Table of Contents
- Factors Affecting Profitability
- Buy Case Analysis: Delta Air Line paper online
- Competitive Advantage Differences between Low-Cost Airlines and Legacy Airlines
- Factors behind the Failure of Legacy Airlines Attempts to Imitate Low-Cost Carriers
- Strategic Options Available
- Best Strategic Option
- Related Case Studies essays
Over the years, the United States airline industry continued to grow significantly serving more than 620 million passengers in 2001 and collecting not less than 581 billion in fares. Although the size of the industry kept growing, major legacy airlines like Delta Air Line continued to post deteriorating profit figures. However, some low-cost carriers like JetBlue continued to thrive in the same industry experiencing an increase in profitability and market share. As a result, the management of Delta Air Line was worried about the performance and, therefore, established a cross-functional task force to dig into the causes of this negative performance. Regarding the challenges affecting Delta Air Line, this paper aims at establishing reasons as to why Delta Air Line is not thriving in the same environment that low-cost carriers are doing so well. Moreover, the essay will recommend strategic options available to the company.
Factors Affecting Profitability
Although the airline industry in America continued to grow significantly, its growth in size did not lead to increased profitability for most airliners in the United States. One of the major factors affecting profitability in this industry is deregulation. The Deregulation Act passed in 1978, led to the freedom of pricing in the industry and route entry and exit. As a result, fares dropped significantly, and twenty-two low-cost airlines had invaded the market and were posing a significant threat to the major legacy airlines that had previously dominated the market (Jan & Laurent, 2015). Due to the high fixed costs of operation and expensive labor matched by low profitability the level of profitability continued to remain below average in the airline industry.
Competition in the airline industry is another factor that led to reduced profitability in the industry. As a result of the Deregulation Act, many low-cost airlines joined the market offering lower ticket prices in the market (Jan & Laurent, 2015). Since customers in this industry selected an airliner based on the fare charged, the airlines competed using a price reduction strategy hence leading to decreased profitability. An increase in the number of competitors in a given market results to price reduction, which in turn leads to a decline in profit margins (Rothaermel, 2015).
In addition, advances in technology played a significant role in reducing the level of profitability in the airline industry. In an attempt to increase their profits level most airlines adopted a price discrimination strategy, but the emergence of the internet which led to the establishment of numerous travel websites downplayed this policy (Jan & Laurent, 2015). Following the increased online avenues where customers could compare different airlines prices charged, the airlines were forced to charge fair prices since the aviation market is price sensitive (Huck, Lünser, & Tyran, 2016).
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Inputs, especially employee salaries and benefits were also a significant burden on the airline industry, which affected the rate of profitability. Most of the airlines labor were unionized with the separate union for each staff type. As a result, the unions negotiated different remunerations hence leading to a significant burden regarding operation cost to the airlines. The unions also implemented working hour’s restrictions, which led to reduced productivity hence small profit margins for the airlines.
Lastly, the 9/11 attack also played a great role in affecting the profitability levels in the U.S airline industry. Apart from the direct losses inflicted by the terrorist attacks on the aviation sector, insurance cost for the airplanes and the airlines facilities skyrocketed significantly. Moreover, the demand for air travel decreased significantly because of these attacks. Additionally, the 9/11 led to an economic slowdown, which in turn reduced business trips hence affecting the level of profitability in this industry (Jan & Laurent, 2015)
Competitive Advantage Differences between Low-Cost Airlines and Legacy Airlines
Although most of the airlines in the U.S airline industry continued to experience deteriorating profitability, low-cost carriers like JetBlue and Southwest continued to register profits in the same business environment. The main reason as to why low-cost carriers thrived in the same environment is that legacy made losses is their business model.
Unlike the legacy airlines, which carried its operations mainly on long distance travels, the low-cost airlines offered point-to-point services, an average of 515 miles. The point-to-point services provided by these low-cost carriers were frequent since they operated between secondary airports (Jan & Laurent, 2015). Due to their mode of operation, low-cost carriers had a competitive advantage over the legacy carriers since they maintained a constant traffic. As a result of the frequent trips, low-cost carriers enjoyed the benefits of economies of scale hence increasing their profitability (Rego, Morgan, & Fornell, 2013).
