Delta Air Lines - The Low-Cost Carrier Threat

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Problems: Since deregulation (1978) the average return on investment below cost of capital for the 5 largest carriers. Due to 911 the demand for air travel declined sharply. • Airline’s profitability hinged on the fraction of its flown seats occupied by passengers- load factor • Costs measured in cost per available seat mile (CASM) – cost required to fly one seat one mile • Yield- total passenger revenue/number of revenue passenger miles (RPM) • RPM- number of revenue seats times the number of miles flown • Average stage length-flight distance • Marginal cost to add a passenger is negligible • Turn-time of the plane important • Cost per available seat mile was low for airlines that flew long distances • After deregulation- high fixed costs and expensive labor, in need of systems to ensure high load factor • Shift to hub and spoke model- which helped achieve high load factor and market power • Segmented into major, national, and regional carriers • $ was the overriding concern of 1/3 of passengers • Airlines encouraged loyalty by frequent flier programs, differentiation of service, frequent departures, and a distinctive culture • Business travelers less sensitive to price- concerned most with schedule • The rise of the internet made customers more aware of price • Yield Management- the computer system became a powerful tool for “adjustable rate airfares” • The internet placed increasing pressure on the airlines • The Air Transportation Safety and System Stabilization Act- attempted to compensate airlines for losses incurred due to attacks Total Cost 40% employee salaries and benefits –largest expense 10-15% Fuel 15-20% Services 15% Aircraft and facility rental After 2001 only the low cost carriers Southwest, JetBlue, and AirTran remained profitable. Southwest- love theme, prided itself on being different, no meals, no seat

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