Capstone: Delta Airlines Strategic Scope

Professor Pham
Spring 2008

Kevin Rose
Garrett Bjornstad
Chris Packard
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SITUATION ANALYSIS
General Environmental Analysis

Technological Trends
The technological aspect of the airline industry is the cornerstone of the airline
market sector. Technology plays a role in several aspects of the airline operation.
Initially, technology is vital to the innovation of existing products. Through innovation,
airline corporations are able to effectively meet the changing needs of the consumer as
well as the need to operate more efficiently. Though continual technological growth is
necessary to survive in the airline industry in terms of consumer needs and operating
processes, technological advances also contribute to the increasing demand for cutting
tangible capacity and/or costs. The reduction of tangible costs is emulated through the
replacement of labor and time; a situation that not only reduces the tangible capacity
process but also restructures the process.
Technology has contributed to the major advancements of aviation size and
efficiency. To better meet the needs of the consumer; naturally the industry has become
focused on larger more comfortable airliners. The airline market continues to rely on the
R&D aspect of technology to enhance existing competition and make it harder for
companies to enter the market.
Technological growth is also becoming more evident in the reduction of operating
costs. As the market continues to experience financial hardships in terms on operating
costs, it is important to eliminate potential financial constraints that tie up cash. For
example, the new planes produced by airbus eliminate a vast amount of maintenance
costs that are otherwise occupied through labor by implementing a revolutionary software
package that systematically performs maintenance updates. “Roger Lecomte, senior vice-
president for technical support and programs, said that product improvements and
services to airlines should optimize, respectively, maintenance and operational costs.
‘This will make our aircraft even more attractive to customers,’ he said” (Careless 1). It is
clear that Airbus is leading the way for technological advances in terms of restructuring
the concept on the safe airline operating processes. In addition to computer software
maintenance programs, Airbus is also improving other aspects of the airline operation. “A
new braking system, inaugurated on the A318, is now available as an option on the A319,
A320, and A321. The new bleed-air system has become standard since September 2003.
Airbus values the savings from these and other system enhancements at approximately $8
per flight hour” (Careless 1).
Technological advances are also reflected through amenities directly involved
with the consumer. From the front end of the supply chain to when the service is
executed, technology plays a role in efficiency and comfort. The reservation system
technology is related directly to the internet. Although there are different avenues to
obtain airline flights, online reservation systems play a vital role in consumer behavior.
Airlines are also taking advantage of the increasing opportunities regarding in-
flight entertainment. Jetblue has implemented an in-flight entertainment system that truly
captures the essence of the current technological savvy generation. Flights include the
ability to send and receive email and instance messages (free wi-fi) and Direct TV
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programming capabilities
(http://www.jetblue.com/about/whyyoulllike/about_why10.html). Fortunately for Jetblue,
operating as a domestic carrier, there is no struggle to comply with international signals
and/or regulations. However, amenities regarding technological changes are a great
selling point that needs to be addressed in the current market.

Demographic Trends
Demographic changes, particularly in America, are very important to the any
industry that conducts business through a relatively luxurious, moderately priced service.
Transportation is the essence of the airline industry; with an emphasis on passengers. As
demographics continue to change, regarding retiring baby-boomers and an increase in the
amount of those living in debt, consumer behavior will likely begin to increase
consumption.
The idea is that because the baby-boomer generation is beginning to age, newly
retirees are indulging on lifestyles consisting of an increase in consumption and travel.
“US online retail sales are forecast to reach $270 billion” (SWOT 7). This forecast would
essentially create an increase in demand for the freight business. In addition to
consumption, an increase in GDP also correlates statistically to the domestic air travel.
“…for example, a 1% growth in GDP will typically result in a 1.2% growth in domestic
air travel…” (SWOT 7).

Economic and Global Trends

It is clear that the American economy is experiencing a trouble-some downtime.
The U.S. dollar has reached an all-time low, and investors are beginning to allocate their
funds overseas. For airline companies in America, not only are they dealing the slow
economic environment they also have to deal with the outrageous ATF (aviation turbine
fuel). However, given the dire circumstances, there is an opportunity to enhance the
business and capitalize on the economic downturn. “A British study of 1,000 businesses
during the past 30 years ‘found that companies that spent more on innovation during the
downturn saw return on capital employed rise 23.8% during the recovery, compared with
0.6% for those that slashed spending’” (Wheaton 1).
Increasing innovation and expanding an organization during an economic
recession can be positive under two circumstances; the company has the capital to
withstand the poor economy and the industry is likely to recover from the downtime.
Taso suggests, “Hard though it may be to accept, there remain a few airline stocks worth
considering…a stronger economy would soon lift a handful of carriers' revenues and
profits” (Tsao 1). The key is choosing the airline that is capable of surviving the financial
pressure of the economic and ATF threats.
Unfortunately in recent past, airlines ATA, Alitalia, Aloha Air, and Skybus have
all filed for bankruptcy. In addition to bankruptcy, ATA, Aloha Air, and Skybus have
stopped operation entirely. It is clear that the economy certainly plays a role in the
performance of those in the airline industry.
The airlines industry is also affected by the interest rate set by central banks. In
recent years, the Fed has raised interest rates substantially. Because an increase in interest
rates directly affect consumer behavior, it is not surprising that the current interest rate is
2.25%, a decrease form 5.25% at the same time one year ago (Bloomberg.com 1). This is
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an element that is huge in terms of an investing standpoint and can potentially play a
large role in strategizing the next strategic move.

Political/Legal Trends
America has hosted one of the most powerful markets the world has ever seen.
America has done so through the idea of a free-market. This hands-off policy suggests
that the market naturally finds equilibrium and can be sustained with little to no
regulation. The extent of government intervention over the span of the American market
existence is debatable; however, the current down-turn within the domestic economy has
cast doubts about the market and has caused government intervention. The value of the
free-market that has sustained America for so long is now on the verge of regulation.
The market regulations within the airline industry have also taken a stern outlook
on the struggling market. As airlines are looking for ways to cut corners, the FAA is
making sure safety is not compromised. In a market that is experiencing increasing
pressure from competition and economy, loosing sight of the standardized process of air
transportation has proved detrimental to the bottom-line.
The Transportation Security Administration (TSA) has also recently stepped up
security regulations given the detriment of 9-11. TSA has set strict standards that include
a longer check in process, more in-depth baggage checks, and restricted access of airport
terminals to only those that have a boarding pass. These strict regulations affect the
ability to turn consumers, fill airplanes to capacity, and affect customer perception.
Considering these external changes are essential for both domestic and international
airlines to consider when operating.
The Airline Deregulation Act (ADA) has also played a role in the evolution of the
domestic airline industry. When the government gave the industry to market forces, the
industry became able to set their own prices and strategize their own routes.

Socio-Cultural Trends
Consequently when the economy is bad, there is chain reaction of socio-cultural
affects. The social aspect of the American culture plays a key role in business throughout
the country because trends directly affect consumer behavior. When a business is
operating in a business environment that is based on the sole idea of consumer purchasing
and the market busts, they are going to need more than a good marketing campaign to
save face. Fortunately for those in the airline industry, there are a lot of viable operations
that enhance the firm’s ability to generate cash in times of poor consumer spending e.g.
utilizing the extensive amount of capital in other ways.
Airlines typically have a high dependence on revenues produced from the
passenger service. The leading LLC in the U.S., Southwest airlines account for 96.3% of
total revenue in 2006 was directly correlated with passenger revenues (SWOT 6). In the
midst of a changing economy and socio-cultural trends, it will be essential for airlines to
utilize their capital in investments that are less elastic in terms of revenues. The idea here
is to have the ability to forecast future earnings in gloomy market conditions given the
very elastic airline marketplace.
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Industry Analysis - Porter’s Five-Forces

Threat of New Entrants

The Airline industry, like many industries that operate using a high amount of
invested capital is generally a hard industry to enter. First you have to consider the initial
business plan. The business plan reflects the processes that are involved with operations,
funding, and logistics concerning everyday operations. Secondly, the business would
need to consider what areas to strategically operate and contact airports, either a hub or
periphery, for further analytical framework (Gillen 6).
Since a number of the worlds leading airlines operate in the United States, the
business environment for those in the airline industry have shifted from the idea of
potential new entrants, to the bargaining power of the consumer. In fact, Ben-Yosef
suggests that the emphasis on creating a barrier for new entrants is coming back to haunt
the airline industry. “Investment in a hub system, while directly impacting the hub
airline’s production and cost functions, also strategically affects the competition’s
positions. A partial explanation of the major airlines’ move to place such a volume of
aircraft orders can be related to strategic investment in overcapacity directed at deterring
entry” (Yosef-Ben 85).
Airlines are also launching new lines of supporting brands that essentially re-enter
an existing airline into the market. An example is Delta’s release of the carrier Song.
Although Song has already gone under, it gives a good sense of market penetration
involved with current airlines.
The American airline industry’s potential threat of new entrants is not likely.
However, we briefly mentioned the benefits of investing in an industry that has slumped
to realize substantial profits in a promising market. The criteria for doing so would
involve new entrants with a high amount of disposable income that can withhold the
market fluctuations. Thus, potential new entrants are typically companies and/or
individuals that have a substantial amount of cash and capital, and are looking to
penetrate a current slumping market, that is historically promising.
In addition to the lack of current market profitability, the market also bears strict
alliance based incentive programs. Frequent flyer miles and other compensation rewards
are very attractive for businesses and passengers. Thus causing switching costs for FSC
to be higher, given the amount of incentives offered through programmed alliances.
In terms of International flights it is important to consider the landing rights and
more importantly landing slots. As the international market continues to increase,
especially in Asia, landing slots are essential when penetrating a new market. The “open
skies” policy created an extended amount of competition within the landing slots aspect
of airline operation. Landing rights worldwide are definitely a deterrent in the
international airline marketplace for new entrants.

