one of them.
Deep Pockets Arena
Delta’s acquisition of Northwest Airlines in 2009 made it the largest carrier in the United States.
However, United usurped Delta’s position with their acquisition of Continental. Southwest and American
have both followed suit by acquiring smaller airlines to maintain their spots in the airline industry and
further grow their brand. This has further led to Delta, Southwest, United, and American controlling 85%
of the domestic capacity for the United States. Delta further has acquired fuel companies such as Monroe
Energy in the past to provide their own fuel. However, the airline industry does not have much capability
to operate in the deep pockets arena as the costs are high to maintain.
External Strategic Factors Weight Rating Score
Opportunities
● Customer Loyalty
● Low fuel costs
● Upgraded fleet
● Strategic Alliance with other airlines
● Emerging Markets
.15
.15
.10
.05
.10
4
3
4
3
4
.60
.45
.40
.15
.40
Threats
● Aging IT Infrastructure
● Highly competitive industry
● Terrorism abroad
● Government Regulation
.15
.15
.05
.10
3
3
3
3
.45
.45
.15
.30
Total 1.00 3.35
31
https://www.statista.com/statistics/250577/domestic-market-share-of-leading-us-airlines/
23. 22
INTERNAL ENVIRONMENT
Corporate Structure
Delta’s corporate structure is vertically organized, indicating that power is allocated from top to
bottom. Corporate governance is established through the company’s various levels of management. It
consists of an executive board and a board of directors in addition to a team of its top management.
Corporate Culture
Delta’s corporate culture, known as the “Delta culture,” is very people focused with a dedication
to teamwork. It is built around their core values: honesty, integrity, respect, perseverance, and servant
leadership. An open door policy exists between management and the employees, because their belief is
that if their employees’ needs are met, the quality of their service will be better.
Corporate Resources
Tangible Resources
Human Resources Delta manages over 80,000
employees.
Aircraft fleet Delta has about 830 mainline
aircraft in fleet, owning 644 and
leasing 186.32
Oil Refinery Delta supplies its own fuel, due
to the acquisition of Monroe
Energy, LLC.33
Intangible Resources
Brand Delta’s brand is considered the
most reliable among its
competitors.34
32
http://www.delta.com/content/www/en_US/about-delta/corporate-information/aircraft-fleet.html
33
http://www.monroe-energy.com/why-monroe-energy/
24. 23
SkyTeam Alliance Partnership coverage areas span
across more than 800 diverse
locations worldwide.
Joint Venture Partners Partnership coverage areas
consist of 648 locations in 123
countries.
Capabilities
Delta possesses a number of capabilities. Primarily, its hub in Atlanta is the world’s largest airline
hub, and it alone handles traffic of up to 1,000 daily departures to 206 destinations. Moreover, with over
800 mainline aircraft in fleet, Delta’s international partnerships gives the airline the added benefit of
serving customers in adjunct with its alliances in 648 destinations throughout 123 different countries.
These partnerships expand Delta’s chances of obtaining a more dominant international presence in the
future. Lastly, with the acquisition of Monroe Energy, LLC, the company is in a unique position to supply
its own fuel for the purpose of powering its own operations. Not only does this make for smoother
operations, but this asset plays a significant role in the move toward debt reduction.
Core Competencies
Delta’s core competency lies within its international partnerships. Its partnerships with Air
France-KLM, Alitalia, and Virgin Atlantic result in more than 250 daily flights across the Atlantic and
service to about 500 locations in both Europe and North America, making it the world’s largest
transatlantic network. Additionally, Delta’s transpacific alliance with Virgin Australia makes flying to
over a thousand locations between North America and the South Pacific possible.35
However, in alliance
with SkyTeam, Delta is able to offer customers global coverage that spans across more than 800 diverse
locations.36
Value Chain Analysis
Primary Activities Ratings
Inbound & Outbound Logistics Above Average
Operations Above Average
Marketing Above Average
Service After the Sale Above Average
34
http://www.usatoday.com/story/opinion/2016/08/10/delta-outage-flight-delay-airlines-customer-
column/88516396/
35
http://news.delta.com/corporate-stats-and-facts
36
http://www.skyteam.com/en/about/
25. 24
Inbound & Outbound Logistics
On-Time Arrival Performance37
Air Carrier % On-Time % Air Carrier Delay % Late Arriving
Aircraft Delay
Delta Airlines 90.29% 3.58% 2.62%
American Airlines 83.51% 4.75% 4.26%
Southwest Airlines 81.26% 4.76% 8.52%
United Continental Holdings, Inc. 85.10% 4.01% 4.54%
Based off of the U.S. Department of Transportation’s 2016 Air Travel Consumer Report, Delta
Airlines managed to beat all three of its competitors in arrival performance by maintain the highest
percentage for being on time, the lowest percentage for air carrier delay, and the lowest percentage for
late arriving aircraft delay.
