Read the attached case and write a report (word limit 2500 +/- 10%, excluding references) that addresses the following tasks:
• A review on the need and importance of environmental analysis by organizations using relevant academic literature.
• An evaluation of the trends in the macro environment that would influence the global Airline Industry using PEST Model.
• Analysis of the competitiveness of Airline Industry using Porter’s Five Forces Model.
• Analysis of the SWOT for Delta Air Lines Inc.
Note : The case is available on the MOVE
Delta Air Lines -Navigating an Uncertain Environment
Delta Air Lines Inc. (Delta), headquartered in Atlanta, Georgia, was the world’s second-largest airline providing air transportation for passengers, cargo, and mail. Delta operated an extensive domestic and international network across all continents in the world except Antarctica. It was also a founding partner of the Sky Team airline alliance. Delta had used mergers and acquisitions (M&A) successfully to solidify its strong position as a leader in the airline industry. It had gone through five M&A since 1953, including the most recent acquisition of Northwest Airlines (Northwest), which turned Delta into an airline with major operations in every region of the world. On the other hand, the Northwest merger took a toll on Delta’s financial position by contributing to its high long-term debt. In 2012, top management was cautiously exploring opportunities for entering new markets, routes, and partnerships in order to boost market share. Company History-Delta Becomes the World’s Second-Largest Airline Delta’s history begins in 1924 with the formation of Huff Daland Dusters in Mason, Georgia. Huff Daland Dusters was the first commercial, agricultural flying company in the US and commenced carrying passengers and mail as its business expanded. Recognizing the success and value of the company, C.E. Woolman, acquired the firm and renamed it Delta Air Services. Throughout the 1930s and 1940s, Woolman focused on defining Delta’s mission to ensure that it would be a viable company in the long term. During this period, Delta broadened its services and expanded its horizons: It secured a contract with the U.S. Postal Service to carry mail, participated in the war effort by modifying over one thousand aircraft, developed a regularly scheduled cargo service, and introduced night service. The company changed its name to Delta Air Lines. All these events laid a solid foundation for Woolman and his young company. Over the next few decades, a series of mergers and key alliances enabled Delta to expand its operations and gain market share in the airline industry. The first merger took place in 1953 with Chicago and Southern Airlines, allowing Delta to become the first service provider in the United States with flights to the Caribbean and South America. The acquisition of Northeast Airlines in 1972 gave Delta a major presence in the north-eastern United States ‘in’ 1984, Delta formed a strategic partnership with Comair Airline, which soon became a Delta wholly-owned subsidiary and connection carrier. Between 1986 and 1991, Delta acquired both Western Airlines and Pan American World Airways. With these acquisitions, Delta gained routes and became a major carrier on the U.S. West Coast and across the Atlantic to Europe. Finally, Delta was able to emerge from bankruptcy by acquiring Northwest Airlines in 2008, which made it the airline with the most worldwide traffic. In 2012, Delta serviced 572 destinations in 65 countries on six continents, including North America, South America, Europe, Asia, Africa, and Australia. It operated 714 aircraft in 5,766 daily flights and employed more than 80,000 employees worldwide. With over 160 million customers every year, Delta was the world’s second-largest airline. Delta was named domestic “Airline of the Year” by the readers of Travel Friendly magazine and was named the “Top Tech-Friendly U.S. Airline” by PC World magazine for its innovation in technology. Delta attempted to operate low-cost carrier subsidiaries through launching the Delta Shuttle in 1991, Delta Express in 1996, and Song in 2003. None of these subsidiaries were successful, however, and were discontinued not long after being established. In 2010, Delta sold Compass and Mesaba, two regional subsidiaries of Northwest Airlines. Delta continued to operate Comair as a wholly-owned subsidiary (based in Cincinnati) as part of its Delta Connection. Delta had originally bought 20% of Comair in 1984, followed by full ownership in 1999 for US$2 billion, but by 2012 many of Comair’s 50-seat turboprop aircraft were getting old and had high unit costs per flight hour. Competitors Over the past decade, there have been a number of mergers and acquisitions among the major airlines in North America and Europe. For example, Air France and KLM merged in 2004, US Airways and America West in 2005, Delta and Northwest in 2008, plus Southwest and AirTran, and British Airways and Iberia in 2010. According to industry analysts, US Airways and Delta were expressing some interest in each other in early 2012, while independently considering American