Threats of Substitutes
It has already been identified that those in the airline industry are operating in a
transportation business. It is also been made evident that ATF (aviation turbine fuel) is a
large contributing expense to those in the airline industry; which in turn has immensely
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contributed to the fall of current airline organizations. A threat of substitutes in terms of

businesses in the transportation sector is a broad scope to analyze. For businesses that are
operating within this particular sector, dependence on crude oil remains constant. The
rationale explains, “The CEF-NEMS model assumes that when world oil demand falls,
OPEC will cut production by an equal amount, so that world oil prices remain constant”
(Greene 1).
The threat of substitutes is a viable concern in any industry, because it directly
affects potential revenue channels that are utilized in other arenas. However, given the
fact that OPEC has a strong correlation with supplier bargaining power, the
transportation sector will be forced to focus on alternative ways of transporting goods and
passengers. For example, the development of fuel cells and hydrogen as sources for fuel.
Alternative energy sources are in demand to not only reduce the operating costs and
eliminating supplier the extensive amount of supplier control, but is also a benefactor
toward the shift to control climate change.
The airline industry has two main substitutes that directly affect the company.
Initially, switching costs to other airlines and also the alternatives to travel; for example,
other airlines, vehicles, trains, and boats. The overall transportation sector, also
experiences a large dependence on crude oil that contributes to tremendous amounts of
operating costs. It is crucial for airlines to continue to operate utilizing their core
competencies to bear competition of existing airlines, as well as other forms of
transportation.
Depending on the region, transportation substitutes vary greatly. In Europe and
Asia there are high-speed trains that are available that operate with speeds from 125mph
and higher. Speed trains are very accessible in Europe and Asia, which makes them
viable substitutes for air flight transportation. Within the airline industry itself,
destination accessibility also plays a major role in potential substitutes. Essentially, the
more destinations, the more likely the airline will accommodate a larger customer based.
Other potential substitutes that are considered threats include non-transportation
based substitutes; particularly in the technology arena. Video-conferencing and
increasing online security have reduced the demand for flight in the business world.
Through technology, business can adequately operate without the constant need to fly
out-of-town to meet business partners. Examples of potential technological threats
include the ISID virtual dealroom that enhances the “services for secure online
management of confidential M&A documents” (DEALROOM).
Alternative energy sources also make up an industry that is increasing in demand.
Alternative energy sources are just one legitimate opportunity to conduct research
focusing on ways that may potentially reduce the amount of supplier bargaining power.

Bargaining Power of Suppliers

It was mentioned that the bargaining power of suppliers within the transportation
sector is very strong. This is indicated by the increasing demand for crude oil and ATF.
Operating specifically within the airline industry, ATF is the highest operating expense
including the airline operation. In 2004, 33.7% of operating expenses were subject to the
flight operations of fuel and pilots” (OPERATING COSTS). Since the bargaining power
of suppliers is strong, mainly associated with the connection to oil and OPEC, it is
important to focus on other ways that counter this constraint.
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In addition to ATF costs, the airline industry also experiences a tremendous

amount of bargaining power from tangible airplane suppliers i.e. Boeing and Airbus. The
idea is that, because these companies have a duopoly on the market, it places a large
amount bargaining power to these suppliers. Additionally, the suppliers place a constraint
on production given the extensive amount of contracts that are backdated.
Given the duopoly within tangible aircraft producers, it is generally in the best
interests of any airline to have strategic partnerships and/or alliances to offset airplane
production costs. For example, if two airlines placed an order together, acquiring 20 new
planes there would generally be a discount for purchasing in bulk; rather than having two
different contracts for 10 airplanes.
Raw materials and labor also play an important factor in the cost of productions
and airline operation. Materials such as steel are often exposed to very elastic markets
which contribute to the bargaining power of the suppliers. Furthermore, there are often
high costs associated with the labor that is expressed through not only wages but also the
intangible elements of operation; such as culture, efficiency, and service.
Bargaining power of suppliers is very high within the airline industry; from the
front of the supply chain analysis all the way to a particular company’s operating
expenses. Because airlines are subject to such controlled circumstances, airline
companies are finding new ways to contribute to the bottom-line. Opportunities through
incentive programs and additional fees have been exhibited to offset such bargaining
powers of suppliers, however, it would be expected that other avenues of market
penetration would be explored to reduce such high supplier influence.

Bargaining Power of Buyers

The passenger airline business in general is highly dependent on passenger
revenue. Airline companies provide a transportation service for often time’s people as
well as freight. In terms of the domestic airline industry, this can be very detrimental to
revenues when the economy is in an economic down-turn. This is a huge problem that
airlines are beginning to face in the American market. The recent closures of Aloha Air,
ATA, and SkyBus are just examples of the effects consumers have in the airline industry.
Over 60% of revenue came from passenger service from one of the largest
airlines in the world (Delta 10k). This is a huge liability because they have created a
situation where the company is dependent on one aspect of the competing industry;
customers. A viable solution to this problem is possible investing into the freight aspect,
which provides a less elastic market to reduce the dependence of passenger revenue.
Within the airline sector, companies have to focus on improving sustainable
profitability. The switching cost of customers generally takes a large hit to the bottom-
line given the high percentage of passenger service revenue. “62% of those who purchase
an airline ticket are affective directly from price” (Price STAT). Online booking has also
played a new interactive role in purchasing airline tickets and has been widely adopted by
airline purchasers. Usability of such online ticketing portals is essential toward
conversion of online purchasers and is an element that needs great consideration.

Existing Rivalry
There are various different categories that contribute to industry leaders within the
airline industry. Among these categories include perceived quality, punctuality, comfort,
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and the ability to generate an above average return. In addition to the leading airline
category, there are also different operational categories. Airlines typically operate as
either low cost carriers or full schedule carriers, both of which operate either
domestically, regionally, and/or internationally. Industry leaders of overall airlines
include American Airlines, Delta Airlines, Southwest, Northwest Airlines, Lufthansa, and
Singapore Airlines.
The growth of airline companies is a current trend in the international market.
Market consolidation is currently being exhibited through the Delta/Northwest merger.
Within the airline sector, there is generally a domino effect that takes place once a
significant change is made within the infrastructure of the industry. It is expected that
there will be a large amount of consolidation within current airlines to sustain themselves
for existing competition and rising operational costs through mergers and alliances.
Operating and profit margins are the essence of airline profitability. As fuel costs
begin to increase and the amount of people flying decreasing, the profit margins are
typically increased through price. Generally, if operating costs increase, a business would
have to take a hit, improve production efficiency costs, and/or increase prices. This can
be problem for both LCC who have already minimized the effect of production cost and
FSC because price increases are a substantial determinant in the consumer behavior of
airline ticket purchasers.
As the market competition begins to experience more pressure in terms of
operating and fuel costs, each company is in need of change. Within the domestic airline
industry, FSC are beginning to seek mergers and acquisitions to reduce capacity and LCC
have to increase ticket prices, gather local routes dumped by FSC and have additional
fees for accommodations to stay afloat.
Although increased prices is a potential burden to the industry, many airlines are
beginning to implement systems that alleviate the increase in passengers cost by attaching
fees for overweight baggage and implementing a business class to offset increasing fuel
prices. "When you can't rely as much on market stimulation and have to steal share from
other airlines, you have to be relevant to business travelers," says Donald Uselmann,
manager of sales products at JetBlue (McCartney 1).

Competitive Landscape

Initially, existing competition regarding the airline industry can be sectored into
three different categories; international, regional, and domestic. Keeping in mind, there
are potential competitors in industries other that affect airline demand. Moreover, there
are different business structures that operate within each of those industries; mainly
focusing on low cost carriers (LCC) and full schedule carriers (FSC). For analysis
purposes we will focus on different segments of the airline industry

American Airlines
American Airlines (AA) is a full schedule passenger airline that is currently the
largest airline in the world in total passengers-miles transported. AA operates hubs out of
Dallas/Fort Worth, Miami, Chicago O’Hare, St. Louis and San Juan, Puerto Rico.
American Airline’s mission statement and/or customer service promise states: American
Airlines and American Eagle are in business to provide safe, dependable and friendly air
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transportation to our customers, along with numerous related services. We are dedicated
to making every flight you take with us something special. Your safety, comfort and
convenience are our most important concerns (AA, 2008).
American Airlines is also a member of the Oneworld airline alliance. Oneworld
includes nine other airlines which offer service to over 675 different destinations. The
other airlines active in this alliance are British Airways, Cathay Pacific, Finnair, Japan
Air, Iberia, LAN, Qantas, Royal Jordanian and Malev’ (Oneworld, 2008). This alliance
like other alliances creates more business for all airlines involved because it gives them
an opportunity to establish a greater market share.

Southwest Airlines
Southwest Airlines is a passenger airline that provides low-cost, point to point
service, operating with no hubs or home airports. Southwest is a domestic airline that
strictly flies in the United States. They currently fly to 64 cities in 32 states and are one of
the top rated airlines in the country in terms of customer satisfaction. The mission of
Southwest Airlines is dedication to the highest quality of Customer Service delivered
with a sense of warmth, friendliness, individual pride, and Company Spirit
(Southwest.com, 2008). Southwest was recently ranked third in the recent customer
satisfaction survey run by the Omaha Aviation Institute (Business First, 2008).
Southwest exhibits state-of-the-art operations processes and consistently realizes
substantial revenues in comparison to the industry average. ___ stat. They typically have
an exceptional amount of cash on hand and have been very successful with fuel hedging
to cut additional operating costs.