Mishandled Baggage Reports38
(Total Baggage Reports)
Air Carrier April 2016 April 2015
Delta Airlines 13,703 18,488
American Airlines 28,934 23,167
Southwest Airlines 35,934 35,363
United Continental Holdings, Inc. 12,487 15,683
According to the U.S. Travel Report, Delta came in second to United as having the least amount
of mishandled baggage reports in years 2015 and 2016. However, Delta now uses Radio Frequency
Identification (RFID) technology to track its baggage, the first among U.S. carriers to use such a state-of-
the-art technique.39
The use of this new technology should drastically minimize the risk of mishandled
baggage in the future.
37
https://www.transportation.gov/sites/dot.gov/files/docs/2016JuneATCR_0.pdf
38
https://www.transportation.gov/sites/dot.gov/files/docs/2016JuneATCR_0.pdf
39
http://news.delta.com/delta-introduces-innovative-baggage-tracking-process-0
26. 25
Operations
Delta’s operations are seemingly spectacular. Standing out among its competitors as having
among the best international offerings, the airlines accommodates more than 180 million customers per
year, flying to 312 different destinations and operating in a total of 54 countries.40
One of the major airline’s main goals is to increase their level of efficiency and power, which has
been done very well thus far despite the fact that their technology systems leave a lot to be desired.
Furthermore, the company made an important decision to bring their reservations system in-house,
putting them on the right path to achieve their desired results.41
Operational Statistics42
Headquarters Atlanta, Ga., USA
Key Hubs and Markets: Atlanta, Boston, Cincinnati, Detroit, Los Angeles,
Minneapolis-St. Paul, New York-JFK, New York-
LaGuardia, Salt Lake City, Seattle, Amsterdam,
London-Heathrow, Paris-Charles de Gaulle, and
Tokyo-Narita
Largest Hub: Atlanta – world’s largest airline hub with 1,000 daily
departures to 206 destinations
Destinations Served: 312
Countries Served: 54
Mainline Aircraft in Fleet: More than 800
Annual Passengers: More than 180 million
Daily Flights: More than 15,000
(includes worldwide alliance partners)
Frequent Flier Program: SkyMiles (established 1981); more than 91 million
members
Employees: 80,000
40
http://news.delta.com/corporate-stats-and-facts
41
https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-airline
42
http://news.delta.com/corporate-stats-and-facts
27. 26
Pre-tax Income (2015): $5.9 billion (excluding special items)
Profit Sharing (2015): $1.5 billion
Alliance: SkyTeam
Joint Venture Partners: Air France-KLM, Alitalia, Virgin Atlantic, and
Virgin Australia
Destinations served with worldwide partners: 648
destinations in 123 countries
Marketing
Delta does quite well in diversifying its marketing tactics. Its Sponsorship & Promotional
Marketing division focuses on creating partnerships in various communities in order to enlarge their
brand visibility43
The marketing team recruits the help of a third party advertising firm, such as MKG, to
cultivate their sponsorship portfolio tactics. MKG specializes in experiential marketing through sports,
entertainment, arts & culture, and food & wine. In the past this third party source has aided Delta in
creating distinctive partnerships that allowed Delta’s story to be brought to life.44
One of Delta’s current
sponsorships is the Chelsea Football Club, a professional English league, which began in 2012 and is set
to last until 2017. The Chelsea Football team members have attended numerous events worldwide
advertising Delta’s products, services, and shared global scope.45
Sports Entertainment/Arts & Culture Food and Wine
43
https://public.conxport.com/delta/sponsorship/home.aspx
44
http://www.thisismkg.com/featured/delta-2/
45
http://news.delta.com/sponsorship-deal-extended-chelsea-fc
28. 27
Commercial ads are another marketing tool utilized by the
airline. Delta is known for hiring celebrities and other people of high
profile to make commercial appearances. Additionally, Delta
makes use of its Sky Magazine as well as digital venues to increase brand
awareness. These venues include social media, such as Facebook and
blog, as well as its ever popular mobile app.