Airlines. Delta’s major competitors in the United States were United Airlines and American Airlines at the high end, US Airways in the middle, and carriers such as Southwest and JetBlue at the low end. American Airlines, United Airlines, US Airways, and Delta had similar business models with hub-and-spoke service, extensive hubs and network infrastructure, global operations, broad service portfolios and relatively high ticket prices. These carriers did not offer many of the amenities that major carriers offered, but were known as budget airlines because of their low fares. The Airline Industry Deregulation The U.S. domestic airline industry was largely deregulated in 1978, and entry barriers for new entrants were lower from a legislative standpoint. Airlines were free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and set fares and flight volumes according to market conditions. Deregulation did not free airlines from oversight by a number of domestic and international agencies. A shortlist included the U.S. Department of Transportation, the U.S. Department of Homeland Security, and air transport and safety organizations of the various countries the airlines served. For example, Delta was a member of the International Air Transport Association (IATA) and was subject to applicable conventions such as the “Warsaw Conditions of Contract and Other Important Notices.” It was also subject to scheduling and landing slot rules by the foreign countries it serves and various airport management authorities. Entry Barriers There was a large amount of bureaucracy involved in setting up a new airline. For example, a new company in the United States must apply to the Federal Aviation Authority (FAA) for an air carrier certificate. In order to operate aircraft, new airlines must obtain an operating license, which was usually a lengthy process. These procedures dissuaded many from entering the industry because the generation of revenues can take a long time. The large capital outlay that was required to start an airline business can also be a serious deterrent for new entrants. An entrant must have sufficient resources to pay the staff required and to either lease or buy a fleet of aircraft. Even if a new entrant had the capital to launch a business, it would encounter obstacles in accessing airports. Established airlines had an edge over potential entrants, for they held a monopoly over time slots at certain airports, making it harder for new airlines to gain entry to those airports. This created immense difficulties for new airlines to negotiate prime slots at busy airports and may result in a new airline being restricted to offering flights only at off-peak times, or having to fly to airports further away from popular destinations. Established airlines formed strategic alliances such as Sky Team, One world, and Start, in order to be more competitive both locally and globally. Airlines partnered with one another not only to achieve network size economies through initiatives such as code sharing, but also to achieve scale economies in the purchase of fuel and even an aircraft. Fuel Economy The cost of fuel had become a significant and growing cost of doing business for the entire airline industry. If oil once again significantly rose in price, the effects could be profound and long lasting. Analysts openly contemplate the end of mass international air travel, an event that could reconfigure world economics and make flying an option for only the wealthy. A flight across the Atlantic can easily consume 60,000 litres of fuel—more than a motorist would use in 50 years of driving—and generate 140 tons of carbon dioxide. The world fleet of jetliners burned about 130 million tons of fuel each year. Supplier Power Fuel suppliers, aircraft manufacturers, and skilled employees were the key suppliers in the airline industry. The industry was characterized by strong supplier power, given the duopoly of the large, jet engine–powered aircraft manufacturers of Boeing and Airbus. Airlines entered into contracts when buying or leasing aircraft from suppliers, and breaking these contracts often invoked heavy financial penalties. Fuel suppliers were also in a strong position, since no viable substitute for jet fuel had yet been discovered. Staffing costs for an airline were substantial, with large numbers of highly trained flight and ground personnel, including mechanics, reservation, and transportation ticketing agents being required in order to provide an efficient service. Labour costs were difficult to cut, given that most large airlines were unionised. Consumer Attitudes Customers in recent years had become increasingly hostile toward the airline industry as a result of travel delays, intrusive screening, and “nickel and dime” issues such as checked baggage fees and even a recent proposal by Spirit Airline to charge for overhead baggage. Both Delta and United led the industry by charging US$100 for a second checked bag on international flights. U.S. airlines collected US$3.4 billion in baggage fees in 2011, helping to offset fuel costs and reducing the need for baggage handlers. According to the American Customer