Singapore Airlines
Singapore Airlines Limited is the national airline of Singapore and operates as a
FSC throughout the world. The Singapore hub gives Singapore Airlines an enormous
advantage toward access to Asia and the Trans-Pacific regions; which represent the most
desired regions in terms of annual population air traffic growth in the world. Singapore
Airlines is also the airline credited with the launch of the Airbus A380.
In addition to Singapore Airlines, Singapore has substantial amounts of shares in
other airlines. Singapore Airlines owns 49% of Virgin Atlantic, the up and coming LCC
of the Virgin Group as well as 49% share of Tiger Airways. The investments indicate
diversification of investments into LCC aspect of the airline industry.

Industry Key Success Factors

Attracting New Customers

The airline industry is multifaceted in a sense of service. Initially, airlines provide
a transportation service that hauls either people or goods from one point to another.
However, given the substantial amount of revenue emphasis from the transportation of
people, airlines provide service to those customers that serve to differentiate themselves
from competitors.
Airlines typically attract customers in two different ways; advertising and
amenities. Advertising plays a minor role in the retention of customers, given the
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substantial amount of consumer price sensitive mentioned earlier. However amenities and
services offered play a larger role in customer attraction. Currently, passenger service
accounts for most of the revenue in the passenger airline industry. Until airlines heavily
diversify operation into other avenues, for example cargo, attracting new customers will
remain a cornerstone of industry key success factors.

Managing Fleet
The airplane fleet is a vital part of the commercial airline industry. The keys to
success regarding fleet management involve being able to fully utilize your resources to
incur proper rates of return as well as maintaining your resource capability to maximize
total potential revenues. The idea is that if an airline fails to fill a plane to full capacity,
the opportunity cost for the plane to sit idle until the load has reached capacity, is
generally greater than flying an empty flight. However, this rationale isn’t typically
exhibited because of other significant variables involved in the flying process; variables
including landing times, connecting flights, customer switching costs due to delays, etc.

Managing People
Management of employees is key to yielding the most efficient and pleasant
operations in airlines. There are two broadly different sectors of employees within the
airline industry; front-line workers and corporate management. Front-line workers
specialize in processes that enable the everyday functions of the given airline; for
example, the loading and unloading of baggage. Moreover, front-line workers are also
responsible for conducting those processes in a service friendly manner, to ensure
customer retention and reliability.
Corporate management, specifically the Board of Directors, is typically
responsible for the strategic decisions that position the airline to compete at the most
effective level of capability. Without managing these positions effectively, the success of
the organization is likely compromised.

Managing Finance
Managing finances is essential in the airline industry; or in any business for that
matter. Because the airline sector is so heavily inundated with high capital expenditures,
the airplane, obtaining substantial amounts of assets is key toward leveraging effectively.
Resource utilization is key in operation sense but also in an investment sense. If you are
effectively producing cash flow from a poor investment that is incurring extensive
amount of debt, operation efficiency doesn’t matter. Managing financials in the airline
industry today is cut throat. Given the extensive amount of external pressure, through fuel
costs, the American looming economy, and market saturation, it is crucial for airlines to
manage finances effectively to be successful.
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Internal Analysis

Delta Airlines

Delta is based and operated out of Atlanta, Georgia. Delta’s flight patterns
revolve four different hubs, each at different airports. The main hub is Atlanta, however
they also have hubs in Cincinnati, New York (JFK) and Salt Lake City. This hub system
allows Delta to distribute flights to an array of domestic and international locations. Delta
flies internationally to 311 locations and 52 different countries (excluding alliances)
(DELTA). They currently operate all over the world and stand as the only U.S. carrier
that flies to Africa.
Delta is also associated with several regional airlines which include; Delta
Shuttle and Delta Connection. These two carriers, along with other regional airlines
focus on delivering service to smaller, less populated air routes. These carriers make it
possible for customers to get where they are going. In the past, Delta has tried competing
with LCC airlines with the Song fleet as well as Delta Express, prior to Song. However,
both airlines suffered extreme financial hardships and were shut down.
Delta Airlines is also the founding member of the alliance SkyTeam, which
includes 10 other airlines from around the world. The 10 different airlines include:
Aeroflot, Aeromexico, Air France, KLM, China Southern, Continental Airlines, Czech
Airlines, Korean Air, Northwest Airlines and Alitalia (SkyTeam, 2008).

Resource Analysis

Tangible
The airline industry typically accounts for a large amount of capital expenditures.
These expenses are, but not limited, the actual airplane. Delta’s fleet is comprised of a
majority of Boeing airplanes; 54% of their current fleet. Delta’s operating fleet includes a
total of 578 airplanes, only 359 of which are owned by the company (DELTA). In 2006,
Delta had an enormous amount of capital depreciation, which was cut by $6 billion
dollars the following year in 2007. Delta has substantially improved their amount of total
assets by dollars through increasing the amount of airplanes and operating capital under
leases. With very little depreciation costs, they have retained more cash and liquid assets
to help sustain themselves with the looming economy, but have cut potential capital in
terms of long term assets that could potentially be a factor for leveraging their operation
if the economic situation worsens.

Intangibles
Delta intangible assets have increased substantially between 2006 and 2007. In
2007, goodwill and other intangible assets account for 46% of Delta total assets
(DELTA). The main source of revenue for the company comes from the mainline
passenger service. The direct passenger service operated by Delta includes over 61% of
operating revenue. Given this figure, the crew of employees is directly related to the
efficiency of capitalizing of the substantial amount of intangible opportunities Delta has.
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Alliances also contribute immensely to the intangible assets of Delta Airlines.

Operating within SkyTeam, Delta is able to capitalize on the vast amount of destinations
that embrace the SkyTeam alliance. This alliance is key in creating synergies that account
for a substantial amount of reputation throughout the world.

Value Chain Analysis

(Pham)

Primary Activities

Inbound Logistics
Inbound logistics is key for effective operation in the airline industry. Since
passenger service accounts for a large percentage of operating revenue, it is important to
maximize the potential opportunities within route selection and operation. The
competitive landscape of the airline industry regarding inbound logistics is becoming
very important for continual operation given rising fuel prices.
In addition to fuel costs, demand for route selection in other regions gives airlines
the ability to capitalize on the potential revenues not currently penetrated. In Delta’s case,
the Asian, Trans- Pacific region is experiencing an increase in air traffic population in
comparison to the rest of the world. Proper inbound logistics would take advantage of
regional demand and penetrate that particular market.
Since Delta operates a fleet of 578 airplanes, it is important to fully utilize the
opportunities of each aircraft through booking flights, pricing seats, and optimizing crew
scheduling to create value for customers. Online purchasing accounts for a high
percentage of seats booked, which allows any airline to operate with less operating
expenses and more preparation for inbound pricing strategies. Crew optimization also
accounts for an important part of airline competition. LCC such as Southwest have
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created the industry benchmark for efficiency and crew production, which has made it
very hard for FSC to compete.
Operations
Operations primarily consist of the process that takes place when the customer is
realizing their service. Included in such operations are ticket counter encounters, baggage
check, gate operations, onboard services, and ticketing offices. LCC have put more
pressure on FSC over recent years with operations efficiency. When looking at airline
operations, it is important to recognize that different sectors of competition deal with
uncontrollable operational constraints. For example, domestic carriers do not have to deal
with customs or international security which potentially increases turn around time.
Ticket counters are becoming technologically innovative. Electronic kiosks are
being implemented throughout the world, reducing the amount of labor that would
normally handle passenger ticketing. This electronic process has become an imperative
part of the check in process while reducing passenger check-in time immensely. Baggage
check-in and gate operations are backstage parts of the operation process. In addition to
baggage fee increases, an alternative way to achieve revenue, the baggage count will
likely cease in weight. Because of the new fee implementation, efficient baggage load
times will decrease and thus gate to gate time will also cease.
Onboard amenities have always been additional incentives for passengers
choosing what airline to fly. For example, JetBlue focuses on the high technological
amenities like, Direct TV and wi-fi for passengers (LOOK at my SOUTHWEST
PAPER). Delta Airlines currently offers DC power and USB ports for charging small
electronics, flat screens, and on demand digital entertainment (Delta.com 2008).

Outbound Logistics
Outbound logistics primarily involves the external processes that distribute the
final outcome to customers. Within the airline industry, these processes include the
baggage carousels, on-flight seating arrangements, and order processing (including
internal and external processing). Delivering the final product to the customer is vital to
service companies because customer retention is so crucial for sustainability; especially
in the competitive landscape of the airline industry.
Baggage carousels are fairly standard worldwide. The operations aspect is ideally
where there is the most potential for improved efficiency concerning baggage
distribution. However, if the logistics of such process where to achieve faster, more
accurate results form the supporting infrastructures (like airports), there may also be
potential for realized efficiency.
Seating arrangements are a key part of the outbound logistics. Passenger service is
the majority of materials handled within the outbound process. This primary activity is
the most important encounter with the customer because it is directly associated with
experience. Because there are many different options when it comes to flying, especially
in America, customer retention is vital and proper seating arrangements are conducive to
producing the desired repeat-customer results.
Becoming technologically savvy is essential within logistics of any operation. As
Delta embarks competing globally, technology needs to be considered when making
decisions concerning logistics. The internal and external processes, including with
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purchasing online and delivering a successful e-ticket check in process is primarily in

accordance with technological capabilities.

Market and Sales

Marketing and sales is generally an important part of sales trends and consumer
behavior. Fortunately for Delta, they operate on the worlds largest airlines. Typically
when you are close to the benchmark of a given specialization, advertising expenditures
are cut tremendously. Advertising is generally a large portion of the marketing and sales
budget. Delta benefits from the situation on two accounts. First, they free up potential
cash that can be invested into other operating activities. The company also has the ability
to cut operations funded by debt given the current market situation.
Marketing is generally confused with advertising. However, the way marketers
position the company is important to achieving a positive customer perception while also
decreasing the service gap. It is clear that the airline ticket purchasing trends typically
take place on-line. Delta utilizes this opportunity by giving customers the opportunity to
participate in focus groups and usability tests in the hub city of Atlanta, GA. Creating
deals for online customers, while at the same educated users on the internet in terms of
route selection and history, is enough to sustain Delta in terms of marketing production.
This is the most effective and low cost process of marketing and sales and will likely be
exhibited given the pressure of the economy, gas prices, and competition.