Service After the Sale
According to Business Travel News, Delta ranked number one
in 2015 as the overall best U.S. Airlines for business travel managers
and buyers, beating all three of its competitors. This is largely accredited to its top-notch customer
service, which received a score of 4.39 out of 5.46
Through SkyMiles, Delta’s widely acclaimed frequent flyer program, members can earn points
yielding them access to complimentary services as well as discounted plane tickets. The SkyMiles
program is separated into two categories, basic membership and the Medallion Elite Program. The
Medallion Program is further divided into four segments: Silver, Gold, Platinum, and Diamond. All of
these programs come with its perks, varying in part at each level.47
46
http://www.businesstravelnews.com/Business-Travel-Research/Delta-Flies-Highest-In-BTN-s-18th-Annual-
Airline-Survey
47
http://www.delta.com/content/www/en_US/skymiles/medallion-program/medallion-benefits.html
29. 28
48
Secondary Activities
Firm Infrastructure
Delta’s infrastructure takes on a functional structure. Over the years it has become more vertically
integrated in order to gain more control of its supply chain. Evidence of this is shown through the
acquisition of the Monroe Energy, LLC oil refinery. With jet fuel being the company’s largest expense,
costing a large annual sum of $12 billion, the airline felt the need to reduce its level of debt and become
unparalleled in procuring this essential product and distributing it to all of its worldwide operations.49
Human Resource Management
Delta manages over 80,000 employees. The company offers a competitive package of
compensation, benefits and career growth and development for its employees. A part of this package is a
48
https://consumerist.com/2014/12/09/delta-revamps-seating-options-offers-complementary-alcohol-to-main-cabin-
on-select-flights/
49
https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-airline
30. 29
profit-sharing plan, which allows employees a share of 10% of profits. However, if the company earns
more than $2.5 billion in a year, employees can receive as much as 20% of profits.
The airlines has only one large union, the Air Line Pilots Association; and great relations exist
between the two entities. Delta’s work groups turned down nine proposals to unionize, making it the only
major airline outside the Middle East that is largely nonunionized.50
Technological Development
Ultimately, Delta seriously lacks in the area of technological development. Similar to other
airlines, its computer system is several decades old. The system has had various upgrades over the years,
but the entire system desperately needs a fundamental overhaul. Delta’s IT system controls everything
from flight dispatching to ticket sales, and any down time can have catastrophic effects. In the 2016 crash,
Delta was forced to cancel many flights and send customers to rival airlines, losing $150 million dollars
and taking a few days to return to normal operations.