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Moreover, the low-cost carriers had an enthusiastic workforce and provided platforms such as the internet. Unlike the legacy airlines, which were a bit sophisticated in the services they offered, low-cost carriers maintained simplicity in their operations. More than 60% of their seats were via online booking, and all their tickets were electronic (Jan & Laurent, 2015). Effective customer care leads to customer satisfaction, which in turn results in customer loyalty. Increased customer loyalty increases an organization's market share hence increasing their competitive advantage (Shepherd, 2012).
Another difference between the legacy airlines and the low-cost carriers is their workforce. Whereas the legacy airlines maintained employees who were under unions, the low-cost carriers used non-unionized labor force and hence reduced their cost of operation since non-unionized workers had fewer restrictions as compared to the unionized. The decrease in cost of service leads to increased profitability.
Factors behind the Failure of Legacy Airlines Attempts to Imitate Low-Cost Carriers
Efforts by major legacy airlines to imitate the low-cost carriers have proved to be futile in the past. Although, legacy airlines simplified their services and lowered their prices they still used large aircrafts for their operations. Besides the fact that large airplanes have a low operation cost and hence supposed to improve profitability, the large airlines continue to experience small profit margins. The reason behind this fact is that the legacy airlines are using large airplanes but only transporting a few passengers and hence the low load factor (Jan & Laurent, 2015). Low load factor leads to less profitability and, therefore, the failure experienced in imitating the low-cost airlines like JetBlue, which had frequent point-to-point trips and a high load factor. Additionally, the legacy airlines were facing problems with lowering pilot salaries due to the unions and hence incurring a high cost of operation, which in turn translates to low profit margins (Tretheway & Markhvida, 2014).
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Strategic Options Available
There are various strategic options available to the cross-functional team led by Mark Balloun. First, the team may encourage Delta Express to launch point-to-point services. As a result, Delta Express will increase the frequency of trips it makes and its load factor (Shepherd, 2012). Consequently, this will increase Delta Force' competitive advantage. Point-to-point services will also reduce the cost of labor since the company will use cheap labor hence lowering its labor force. Matched with a proper marketing strategy this approach stands the chance of reviving Delta's competitive advantage (West, Ford, & Ibrahim, 2015). However, investing on point-to-point services will see Delta restructure all its operations, which will need a significant amount of money to fund this project.
Second, Delta Express can consider substituting the large airplanes such as Boeing 737 to smaller planes such as Airbus A320. Smaller planes pay low pilot salaries hence reducing the cost of operation. The smaller planes also increase the load factor hence increasing profitability (Nagurney & Li, 2015). Additionally, smaller airplanes will also suit better in offering low-cost services. Likewise, this plan needs massive amounts of funds to purchase the airplanes and conduct an extensive marketing approach.
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Third, Delta may improve its technology and advertisement efforts to match the markets demand. Increased technology will improve customer relations and transparency hence regaining clients’ trust and satisfaction (Bharadwaj, El Sawy, Pavlou, & Venkatraman, 2013). The only disadvantage of this strategy is that they will have to drop their price discrimination strategy since the pricing information will be at the client's disposal.
Lastly, Delta Express may consider adopting simplicity in their operation. For instance, instead of using different employees for a different class of flights they should use a single team. As a result, the company will reduce its cost of operation hence improving its competitive advantage (Pearce, 2013). However, adopting this strategy might affect its authenticity and hence lose its loyal customers since some of the customers consider brand names when making their flight decisions.
Best Strategic Option
Based on the competitive advantage of the four strategies, I would recommend Delta Express to adopt point-to-point services strategy. Matched with a proper marketing platform this plan will enable Delta to compete with the low-cost carriers at the same level and significantly increase its profitability.
In order to be effective in satisfying customer needs while still enhancing growth and profitability, a company needs to identify market demands and match them with effective strategies. Additionally, a company has to ensure that in meeting the aforementioned demands it maintains a significant profit margin by minimizing costs and maximizing revenue. Regarding Delta Air Line, it is evident that the challenges facing it are from both its internal and external structure. Some of these difficulties like price policies are self-inflicted due to failure to understand factors that influence customers' decision. Delta Air Line needs to assess the market demand and its internal structure to identify strategies that are causing the current setbacks. Insight regarding the customers' needs and the company's structure will enhance Delta Air Line ability to increase its competitive advantage over its main rivals and experience growth in profitability. Therefore, Delta Air Line needs to identify its driving forces and maximize on them while identifying factors that are drawing it backward to come up with an effective business strategy that will improve its prospects.