Service
Service is the core offering of a passenger airline corporation. Transportation of
passengers is the core service while the point of interaction service includes the on-flight
amenities as well as other interacting opportunities. The industry value chain suggests
that baggage retrieval, problem recovery, and check-in options are proprietary to service.
These elements are likely the deciding factor for customers to realize full customer
satisfaction; especially the customer recovery paradox.
Delta employees are known for great customer service and satisfaction. Because
the company operates as a FSC and has destinations all around the world, Delta position
is set at not cutting corners when it comes to service. An example as to why HR programs
and employee turnover rates are highly regarded among the industry includes the
exceptional pension plans and stock options that are available to employees as time goes
on.

Support Activities

Procurement
Procurement is the process of acquiring the inputs needed for operation. This is a
very important strategic part of the airline industry at this time. The need for cash on
hand is key for many reasons already discussed. However, the procurement for inputs is
essentially in the advancement of market share; this is why airlines are exhibiting
consolidation trends. Typically, acquiring inputs in the airline industry consists of
airplanes, labor, rights to landing slots and gate assignments. These are all support
activities that the operation process is reliant on.
 15

The recent agreement for Delta to merge with Northwest is a decision based on
the procurement of capital capacity that will allow Delta inputs sustainability in the
current domestic economic situation. The reasoning behind such procurement is a
strategic decision to realize additional capital and capacity without having to expend an
ample amount of cash in the process. Thus, procurement is very important from a
strategic standpoint, especially when the surrounding economy is in dire conditions. The
ability to procure inputs in a recession leaves room for high potential ROI figures, in the
market is promising.

Technology Development
Technology is the x-factor of the airline industry. Mentioned earlier was the
advancement in fuel mileage and labor costs with the new Airbus planes and the
technological amenities are becoming more prevalent in consumer behavior. Technology
is continuously advancing within Delta’s corporation. The development of new
reservation systems, kiosk renovation, aircraft routing systems and in-flight
entertainment, Delta does a great job at staying of the cutting edge of technological
opportunities. Although support activities place an emphasis on technological
development, the focus on keep a punctual time schedule is embraced and achieved
through the advancing scheduling and checking in systems.
An updated baggage tracking system would also be helpful in locating lost
baggage faster for the customer. Baggage systems are a fail point for all airlines in the
industry. If technology development focused on this aspect of the support activities there
would be an increase in customer satisfaction and help with retention rates.

Human Resource Development

Human resource management consists of training in all of the value chain’s
primary activities. These consist of baggage handling training, customer care training,
pilot and safety training and problem solving training. This process has increased in
awareness recently because of the current maintenance lapse in the FAA. Delta had to
ground planes along with other airlines in the domestic market, because the FAA HR
department wasn’t exhibiting proper training.
The idea is that HR can have a potentially large impact on airline operations;
whether it is involved with an external HR department or the actual HR department of
your company. The current merger between Delta and Northwest Airlines is the
consolidation of two airlines that will become the largest airline in the world. Having an
effective HR department will be vital toward creating value to the customer. Integration
systems between the companies will directly affect the pricing strategies of the volatile
market environment. Mike Campbell, the HR director of Delta has experience working
with other airlines, specifically Continental Airlines. “Mike has been known for
promoting an inclusive, diverse, and respectful culture…” (Delta.com 2008). The
experience of other airlines as well as work in creating inclusive cultures sets Delta up
with an experience HR director that can be effective when it comes to merger integration.
 16

Firm Infrastructure
Initially, the firm infrastructure identifies the firms ability operates efficiently,
given the general process positions of the companies. These positions include general
management, accountants, legal supports, strategic decision makers, and government
regulations that are outside the C-Suite.
Delta has an aggressive firm infrastructure given the fact that they were first
movers in the current recession seeking to offset threats of operation. These threats
include the economic situation, the increasing ATF costs, and increasing competition.
Delta’s management has exhibited this aggressive strategy to avoid going bankrupt given
the recent airlines that have gone bankrupt and closed passenger service.

Capabilities
Delta’s capabilities are what make it a premier air carrier in the United States and
the world. Delta’s main capability involves their employees; specifically the pilots.
Because America provides a substantial amount of the pilots throughout the world
(28,000 commercial pilots), there is a high demand for American trained pilots. Because
Delta offers such a great employee incentive program, Delta has the capability to provide
the most quality labor within the global industry. Although there is not a current high
demand for pilots in the domestic industry, strategic management has forth a large merger
agreement with Northwest Airlines. Increasing regions in terms of air traffic include Asia
and Trans-Pacific, which are markets the merger plans to penetrate. This is the most
important capability because Delta can penetrate new markets while having the
sophisticated labor to do so.
Delta is also highlighted by the vast amount international networks and routes that
enable Delta to cover most of the globe and cater to an enormous list of destinations and
their alliance with SkyTeam. Not only does Delta focus on international flights, but they
emphasize long-haul flights. Given the SkyTeam alliance, they have the capabilities in
taking customer wherever they need to go, whenever they need to go. This is a statement
that many airline companies are trying to achieve.

Core Competencies
Delta’s core competencies include international travel, technology, long-distance
flights, a variety of popular destinations, cooperation with other airlines, and luxurious
amenities for passengers. Delta provides these services as one of the largest airlines in the
world; despite the current merger with Northwest.
International travel and long-distance flights are a core competency for Delta
because they specialize in these types of routes. Delta also offers flights to over 58
different countries, which is the largest in the industry (Delta.com, 2008). This sets them
apart from their competition and gives them a majority of the international market share
in terms of the U.S. The international sector is primarily exclusive to South America,
however they also operate worldwide.
Their alliance with the SkyTeam is essential because the partners of the alliance
generally fly to places that Delta does not; therefore customers will always have a choice
from the SkyTeam alliance destination list to choose from.
Delta’s technology is also above average in the airline industry. They offer self
check-in kiosks (which have recently been renovated) and other in-flight amenities that
 17

other airlines do not. They also have their executive lounges that are located in different
airports and are available for all of there executive members or for a fee to the casual
passenger.

V.R.I.N. Analysis

Value
Delta’s international network allows them to stand out in the industry and allows
them to attract more customers to different locations. They have over 29 nonstop flights
across Europe, India and Israel and they have the second largest route system in South
and Central America. Delta offers more than 12 unique destinations across the Atlantic
that other carriers do not (Datamonitor (Delta), 2007).
To effectively counter the potential threats in the industry, Delta has the
capabilities to reduce domestic flights and penetrate higher traffic areas given the amount
of destinations that operate in. The neutralization of the potential threats to the industry is
vital and Delta withholds the resources to survive the potential threats to the industry.

Rare
The traffic that goes through Atlanta Hartsfield Airport and John F. Kennedy
Airport makes Delta’s placement rare because they have hubs in two of the busiest
airports in the US and the world (Datamonitor (Delta), 2007). These airports are not only
huge for domestic flights but they also have international departures and arrivals as well.
International departure is exhibited through being the only domestic airline that
flies to Africa. International processing is important to understand because in different
regions, trends are typically different from that of the U.S.

Costly to Imitate
The international network and the presence in two of the busiest airports in the
world are costly to imitate for competitors because it would require an enormous amount
of capital to expand to the unique destinations that Delta’s flies to. In addition to
acquiring capital expenditure that would be conducive for airline operation, Delta also
operates a very diverse fleet of Boeing as well as Airbus airplanes. Airports around the
world are also experiencing over crowded gate congestion with airlines and airplanes,
making it close to impossible to let any new airlines to acquire hub access at airports like
JFK or Atlanta Hartsfield. This would be very costly to Delta’s competitors to purchase
space from other airlines.

Non Substitutable
The international network and the location of the four hubs (JFK, Atlanta, and
Cincinnati & Salt Lake City) that Delta operates make them a successful company. Their
hubs act as a center and support system for their entire operation (Datamonitor (Delta),
2007). The non-substitutable characteristic of Delta’s international presence is vital.
There is no equivalent to the access of Africa and South America in the airline competive
 18

landscape. This leaves Delta a continuous exit strategy to exploit when given a
detrimental situation that potentially comprises business operation.

SWOT ANALYSIS
Strengths

Strong Market Position

Delta is ranked as one of the top airlines in the US and in 2005 and 2006 it was
named America’s Leading Business Class Airline and the Leading Budget Airline
traveled by professional (Datamonitor, 2007). Delta is the second largest airline when it
comes to passengers carried and it is the 4th largest airline compared to other airlines
when you compare operating revenues (Datamonitor, 2007).
Delta has recently just expanded its service to be the first airline to serve all 50
states in the US, therefore giving them a good competitive edge over their competitors in
the US. Delta not only operates airplane travel but they offer a shuttle service from JFK
airport to Manhattan and 34th Street in New York (Delta.com, 2008). This gives them
even more of a competitive advantage because they can offer something that no other
airlines offer to their business customers.
Delta is also talking about merging with Northwest Airlines, which would give
them even a stronger market position. If this happens they could force other airlines to
merge as well to keep in competition with Delta and Northwest. “Analysts said the
mergers could also lead to higher fares in some markets, at least in the short term, as
combined carriers reduced flights and the number of seats, and used their increased
market power to raise prices” (Sorkin & Bailey, 2008).