Procurement
With the exception of its aircraft, Delta derives its supply from multiple sources. However, as
their mission is to “deliver value by developing partnerships with qualified diverse suppliers,” Delta
initiated the Supplier Diversity Program. Their philosophy is the following:
“Delta Air Lines recognizes the critical role of small, minority, and women-owned businesses in
the overall strength of the U.S. economy and ultimately to Delta stakeholders. To maximize returns to
Delta customers, shareholders, employees, and the communities in which we operate, Delta seeks to
utilize the products and services of qualified small, minority, and women-owned businesses.”51
Partial Listing of Products and Services52
Aircraft & Aircraft Mtc. GSE (Ground Support
Equipment)
Simulators
Aircraft & Engine Parts Insurance (Corporate) Supplies
Airport Services Mail & Postage Technology - Hardware
Beverages Marketing Technology - Phones & Pagers
Cargo Meetings & Events Technology - Software
50
https://hbr.org/2014/12/deltas-ceo-on-using-innovative-thinking-to-revive-a-bankrupt-airline
51
http://www.delta.com/content/www/en_US/about-delta/partnering-with-delta/supplier-diversity.html
52
http://www.delta.com/content/www/en_US/about-delta/partnering-with-delta/supplier-diversity/supplier-
diversity-process-overview.html
31. 30
Environmental Services MRO (Mtc. Repair & Overhaul) Tooling
Equipment Paper & Printed Products Transportation
Facilities Maintenance Passenger Expenses (IROPs) Travel & Expenses
Food Professional Services Uniforms
Fuel Safety & Security Utilities
STRATEGIC ANALYSIS
Operations-Level Strategy
On the operational level, Delta primary strategy is to continually enhance the customer
experience through technological innovation. This year, Delta has implemented two strategic initiatives
that capitalize on the prevalence of smartphone usage among their passengers. The first is the release of
Delta Studio as a complimentary inflight service on all Wi-Fi-enabled flights. Studio provides on demand
video streaming and entertainment platform on mobile devices. In 2016, they became the first U.S.
carrier to offer this mobile in-flight streaming service for free on all domestic flights. JetBlue had offered
a similar service in a seat-back display with live television.
In October, Delta released a luggage tracking feature that displays tracking data from RFID-
enabled luggage tags in their mobile app. This allows passengers to follow their luggage in real time,
providing a transparent view into one of the more stressful of air travel. This feature is complimented by
the addition of free in-flight Wi-Fi access for all U.S. domestic flights. While limited, the free network
allows passengers to stream free on demand video content and access the Delta mobile app for flight and
luggage information.
Business-Level Strategy
During the late 1990s and mid-2000s, the traditional airline industry faced a series of threats to its
historical structure of major legacy carriers offering hub-and-spoke-style operations. The entrance of
low-cost carriers with point-to-point service caused a major reaction of the largest carriers attempting, and
failing, to introduce low-cost sub-brands. Delta tried twice, introducing Delta Express in 1996 and Song
32. 31
in 2003. Delta’s foray into the cost leadership realm was major failure and led other legacy carriers to
abandoning the strategy altogether.
The result of this failure was a shift in strategy beginning in 2007 to achieve market share
dominance through differentiation of the core Delta brand. This strategy involved the acquisition of
Northwest in 2008 to broaden the scale of Delta’s domestic operations, increased emphasis on high-level
customer service, promotion of Delta’s unique international presence, and aggressive marketing against
global competitors United and American. Instead of trying to compete on price with low-cost leaders
such as Southwest or JetBlue, Delta now seeks to validate their price through superior operations and
service.
After Delta’s purchase of Northwest, they were able to expand their international presence and
offer the most extensive domestic network in America until 2015. They continue to utilize regional
carriers to outsource smaller local flights out of major hubs to direct core resources towards mainline,
high-revenue flights between major cities around the world. Seventeen percent of Delta’s total revenue
comes from feeder airlines that operate smaller planes at a lower cost. While primary operating costs are
paid back to the Delta Connection carriers, all ancillary revenue, such as ticketing, cargo, and in-flight
services is held by Delta. This contrasts with low-cost providers, whose primary revenue is generated
from small airports and point-to-point service. This strategy allows Delta to promote its status as one of
the world’s largest airlines serving over 300 destinations in 71 countries worldwide.
In customer service, Delta promotes its SkyMiles loyalty program and Sky Club network as two
core offerings. The SkyMiles program has partnered with American Express to pair loyal customers with
the world’s premier credit card service operator. Delta recently lowered status requirements and lowered
the mileage prices of international flights through partnerships with Virgin Atlantic, KLM, and Air
France. In November, Delta announced a partnership with AirBnB for customers to earn SkyMiles for
stays booked through the service.