Satisfaction Index, the airline industry as a whole received a score in 2011 of 65% out of 100% possible. This compared to 82% for the full-service restaurant industry. In order of highest customer satisfaction for 2011 were Southwest (81%), Continental (64%), American (63%), US Airways and United (61%), and Delta (56%). Technology Delta had a lengthy history of embracing technology, from early adoption of jet aircraft to the use of mainframe computers, and more recently, integrating the Delta and Northwest websites, operations and reservation systems. Delta was at the forefront of developing technologies to increase the total customer experience. Passengers were able to view, select, or change seat assignments at its online website. They could also receive boarding passes via self-service kiosks. Delta, along with the Transportation Security Administration (TSA), initiated the paperless mobile check-in for domestic travel from some airports in the United States. It was now offering upgraded video, music, game, and power options on many of its newer aircraft. Industry Outlook According to IBIS World’s “2012 Domestic Airlines in the U.S. Industry Market Research Report” the U.S. airline industry had been unstable over the past decade with revenue growing marginally at an annualised rate of 0.3% over the five years leading up to 2012. Revenue was up 9.0% during 2010 and 3.6% in 2011. The overall trend over the past five years had been an increase in market share for low-cost carriers such as US Airways, JetBlue, and Southwest Airlines, to the detriment of American and United Airlines. The IBIS World report predicted that the U.S. airline industry should experience a modest recovery and positive growth over the next five years. Nevertheless, high fuel costs should continue cutting into profitability. Major carriers were expected to continue merging in order to boost profitability and gain a competitive advantage. Outside the United States, many nations had traditionally subsidized their national air carriers. There had been an economic benefit in having a nationally branded airline flying the flag overseas, bringing tourists into the country, and generating income for local businesses. National pride also played a role. An increasingly competitive global airline industry meant that small national airlines had become less cost effective. Airlines had been forced to ask for more money from their governments or else go out of business. This was why New Zealand stepped in to prop up Air New Zealand in 2001. For their part, many governments no longer had the money to support airlines as they did in the past. In January 2012, Spain’s Spanair and Hungary’s Malev foundered when their governments reduced airline subsidies. State investors in Sweden’s SAS, Ireland’s Aer Lingus, Portugal’s TAP, and the flag carriers of Poland and the Czech Republic indicated in 2012 that because of the European debt crisis they would be reducing financial support and seeking new investors. Turkish Airlines was working to buy a stake in LOT Polish Airlines from the Polish government, which had been trying to sell its 25% share of the carrier since 2009. These state-supported European airlines found themselves falling behind Europe’s three big airline groups: Air France-KLM Group, Deutsche Lufthansa (including carriers in Austria, Belgium, and Switzerland), and International Consolidated Group (merger of British Airways and Iberia). It was logical to expect that mergers among state-supported airlines would soon occur as governments chose to privatize their national airlines by selling their ownership shares. The International Air Transport Association (IATA) forecasted that the global airline industry would post a second consecutive year of net profit declines in 2012 as the deepening European debt crisis would offset lower fuel prices, stronger-than-expected growth in passenger traffic, and an improved freight market. Although the IATA expected modest profit growth for carriers in North America, carriers in the Asia Pacific region should see the most increase in net profits in 2012. In contrast, European airlines should report a US$1.1 billion loss. According to John Leahy, Chief Operating Office for Airbus, “There’s no doubt about it that 2012 is a softer year than 2011 in terms of orders and in terms of the health of some of the airlines.” Challenges Facing Delta Delta had emerged from bankruptcy and proven that it could be a profitable company. The Sky Team Alliance, a substantial flight network, and the recent merger with Northwest had contributed to its success in this industry. Like many successful companies, however, Delta continued to struggle with how to remain a viable company in the long term. While mergers and acquisitions had enabled the company to become the world’s largest airline carrier, Delta still needed to focus on maintaining its profitability. Significant challenges for Delta remained.
Source: Abridged version of the case written by Dr. Alan N. Hoffman, J. David Hunger Rotterdam School of Management, Erasmus University and Bentley University, 2015
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