International Network
Delta has the largest Trans-Atlantic, offering 29 non-stop flights to different
destinations across Europe, India and Israel and the second largest route system in South
and Central America (Datamonitor, 2007). By having a large international network it
makes Delta more desirable because people will not have to rely on other airlines for the
flying needs, they can instead work directly with one airline for their nonstop service
needs.

Delta Hubs
Hartsfield Jackson Atlanta International Airport is the largest airport in the United
States in terms of number of passengers that came through and John F. Kennedy
International Airport is ranked number eight on the list in terms of passengers that travel
through, but it is the largest international terminal in the US (FAA, 2007). This is very
important for Delta’s competitive advantage over other airlines because more passengers
that travel through their hub airports, the more chance that they would handle those
passengers.
 19

Weaknesses

Bankruptcy
Delta finally had its first profitable year in 2007 since the year 2000 when there
net income was $828 million. Since 2000 they have had six consecutive non profitable
years, losing over $18 billion. In 2007, Delta’s net income was $1.6 billion and total
revenue was over $19 billion (Morningstar, 2008). The company’s net loss in 2005 and
2006 amounted to about $10 billion, which made Delta unable to meet its debt and
pension obligations, so as a result Delta filed Chapter 11 bankruptcy (Datamonitor,
2007).

Weak Cargo Revenues

Although Delta is mainly a passenger airline, it also has a cargo section that
makes up 12% of its revenue (Reuter (Delta), 2008). Delta has not used its vast
international network of over 50 countries to increase its cargo shipments. The cargo
business has lower demand elasticity than passenger business, which services as a barrier
against the rising jet fuel costs.

Opportunities

Increase Cargo Revenues

If Delta increased its cargo carriers and routes, it can compete and possibly take a
little market share away from UPS and Fed-Ex. Currently, Delta offers cargo service to
all 50 states and a few other destinations, but an increase in the cargo routes to Europe
and Asia could really increase Delta’s revenue.

Increased International Flights

Delta has been working in increasing their international flights per day and to
different destinations, but they need to continue to grow the business as a whole, since
there are huge opportunities in Latin American and in the Asian Pacific.

In-Flight Entertainment and Services

On April 1, 2008 Delta expanded its food for purchase service to every flight of
750 miles or more in the US (Delta, 2008). Delta still has an opportunity by expanding
their in-flight entertainment for the business and casual traveler, if they do this they can
advertise the benefits to flying with them and make them look more appealing to the
consumers.
 20

Threats

Rising Jet Fuel Costs

Jet fuel costs are rising rapidly, which is a huge problem for all airlines when they
have to fight the battle of ticket costs and operating costs. The average price for jet fuel
is $134 a barrel, which is a 62.1% rise from last years price per barrel (IATA.com, 2008).
As the cost of jet fuel rise, so will the airline’s costs, this will then in turn make the price
to fly rise to cover the airline’s costs. This trend could impact Delta’s margin.

Low-Cost Carriers
The continuing growth of low-cost airlines, such as JetBlue and Southwest has
been one of the biggest threats to Delta’s domestic markets share. These low-cost
carriers are putting competitive pressure on Delta to lower their costs or to come up with
alternatives to try and combat these low-cost competitors. Although these low-cost
carriers do not offer all the services and amenities that Delta offers, they are still a huge
threat to FSC in America and Europe because consumers are looking for price as the
main motivator in purchasing decisions.

Insurance and Security Costs

Since the September 11th terrorist attacks in 2001 insurance and security costs
have dramatically increased. Insurance premiums for airlines have significantly risen and
insurers have limited the amount of insurance available to airlines for third-party claims
(Datamonitor (Delta), 2007). Although to combat this, the government had offered
coverage above and beyond the $50 million limit the insurance companies have offered,
but the government has recently stopped providing that extra insurance, therefore
increasing the costs to airlines even more (Datamonitor (Delta), 2007).
Security restrictions have also risen, which means Delta has to hire more
employees, which in turn creates a higher operating cost to the airline. Both of these
factors take away from Delta’s bottom line and negatively affect the net income.

Economic Factors
The domestic economy has become an important factor to the operation of airline
companies. With the recent closure of four different airlines, along with the other threats
already mentioned, the economic situation in the U.S. has become a major threat to
operation. The recession puts pressure on airlines to fight for passenger service and
increases competition within the domestic market. Generally, airlines operating as
majority passenger service transport relay immensely on passenger service for revenues.
 21

Strategic Alternative

Outside of becoming the largest airline worldwide, finalizing the merger with
Northwest Airlines would benefit Delta in a variety of areas. First it would give them an
expansive international presence opening up entrants to that market. As Northwest is well
positioned to tap growth through their terminals in Beijing’s new airport, as well as being
one of the two US airlines with the rights to fly from Tokyo to other cities in Asia they
are opening up opportunities to capitalize on their increased market share in the growing
demand for flight service in those areas. (newglobalairline.com, 2008)
The merger is also beneficial from a separate financial standpoint. As Delta’s
acquisition of Northwest is a merger between two companies that does not involve any
monetary exchange between both parties. The merge will be more beneficial than the
stand alone plan when examining the looming talks of an economic recession. As a
recession decreases the demand for flight service which directly effects flight capacity.
The merger will allow Delta to remove the overlapping terminals and routes between
themselves and Northwest increasing their size and capital and further position Delta to
take on this threat. By eliminating the overlapping routes Delta will be able to increase
flight capacity in those areas through the addition of Northwest’s customer’s base as well
as reduce operating costs resulting in more profitability to the bottom line.
In relation to the consolidation of the two airlines they will also have the ability to
reduce employee expenses. Executives are expecting around 1,000 corporate office job
cuts resulting in roughly $22 million in cost savings. (newglobalairline.com, 2008)
The transaction will also strengthen Delta’s position in domestic flights. As Delta
is already stationed in Hartsfield-Jackson Atlanta International Airport, it obtains position
in the world’s busiest passenger airport. With the addition of Northwest, which resides in
Minneapolis St. Paul International Airport they would be able to add a hub, which has
shown growth for business travel for many years and is expected to continue increasing
well into the future. As business travelers are the target market for domestic flights
providing the largest revenue stream this becomes a very beneficial avenue for Delta to
pursue. In addition major low cost carriers such as Southwest Airlines do not have a
major presence in these two airports making it easier to capitalize on the market.
Aside from the organization in and of itself the transaction will also benefit
employees, communities and the combined customer base. In regards to the employee
status they will receive more stability for future personal growth “in the face of
significant economic pressures from rising fuel costs and intense global competition.”
(Delta.com, 2008) They will also gain more job security as well as receive an equity
stake in the combined airline. As far as communities within the United States they will
gain alternative access to enhanced destinations worldwide. (Delta.com, 2008) Finally
customers will benefit from the merger’s combined carriers complimentary route
networks, offering competitive fares and “a superior travel experience to more cities than
any other airline.” (Delta.com, 2008)
Reasons for the Merger

Jet Fuel Prices

The rising jet fuel prices are dramatically hurting bottom line profits of most
airlines. Jet fuel costs have risen from roughly $55 a barrel a year ago to now around
 22

$140 a barrel (IATA.com, 2008). Currently Delta and Northwest are increasing their fuel
surcharge to cover the rising expense, but the merger will help customers looking to
make connections between the two carriers, by only having to pay one surcharge instead
of multiple.

Slowing Economy
The slowing US economy is causing people to leave the money that they have in
their wallets until this so-called recession is over with. By Delta and Northwest merging
together they will be better suited to withstand the recession and come out profitable and
as strong as ever. Another factor in the US economy is the constant decline of the US
Dollar. This is affecting businesses that compete globally, since other currencies are
much stronger than the US Dollar.

Compete Globally
Although Delta is able to compete with other airlines globally, the acquisition of
Northwest gives Delta the benefit to compete in the Asian market without using any cash,
since the acquisition of Northwest is a straight merger. Delta will have new hub in
Amsterdam, which will help them expand their already expansive European market. The
key acquisition is Northwest’s hub in Tokyo because this will give Delta expansive
access to the Japanese and Asian markets, which are growing more rapidly than any other
market in the world.

Route Map Combination

Another key factor in the merger between Delta and Northwest is the fact that
they have very few overlapping routes that will interfere with each other. When you
combine the two geographically distinct route networks with very little overlap, Delta
and Northwest will have a good portion of the entire world covered making them the
largest airline worldwide.

Strategic Implementation

Cost Savings
The primary reason of the Delta, Northwest merger is a result of the costs the two
airlines will save and the market share they will gain. Delta and Northwest executives
are projecting only 1,000 job cuts from their corporate offices eliminating the removal of
any frontline jobs. Although analysts believe this is a weak estimate, provided in order to
get the merger approved by the Department of Justice. The estimate would still result in
an average cost savings per year at approximately $22 million in employee expenses.
The 1,000 job cuts are expected to take place prior to the merger, however Delta has
already announced that they plan to cut 2,000 jobs over the course of the next year before
the merger. These additional job cuts will consist of Delta frontline employees as well as
corporate employees and they will aid in the reduction of employee expenses.
Delta will also be gaining additional hubs and gates at airports that they currently
don’t have a huge presence in, these additional hubs will boost their revenues and make
the combined carrier a more globally complete airline. They will be gaining international
 23

hubs in Amsterdam and Tokyo. Their hub in Amsterdam will benefit the company
immensely because it will give Delta a center in the European market, benefiting them
through their already established presence in Europe.
The hub in Tokyo is the key acquisition because of the bilateral aviation
agreement, which gave two airlines exclusive rights to the Asian market. Northwest and
United are the only two airlines that are allowed extensive access to Tokyo and other
Asian countries. By acquiring this hub it will give Delta a very good starting point in
their growth toward the Asian market, which is the fastest growing market in the airline
industry, growing by 8.8% each year, which is nearly 3% higher than the US market. By
acquiring these two international hubs, Delta is more equipped to serve the world as an
all around international airline.
Delta will also be acquiring hubs domestically in Detroit, Minneapolis and
Memphis that will help to serve their domestic routes as well. This could possibly give
them a chance to compete with the low cost carriers since they will have the US covered
with domestic routes.
Finally by combining the routes Delta will have a strong presence in Europe,
Asia, South America, Canada and some in India. By combining these routes and having
the strong presence in the international market Delta can compete with any other airline
in the industry.