SkyMiles card holders are able to gain discounted access to their Sky Clubs, a worldwide network
of VIP clubs providing complimentary food and beverage service. In contrast, neither American nor
United offer discounted access to their premium lounges to holders of loyalty program cards. Delta’s Sky
Club also has more international locations and offers a better variety of food and beverage than its
primary domestic competitors. Until 2016, Delta was also the only major U.S. carrier to continue to offer
complimentary in-flight snacks on domestic flights after a cost-saving, revenue boosting industry push,
led by American, to offer food for purchase onboard to supplement dipping profits.
In order to market their differentiated strategy, Delta rebranded itself for a more modern,
international feel and emphasizing its superior premium service offerings. This first occurred after the
Northwest acquisition in 2008, with the introduction of a modern logo. Delta described this new branding
as representing is “successful transformation into a highly-differentiated, customer-focused airline.”
Through its status as the only major U.S. carrier with hub-and-spoke presence on both the European and
Asian continents, they have positioned themselves to project their brand globally and offer Delta-branded
33. 32
connecting flights and premium Delta service worldwide. They also sponsor Chelsea FC, a premier
English football team with a global following. This follows a trend of world airlines sponsoring major
football clubs led by Emirate’s sponsorship of Arsenal and FC Barcelona.
Corporate-Level Strategy
Directional
Delta’s seeks to maintain its approximately 15% market share of the overall American air travel
market through strategies aimed at stability among mainline flights with retrenchment in smaller markets.
Among mainline flights and legacy carriers, the airline industry has an extremely high level of brand
loyalty, which decreases the ability of competitors to pull new customers toward their service. Since its
last major acquisition in 2007, Delta has sought to consolidate its hold on major airports and increase
customer loyalty through premium service offerings to loyalty program members and increased
connectivity internationally. In contrast, Delta has divested from smaller markets where competition has
increased from low-cost carriers offering limited point-to-point service. The overall stability strategy has
sought to solidify their hold on key revenue streams from major markets and international traveler and
outsource operations to regional carriers to compete with low-cost carriers in the smaller markets.
Internationally, Delta’s stability strategy translates into its SkyTeam alliance, with partner airlines
extending Delta’s operational reach further into Europe, Latin America, Asia, and Australia without
having to invest significant capital in developing maintenance facilities, human resource operations, or
support centers abroad. This reduces financial exposure to foreign currencies and any potential liquidity
issues in the countries where assets are held. One of their most important partnerships is their
transatlantic joint venture with KLM-Air France, Alitalia, and Virgin, which provide management and
support for Delta hubs in Amsterdam and Paris. Recently, Delta has expressed interest in an acquisition
Avianca, the Colombian flag-carrier, which would extend operational reach into Latin America where
American Airlines has traditionally been dominant. This indicates a small growth strategy in one of
Delta’s weakest international markets.
Diversification
Delta pursues a dominant-business strategy with commercial, scheduled passenger air service
providing an overwhelming majority of their total revenue. Currently this segment makes up 87.2% of its
total revenue, with major cash flow streams from ticket sales and in-flight purchases. A majority of their
capital expenditures, development and strategic positioning investment goes into this segment to increase
revenues, lower operating costs, and maintain market share through customer loyalty.
In addition to scheduled passenger service, Delta offers cargo service through Delta Cargo,
making up the second-largest revenue stream at 2.5% of the total. Delta Cargo, unlike other air cargo
services such as FedEx or UPS, does not provide door-to-door parcel services on dedicated cargo planes.
Instead this business segment focuses on contract service of larger shipments which are carried in the hold
of scheduled passenger flights. These shipments can be picked up at the airport by the receiving party
34. 33
rather than delivered by a Delta driver. This is comparable to other major airlines who supplement excess
hold capacity with cargo shipments to boost revenues, if only slightly.
Delta’s remaining 10.3% of revenues stem from a variety of smaller complimentary operations
that utilize their existing fleet or expertise. The Delta TechOps division offers third-party maintenance
and repairs services to clients. This service utilizes Delta’s economies of scale, training expertise, and
global reach to help smaller airline operations with MRO at a lower cost. Likewise, their Global Services
division utilizes Delta’s operational expertise to outsource management and consulting services to smaller
airlines. Another minor revenue stream is the Delta Private Jets service which offers charter services for
both larger clients with capacity to fill a commercial jet and private parties needing a traditional luxury
service. These clients include high-net worth individuals, corporations, political campaigns, and sports
teams. Finally, Delta operates a wholly-owned oil refinery, Monroe Energy, to supply its jet fuel. Aside
from the energy needs of Delta, the refining process also produces other byproducts which are then sold
for revenue.