Keys to Success
There are several factor of this merger that need to fall into place in order to
successfully merge together. The Northwest pilots and the Delta pilots are currently
debating over the pilot seniority list. This seniority list determines which pilots get the
best flights at the best times, which creates controversy between the pilots that are near
the top because they have been flying the longest.
Another key to the success of the merger is keeping the two international hubs
running smoothly, this is very important because most international flights have
connection flights that they need to be on time for. If the international hubs or the exit
hubs leaving the US get backed up it can cause a chain reaction of delayed and missed
flights, which will ultimately cause the customers to be dissatisfied.
Unfortunately for the two airlines they have completely different fleets of aircrafts
which causes issues with the maintenance of each model of aircraft. Delta is an all
Boeing fleet, including McDonald-Douglas. Their current fleet is below (FAA (Delta),
2008):

Make/Model Count
BOEING B-737 71
BOEING B-757 135
BOEING B-767 101
BOEING B-777 10
DOUG MD-88 117
DOUG MD-90 16
TOTAL: 450
 24

Northwest’s fleet is much more diverse, with a mixture of Airbus, Boeing and
McDonald Douglas jets. Their current fleet is displayed below (FAA (Northwest), 2008):

Make/Model Count
AIRBUS A-319 57
AIRBUS A-320 73
AIRBUS A-330 32
BOEING B-747 33
BOEING B-757 71
DOUG DC-9 115
TOTAL: 381

After the merger there will be some new airplanes ordered between the companies
and there will be some airplanes retired, but at the start of the merger the new Delta will
have over 800 aircrafts that will need to have mechanics to service them. This can cause
a problem because certain mechanics are only certified to work on McDonald Douglas
jets, Boeing jets or Airbus jets. This can cause a problem because hiring someone who is
certified to service all the jets will ultimately cost more, unless they can figure out a way
to distribute the mechanics around the world.
Another very important key to success for Delta after the merger is to remove
gates at overlapping airports because the combine airline will share gates. This is a key
to success because by cutting these gates they will save money and ultimately grow their
bottom line.

Global Network
By combining the two airlines Delta will have the most expansive global network
in the industry and a very good grasp on the domestic market to possibly take a chance
and compete with the low cost carriers. By acquiring Northwest, Delta will have full
access to the Asian market using the Tokyo hub as a distributor of Asian flights to and
from the US. This is a key acquisition for Delta because of the Bilateral Aviation
Agreement that gives only 2 US owned airlines extensive access to the Japanese and
other Asian markets. By the two US airlines merging together, they can cover an
extensive part of the international market. Delta already has a huge presence in Latin,
South America and Europe and Northwest has a strong international presence in Canada
and Asia. Northwest offers over 200 nonstop flights to Asia each week, which will boost
Delta’s bottom line in the fast growing market.

Potential Risks
Even though the merger is the best plan for Delta, this does not mean that there
aren’t some potential risks involved. First and foremost is the risk of the $168 million
divorce penalty. If the merger is accepted by the Department of Justice and the two
airlines decide to go ahead with it, they risk the divorce penalty if the merger does not
workout and the airlines have to part ways. The $168 million is to be paid in cash, which
would detrimentally hurt the airlines cash on hand. Since neither airline has much cash
on hand this could ultimately be the death of the two airlines.
 25

The next serious risk is there brand equity. There is a big difference between
creating an alliance and merging two airlines together. There is brand equity at stake for
both companies. If a catastrophic event, such as a plane crash, the new giant airline
would suffer severely. If an aircraft crashes and they are in alliance with another airline
this would not negatively affect the other airlines in the alliance because it is not directly
related to their particular airline, such as Delta. So, there are some potential risks when it
comes to brand equity when merging rather than creating an alliance.
Antitrust exemptions are another serious risk to the new Delta. These antitrust
exemptions would give other airlines an opportunity to compete with Delta Airlines.
Other airlines such as American Airlines, British Airways and Continental are seeking
these exemptions to be able to set their own prices and their own schedules according to
their inside information (Schlangenstein, 2008). This would ultimately let these different
airlines compete with Delta because they will be able to create price wars and differ their
schedules to help them compete with Delta in every aspect.

Financials and Economic Value Added

Economic value added (EVA) and other financial ratios are key to determining
the success in Delta’s strategy in merging with Northwest Airlines. By combining
financial information obviously as a whole Delta will grow, but they could grow in the
wrong direction if Northwest is not a well run company as well. First Delta can compare
ratios which can be viewed in (Appendix E). These ratios compare the industry average
with the companies stand alone financials and then ultimately with Delta and Northwest
Airlines combined. After significant analysis one can determine that every ratio changed
for the positive by combining the two airlines and these numbers will only get better
when they cut costs and possibly start hedging fuel.
The liquidity ratios and the profitability ratios are very important because they
determine how well the airlines can pay off their debt and how profitable the company
will be. Even with the merger the company’s current ratio is not up to industry average,
but their quick ratio, which does not take into account inventory is above industry
average, which is good, however both of these ratios should be positioned at 1.0 or above
(see below). But, the positive aspect here is that both ratios show positive growth prior
the two companies merging together. Nevertheless there is a disclaimer in that the ratio’s
don’t have to be 1 because there is plenty of access to financial options in order to make
those numbers acceptable.

Liquidity Ratios Industry Total Company Total Merger Total

Current Ratio 1.04 0.793 0.956
Quick Ratio 0.76 0.662 0.8835

The profitability ratios are also changing for the positive. The net profit margin
rose by over 4% and the return on total equity also rose almost 2%.
Profitability Ratios
Return on Total Assets -0.17 4.972 6.75
Net Profit Margin -0.13 8.499 12.603
 26

The economic value added (EVA) is a key ratio in determining the actual
economic profit of a company. The EVA for both companies is on the rise for the next 3
to 5 years. Delta’s EVA will grow $11,087,000,000 over the next 3 years, which is a
solid number on its own. Northwest’s EVA will grow by $6,397,000,000 over the next
three years as well. This is very good and will ultimately continue growth as the merger
between Delta and Northwest takes place. The economic value added through the
combination of the two airlines is tricky because you cant predict the impact the merger
will have on the economy. As a rough estimate we combine the revenues, capital
invested, depreciation, capital expenditures, working capital, debt outstanding and shares’
outstanding. As a merged company Delta’s EVA would grow by $17,175,000,000 over
the next 3 years (see below). But, you have to remember that this is a rough estimate and
it does not account for customers lost because of the merger.

$ $ $
EVA 3,073 5,521 8,581

This only supports our strategic plan of merging Delta and Northwest together.
Combining the two entities into the new Delta airline, would develop significant market
share, develop the world’s largest airline and ultimately take over the global scene which
houses the highest opportunity to attain profitability.

APPENDIX A
Strategic Alternatives

Standalone Plan:
With the finalization of the merger with Northwest drawing near, Delta airlines
could move to a stand alone strategy. As the plan would not include the acquisition of
Northwest, one of two things would have to happen in order for this alternative to be put
into action. One way the strategy could be implemented is if the merger with Northwest
was declined by the board. The other option would be for Delta to pay $168 million
dividend to Northwest as a divorce penalty. (newglobalairline.com, 2008) The plan which
is estimated to obtain an annual growth rate of 12% in 2008 includes two major actions
that have already been announced. First, in response to the threat of a looming recession
in the economy and a decrease in demand for air travel, Delta has announced that it will
downsize its staff removing approximately 2000 front line and corporate employees.
Second, Delta has added additional aircrafts to its fleet. The addition of the Boeing 777
LR which is slated to fly between New York and Mumbai, is expected to boost annual
revenue by $10 million, due to its increased cargo space.
In addition to the actions already announced, there are many other avenues Delta
could travel in order to strengthen their standalone plan. First, they could reduce capacity
in available seat miles. As unprofitable routes are a deterrent to the bottom line, Delta
must make sure that their load factors remain above 71%, which represents the capacity
of the plane that must be filled in order to break even (MSN Money, 2008). Some other
options for revenue growth to help assist the break even point are to charge money for
 27

checking bags, increasing the use of self-servicing kiosks in order to reduce the $25 per
ticket cost of issuing a paper ticket, (Delta.com, 2008) and offering incentives such as
double reward miles for using online check in. Another option within the standalone plan
is to cut back on domestic flights. As domestic carriers such as Southwest operate under a
low cost pricing structure competition becomes fierce as profit margins remain minimal.
By reducing these routes and focusing on the growing markets such as Asia, Delta would
not only receive higher demand for their service, but also more profitability. As the
formation of alliance’s provide major benefits in the airline industry, Delta could look
into forming non-air alliances in areas such as rental cars and hotel services. Through the
integration with these alliances Delta would be able to add value to its consumers through
package deals, as well as cut out intermediary travel agent costs. Finally Delta could look
into altering its flight scheduling times so that they don’t operate at the same times as
other airlines. Through doing this Delta would be able to reduce turn around times by not
waiting on terminals to open, as well as making it more efficient for passengers to hook
onto connecting flights.