Hypercompetitive Strategy
The airline industry, along with many others, has benefited from historically low fuel prices. In
response, the oil industry has cut production to attempt to curb supply and drive up prices. However, in a
blatantly hyper-competitive move, Delta’s Monroe Energy has implemented a counter-intuitive strategy
of continuing high jet fuel output despite low market prices. Low yields would generally drive refinery
operators to other more profitable products, but Delta is committed to sacrifice yields to benefit its
primary business operations as a passenger airline. By pressuring Monroe’s management to keep output
and price below equilibrium, they have successfully hedged against the market forces at work. This could
have only been achieved through complete control of the subsidiary, and this continued strategy will
provide an operational advantage over competitors.
Internal Strategic Factors Weight Rating Score
Strengths
● Excellent Operations
● SkyTeam Alliance
● Second largest flight network
● Large Customer Base
● Oil Refinery Ownership
.10
.10
.15
.05
.10
4
3
5
4
4
0.4
0.3
0.75
0.2
0.4
35. 34
● Employee Relations
● Brand
.05
.15
3
3
0.15
0.45
Weaknesses
● International Cabin Experience
● Outdated Technology
● Low International Revenue
● Debt
.05
.10
.10
.05
3
4
3
3
0.15
0.4
0.3
0.15
Total 1.00 3.65
Strategic Factors Weight Rating Score
● (S) Strategic mergers and acquisitions
● (S) Strong global presence and market position
● (W) Debt burden/indebtedness
● (W) Aging IT Infrastructure
● (O) Customer Loyalty
● (O) Low Fuel Costs
● (T) Government Regulation
● (T) Highly Competitive Industry
.10
.15
.10
.15
.15
.10
.10
.15
4
4
3
5
3
4
4
3
0.40
0.60
0.30
0.75
0.45
0.40
0.40
0.30
Score 1.00 3.60
36. 35
Review of Current Mission and Objectives
Delta desires to employ innovative strategies, key partnerships abroad, and a giant fleet to meet
the consumer’s needs. Under the current mission, Delta does that; however, Delta cannot just want to
meet the consumer’s needs anymore. Delta needs to look toward building the best consumer experience in
the American airline industry. Delta has failed to use technology to create innovative strategies and needs
to look at using technology to apply more innovative strategies.
Strategic Alternatives (TOWS)
External Opportunities
● Customer Loyalty
● Low Fuel Costs
External Threats
● Government Regulation
● Highly Competitive Industry
Internal Strengths
● Strategic mergers and
acquisitions
● Strong global presence
and market position
● Enhance SkyMiles marketing
to Japanese and European
markets where Delta has
existing hubs. Offer
incentives to join program for
business travelers operating in
the United States.
● Through Monroe Energy,
acquire additional refining
capacity to increase
economies of scale and reduce
the costs of jet fuel
production.
● Leverage the large domestic
market share to lobby
government regulators against
providing benefits for low-cost
airlines.
● Acquire controlling stakes in
smaller competitors, such as
Allegiant, providing low-cost
vacation travel under the Delta
umbrella (see KLM-Air
France’s joint venture,
Transavia)
Internal Weaknesses
● Debt
burden/indebtedness
● Aging IT infrastructure
● Reduce exposure to fuel cost
volatility by storing jet fuel in
tanks owned by Monroe
Energy. Holding large
quantities (millions of gallons)
at current prices will have
future benefits if costs rise.
● Use an updated passenger
information system to capture
customer loyalty through
catered offerings, especially to
SkyMiles members and
targeted advertising to non-
members
● Reduce debt burden through
the sale of strategic assets to
competitors, such as aging
planes or gate contracts at
smaller airports.
● Increase transparency of the IT
system to allow government
regulators more insight into the
operations. This will have the
effect of easing the minds of
government regulators to
preempt in further constricting
measures.
37. 36
Recommended Strategy
Delta must improve their customer service by two means: Information Technology and Cabin
Experience. Delta needs to recreate and introduce customers to a brand new Delta experience. Building
partnerships outside the airline industry is a must. Delta’s partnership with AirBnB is on the right path.
However, further steps need to be taken. That is why we suggest Delta partner with Uber. Offering
concierge services with Uber to all SkyMiles members shows that Delta is willing to take care of their
customers. Moreover, Delta can offer SkyMiles members the opportunity to rack up points when they
choose to take an Uber.
Moreover, Delta can partner with celebrities to improve their food menus. Celebrity chefs, such
as Anthony Bourdain could redesign the food menu promoting more health conscious items. Additionally,
Delta should look towards renovating the cabin ambiance, such as having starlit cabins when it gets dark
or seat dividers can further improve the customer experience. Such an ambiance will have people talking
about why people should fly with Delta again.
On the IT side, Delta should invest in technology systems that have a “fault tolerance” system.
These types of systems presume that at any given moment any module within the system could crash, and
for this reason in particular each level of the network has numerous ready reinforcement measures. While
Amazon and Google experience servers failing on a regular basis, they have hundreds of thousands of
servers on standby whenever the need arises. The case for Delta should not be any different. Ed Bastian
once stated that millions of dollars were invested in Delta’s technological infrastructure over the past
three years. Still, as everyone observed from the crash on August 8th
, the amount spent to update the old
information systems was just not enough.
The overhauling and revamping an outdated IT system comes with risks and high costs, but for
the long term, it is a necessity that needs to be taken into consideration. The implementation of this
overall should take place in various stages so as not to shut down the entire system. Avoiding such the
risk is no longer an option. Delta has to take on the costs of restructuring its IT systems. Consider the
opportunities and threats of choosing to upgrade.
III. FINANCIAL ANALYSIS
Profitability Ratios
Ratios 2011 2012 2013 2014 2015
Gross Profit
Margin
5.06 0.07 93.42 -7.38 10.31
Return on
Investment
1.97 2.29 21.78 1.24 8.44
Net Profit
Margin
2.43 2.75 27.90 1.63 11.12
Return on
Equity
- - 4.49 6.14 4.90
Earnings Per
Share
1.01 1.19 12.29 0.78 5.63
38. 37
Liquidity Ratios
Ratios 2011 2012 2013 2014 2015
Current Ratio 0.61 0.62 0.68 0.74 0.52
Quick Ratio 0.41 0.38 0.38 0.39 0.32
Inventory to
Net Working
Capital
-3.21 -4.78 22.28 16.32 20.42
Cash Ratio 0.28 0.25 0.27 0.20 0.20
Delta’s low current ratio and quick ratio are concerning. Lenders will not be as likely to lend money to
Delta due to the poor ratio.
Activity Ratios
Ratios 2011 2012 2013 2014 2015
Inventory
Turnover
61.04 31.16 20.10 23.99 22.07
Days of
Inventory
5.98 11.71 18.16 15.22 16.54
Asset Turnover 0.81 0.83 0.78 0.76 0.76
Fixed Asset
Turnover
1.73 1.79 1.77 1.84 1.81
Accounts
Receivable
Turnover
23.26 22.52 22.88 20.67 18.86
Accounts
Payable Period
28.92 32.80 39.98 39.11 57.11
Days of Cash -7.25 -4.89 -5.87 -6.23 -21.38
Leverage Ratios
Ratios 2011 2012 2013 2014 2015
Debt to Asset 30.52 27.24 24.88 18.75 15.70
39. 38
Ratio
Debt to Equity
Ratio
- - 84.13 96.19 62.36
Long-term
Debt to Capital
Structure
81.61 95.58 103.59 46.21 45.89
Other Ratios
Ratios 2011 2012 2013 2014 2015
Price/Earnings
Ratio
10.78 12.47 2.62 56.26 7.23
Dividend
Payout Ratio
- - 2.5 2.4 11.4