International Expansion:
International travel is attractive in the airline industry due to its higher, more
profitable return in comparison to current domestic routes. As low cost carriers are
making it hard to compete on the basis of achieving profits, Delta could reduce domestic
flights and optimize the unused resources internationally. One area in which Delta could
expand is over Asian and Trans-Atlantic routes. As these areas provide an 8.8% growth
rate in comparison to the 5% air passenger rate world wide and are expected to continue
to outpace the world average for the next 10 to 20 years due to rapid population and
economic growth this becomes an appealing market for Delta to pursue.
(newglobalairline.com, 2008) In addition to the expansion of the Asian and Trans-
Atlantic routes, Delta could look to continue expanding on their already expansive
network in Latin America, where they recently added five new routes.
An additional option for Delta to expand internationally is to establish alliances
with other global carriers, enabling them to sell tickets for partner airlines. This strategy
will allow Delta to capitalize on areas they cannot reach due to current monetary
limitations, airport access and current regulations.
International expansion is globally competitive due to open skies. As Delta alone
does not have the access or resources available to become a major competitor against
other legacy carriers internationally, a merger becomes the most sustainable option for
Delta to gain the position they desire in the international market.

APPENDIX B
Delta’s EVA
 28

APPENDIX C
Northwest’s EVA

APPENDIX D
Combined EVA
 29

APPENDIX E
Other Financial Ratios

Delta Airline Financial Ratios

(DELTA)
Liquidity Ratios Industry Total Company Total Merger Total
Current Ratio 1.04 0.793 0.956
Quick Ratio 0.76 0.662 0.8835
Inventory to Net Working Capital -4.671 -0.335

Profitability Ratios
Return on Total Assets -0.17 4.972 6.75
Return on Common Equity 15.94 22.156
Net Profit Margin -0.13 8.499 12.603

Leverage Ratios
Debt to Assets 28.668 28.79
Long-Term Debt to Equity 78.968 84.482

Activity Ratios
Inventory Turnover 41.54 69.413 70.062
Total Asset Turnover 0.78 0.729 0.696
Accounts Recievable Turnover 26.87 19.148 18.434
Average Collecting Period 18.801 19.55

Sharesholder Return Ratios

Dividend Payout Ratio 2.26 0 0
Cash Flow Per Share 9.434 10.266

APPENDIX F
Competition: Southwest Internal Analysis
 30

Internal Analysis
Resources
The internal analysis of any corporation is exhibited through two main aspects;
tangible and intangible. Southwest Airlines currently operates a uniform fleet of around
481 Boeing 737’s and obtains the gate rights to a substantial amount of airports in the
U.S. Gate rights are an essential tangibility to the success of their operation because it
their strategic gates in cities with moderate climates directly contributes to the one of
their core competencies; punctuality. The uniform fleet also contributes to the efficiency
of production based on the maintenance aspect alone. Mechanics and services are
standardized, thus making it easier for potential problems to be identified and/or fixed in
a timely fashion.
Southwest Airlines also obtains a very strong culture that adds a tremendous
amount of asset to the company. In several ways the company reaps benefits from the
unique culture. Quality and customer perception is directly correlated with the culture.
Corporate culture also adds to the bottom-line in terms of operating expense because
happy people operate more efficiently.
The infrastructure of Southwest Airlines is the reason why they are the number
one leading LCC in the U.S. The decentralized, cross-functional organization continues
to produce a profit margin as well as quality.
Value Chain Analysis – Primary Activities
The inbound logistics of Southwest produces a fast reliable service, with friendly
faces along the way. The inbound activities include ticketing, maintenance, baggage
transfer, operating systems. Southwest has always operated as a no frills airline, which
reduces the amount of inbound logistics dramatically. For example, there are no seat
assignments when flying on Southwest.
Operations have been the emphasis of praise over recent years regarding
Southwest. The idea of LCC is that operations are so lean that if in turn allows the
company to obtain the management strategy of price leadership. As Southwest continues
to thrive, increasing efficiency will be essential to sustain such success.
When Southwest Airlines markets their ability to fly to on-time, its not lie. The
outbound logistics of the company is exemplary within industry practice. The amount of
business generated from word-of-mouth regarding simple punctuality is tremendous
based on this particular characteristic.
The marketing aspect of Southwest, like the corporate culture, is very fun.
Commercials and other advertisements emphasize the lighter side of life. The marketing
tools utilize humor, which embraces the attraction to the popular LCC.
Southwest Airlines is currently operating in the service sector. Service is the
cornerstone of LCC because customer loyalty is crucial for sustainable profit margins.
Southwest has operated as a standardized airline that focuses on the experience of flying
comfortably from point-to-point at a low cost.
Value Chain Analysis – Support Activities
Procurement of goods and materials is important within the airline industry;
especially concerning LCC. Companies operating LCC find every way possible to cut
costs. For example, “Southwest said it has contracts covering more 95% of its expected
fuel needs for the second quarter at the equivalent price of $50 per barrel for oil”
 31

(USAToday 1). What this suggests, is that Southwest pre-purchases fuel quarterly to
reduce the impact of elasticity concerning fuel prices.
The technological development of southwest also plays a role in the process
turnover from flight to flight. Because the intricate electronic ticketing system allows
customers to choose their seats based on when they checked in, the company is able to
save an immense amount of time with the boarding process. In addition to the ticket
system, Southwest also obtains great incentive program data base for frequent flyers. As
technological advances continue to saturate the market, the company needs to continue to
update systems to comply with updated systems within the industry.
The basis behind the whole Southwest Airlines process is initiated through the HR
department. Hiring and training are very important to the process of putting together an
efficiently operating crew. Fortunately for Southwest, recruiting is unnecessary.
Choosing the right people to work for the company is crucial to the success of the LCC.
Southwest also withholds a very unique firm infrastructure. The idea behind the
unique business plan is to utilize the full potential of an employee while enjoying the
work load. The corporate culture adds an enormous about of intangible assets to the
company and is superior to that of the competition.

Core Competencies
There has been a longstanding approach to the core competencies offered at
Southwest Airlines. The competencies include their quick turn-around time operating
process and their unique corporate culture. Because the company operates as a LCC, the
idea is to limit the amount of costs incurred in operation and pass the savings on to the
customer; who will thereby be inclined to purchase from Southwest.
Given the current economic circumstances the current core competencies of
Southwest Airlines will undergo the ultimate test. Unfortunately, core competencies are
not always permanent. With current market conditions, airline companies are seeking out
ways to operate at lowest cost and consumers are purchasing based on the criteria of price
alone.
For LLC, the ability to compensate for increasing production costs in raw
materials, for example through ATF, they have no choice but to raise prices to
consumers. When LCC are raising prices and FSC are lowering prices to fill the volume
of aircrafts, the industry begins to experience equilibrium-like behaviors. These
circumstances will test the competencies of Southwest because of the intensified
competition of the airline industry.
The unique corporate culture has been a great selling point for Southwest in terms
of customer quality as well as employee productivity. Given the economic circumstances,
Southwest Airlines culture will also be tested. The corporate culture is a contributing
factor to the extremely loyal customers Southwest has obtained through incentive
programs and friendly service. As the industry competitors increase financial pressure,
Southwest will begin to discover whether there is merit between atmosphere and
customer loyalty.

SWOT ANALYSIS
Internal Analysis
Strengths
 32

The strengths of a Southwest Airlines include several different characteristics.

The characteristic strengths that are identified within any company are the basis for
strategic advantage. Within Southwest Airlines, the key strengths are operational
performance, strong returns, and market leadership. These traits have enabled Southwest
to operate as a market leader of LCC for a substantial amount of time.
The operating performance has already been identified as one of the company’s
core competencies. Southwest is able to increase profit margins immensely through there
very efficient operating process. The ability to perform profitably on the basis of
operations is important and highly non-substitutable. The idea is that, although the
industry is experiencing a tremendous amount of pressure from buyers and suppliers,
Southwest is able to control its core competency within their own firm.
Southwest Airlines has always produced a relatively high profit margin in
comparison with the industry average. The average ROI for Southwest in 2006 was
respectively 4.3%; considerably lower than those in the industry at -3.9% (SWOT).
Unfortunately, as the economy continues to slump, the ROI margins are closing up. The
ability to utilize the cash generated from operating processes is nearly over.
Market leadership is very important to Southwest operation. Market leadership
reflects best in practice and illustrates the exemplary business plans of those in the airline
sector. Given the current market conditions, the goal now is achieve stability. The process
of doing so reflects Southwest’s ability to seek new opportunities that are available given
there market leadership. Generally, firms tend to expand within the industry and/or
expand horizontally into a different sector. For Southwest, the company has experienced
the opposite approach with the closure of partner ATA.
Weaknesses
The case has previously suggested the passenger dependence of Southwest
Airlines. In addition to passenger dependence Southwest is also liable to low inventory
turnover ratio and lower load factors. Low inventory turnover essentially leads to lower
profit margins; a key attribute toward operating in today’s airline environment.
Statistically, load factors for Southwest are low in terms of industry averages. The record
73.1% load factor does not touch the industry average at 76%. The results of obtaining
low load factor ratios are too directly correlate with a decrease in profit margins.
However, the numbers are not equally distributed given the extensive frequency on
flights that exist within Southwest’s point-to-point service.

External Analysis
Opportunities
The potential opportunities of Southwest Airlines are extensive. The available
opportunities correlate with the company’s strengths and give them an ability to sustain
their market leadership. The opportunities that linger include the growth of the freight
business, expanding passenger service in other countries, and potential investments that
are available given the market conditions. These opportunities create a pathway of
sustainability that reduces the impact of external bargaining power and elasticity.
The fright business is an attractive investment because the demand for freight is
contingent on the all purchases; contrary to consumer participation within the passenger
airline sector. Technological advances have produced scanning systems that meet the
qualifications of the U.S. Postal Services, making the freight market relatively easy to
 33

enter; if you have the invested capital e.g. airplanes, etc (SWOT 7). This immediately
makes the industry attractive for a company like Southwest, because it reduces the
elasticity of the passenger service sector and enables the company to accurately forecast
profit margins and revenues.
Although the American economy has contributed to the lessened amount of
people flying, that is not the case for emerging nations. But utilizing their market
leadership, Southwest can expand into other nations such as India and China, with
increasing travel opportunities at around 5% higher than travel expected throughout the
rest of the world (SWOT 8). Non-domestic growth has always been a viable option for
Southwest, however, with the American market bust; it may be closer to reality than one
may like to think.
Given the fact that Southwest is the market leader of LCC, naturally the company
has an extensive amount of capital invested that can be leveraged for growth. The slow
economy is a potential gold mine for those looking to expand growth in an interest
friendly environment for those with the ability to do so.
Threats
External threats have contributed to the increased in airline financial pressures
over recent months. The threats include the intensified competition and increasing costs
of ATF. Through there is an enormous amount of potential threats that may affect the
airline industry in general, Southwest it currently facing these two problems.
It is important to understand that the strengths of the Southwest are a direct result
of the companies actions to minimize the potential threats to company. Moreover, the
financial pressure exerted by the current economic situation is diluted in the Southwest
Airlines ability to operate at efficient profit margins while maintaining market leadership.

APPENDIX G
Competition: American Airline Internal Analysis

Internal Analysis

Resources:

Tangible:

AMR has tangible resources in their financial situation. Although

obtaining profitability hasn’t been a strong suit, obtaining capital is plentiful
through banks, venture capitalists and other financial services. This can be
exemplified through their acquisitions of American Eagle and American
Connection. AMR also has a lot of technological resources. Finally AMR has its
fleet of planes.

Intangible:

One of the most important intangible resources to AMR is their human

capital. Within the employees holds an extremely valuable resource in their
knowledge and experience. In addition to this if AMR were to utilize tools such as
 34

a knowledge management systems where employees can share knowledge, they

would be able to obtain more resources. Some of the other intangible resources
that AMR has are their culture, leadership, control systems, structure and
customer service.

Value Chain Analysis

Primary Activities:

Inbound logistics:

The overall process of inbound logistics in the airline industry is

constantly changing. The major reason for change is due to technological
changes. As AMR operates on a low profit basis finding areas which are more
efficient can help increase profitability. Currently AMR’s inbound logistics
consist of things like Route selection, Yield management system or pricing
strategy, Passenger service system, fuel, flight and crew scheduling, facilities
planning and Aircraft acquisition.

Operation:

The operations sector of the value chain is extremely important to the

overall success of AMR. Operations not only assist in the overall efficiency of the
company through ticket counter, gate and aircraft operations. It also transcends to
the consumer by means of on-board service, ticket counter as well as gate
efficiency and Baggage handling. Since AMR is a luxury provider performing
operations by means in which the consumer can recognize the value added is
important to AMR’s overall success.

Outbound logistics:

This form of operations is important in order to maintain customer

satisfaction. It includes “collecting, storing, and physically distributing the final
product to customers.” (Strategic Management, 2008) AMR uses outbound
logistics in their Baggage system, Flight connections and Rental car and hotel
reservation system.

Marketing and Sales:

AMR utilizes the means of Promotion, advertising, an advantage program,

travel agent’s and group sales, in order to effectively attract customers to utilize
their service. (aa.com, 2008)

Service:
 35

AMR provides its customer base with a lost baggage service, a program
designed to follow up on complaints, the internet, and representatives that will
assist their customers with any questions they may have. As AMR is a luxury
based airline these service help invoke the quality and value AMR has to offer.
(aa.com, 2008)

Support Activities:

Procurement:

AMR utilizes information technology communications in order to

communicate with suppliers, so they can deliver their end service. (aa.com, 2008)

HR Management:

AMR does a great job in human resource management. As a company

AMR places a special enfaces in training. Employees are not involved in cross
training and upon joining the company they interact in training programs that
relate to their particular job such as pilot, agent, in flight and baggage training. All
employees also participate in mandatory safety training. (aa.com, 2008)

Firm Infrastructure:

Firm infrastructure is used to identify “external opportunities and threats,

identify resources and capabilities, and support core competencies.” (Strategic
Management, 2008) AMR utilizes its financial policy, accounting, regulatory
compliance, legal and community affairs in order to benefit from these
opportunities. (aa.com, 2008)

Technological Development:

In order to improve procedures and increase customer value AMR utilizes

its technological development as a tool to differentiate themselves from the
competition. In doing so AMR currently uses a computer reservation system, in
flight computer system, flight scheduling system, a yield management system,
product development team, market research and a Baggage tracking system.
(aa.com, 2008)

Capabilities

Distribution:

AMR’s main source of distribution is through Sabre Holdings Company. Sabre,

“provides access to the world's leading global distribution system (GDS).” (aa.com,
 36

2008) The GDS system is essentially a marketplace that brings AMR together with more
than 50,000 travel agency locations. Through the use of this service AMR has the ability
to work in real time, increasing overall efficiency. (aa.com, 2008)
One unique way in which AMR is utilizing distribution is through its “Source
Premium Policy.” (Harteveldt) The policy which was initiated in 2007 will charge travel
agencies a $3.50 service fee when they don’t use low cost distribution providers. This
method was put into action in order to try and minimize distribution costs.

Technological Advances:

As Technology Provides a Competitive Advantage to American Airlines, they

focus hard to continuously improve in this sector of the company. One of AMR’s most
recent advancements is the launch of a Spanish-language site. This allows Spanish
natives to book American Airline flights in their own language using the internet.
(aa.com, 2008)
Another recent technological advancement from AMR is a new portion on their
website. A calendar based page allows advantage flyers to view all of the upcoming
discounts in a simple and easy manner. (aa.com, 2008)
The most recent advancement for AMR is connected to cell phone users. Through
a free sign up process customers can receive text messages with fare sale information and
special offers that are going on each week. (aa.com, 2008)

Manufacturing:

American airlines utilizes an outsource method for the manufacturing of its

products. Main suppliers such as Boeing and Airbus are the main suppliers.
(Datamonitor, 2007)

Culture:

The culture residing at AMR is hierarchical. The employees are held to a

mandatory code of ethics, in which they are expected to follow the guidelines set forth.
These include abiding to the law and performing ethical actions. (Datamonitor, 2007)

SWOT Analysis

Strengths:

Global Network:

American Airlines is one of the largest passenger airlines around the

world. Throughout its operations in approximately 150 different locations,
American Airlines provides service to its global network. Outside of international
operations AMR has a regional airline called American Eagle. To partner up with
American Airlines and American Eagle, AMR also contracts out three
 37

independently owned regional airlines. By having strengths in both fields of

regional and international airlines AMR can better service its customer base.
(Datamonitor, 2007)

Strong Alliance’s and Marketing Tie Ups:

AMR has found a multitude of benefits is forming alliances with other

international airlines. The major alliance that American Airlines has formed is
called oneworld . Within this alliance are international carriers such as “Aer
Lingus, British Airways, Cathay Pacific, Finnair, Lan Airlines, Iberia, and
Qantas.” (Datamonitor, 2007) Through the use of this alliance AMR can network
member carriers in order to enhance overall customer service and connections to
final destinations. The alliance also links frequent flyer programs. American is
currently in the process of developing “marketing relationships with Air Pacific,
Air Sahara, Air Tahiti Nui, Alaska Airlines, China Eastern Airlines, Deutsche
Bahn, EL AL, EVA Air and Gulf Air.” (Datamonitor, 2007) through the use of
marketing tie-ups AMR can increase opportunities to capture new markets and
improve upon its current network. (Datamonitor, 2007)

Consistent Top of Line Growth:

AMR has seen revenue growth, grow at a steady pace. From 2003 to 2006
AMR has grown in revenue from $17,440 million to $22,563 million, these
results are mainly due to the growth in passenger revenue which has increased by
7.5% even with a 1.2% decrease in average seat miles. (Datamonitor, 2007)
Throughout 2006, AMR received approximately 80% of its overall revenues from
passengers. The revenue’s stemmed from the domestic operations at 63% and
international operations accounting for 37%. (Datamonitor, 2007) The overall top
of line growth is an indicator for AMR that they are penetrating the domestic
market, which can in turn be used as a form of leverage for future growth areas.
(Datamonitor, 2007)

Weaknesses:

Weak Returns:

Like many of the airlines AMR has not been able to establish good
returns. AMR’s assets over the last five years have been recorded on average
4.6% lower than the industry average of 3.9%. (Datamonitor, 2007) this is shown
to be a direct reflection of the management in their inability to utilize their assets
to turn a profit. (Datamonitor, 2007) A negative impact of this is that with low
returns comes less of a chance to receive financial support from investor groups.

Unprofitable Routes:
 38

AMR has also run into the issue of running unprofitable routes. Although
AMR likes to be active in as many destinations as possible, it must find was to
generate profits along their unprofitable routes, if they want to see an increase in
profitability. (Datamonitor, 2007)

Weak Operating Margin:

Although AMR has been able to establish consistent revenue growth, they
have not been able to raise their overall operating margins. In relation to the
industry average of operating margins at 0.95% AMR was at negative 3.45%
between the years of 2002-2006. (Datamonitor, 2007) Once again this low
operating margin is represented by poor management cost structure as well as a
bad financial position. (Datamonitor, 2007) This trend could reside as a problem
for future margins.

Lower Inventory Turnover Ratio:

AMR has also had issues in establishing good inventory turnover. As the
industry average is at 42.28, AMR was at 34.59. (Datamonitor, 2007) This
indicates that AMR is not doing a sufficient job in forecasting trends. By running
operations with a low turn over, AMR is increasing their holding costs, as well as
putting more pressure on revenue growth and margins. (Datamonitor, 2007)

Reliance of Business Fares:

Although AMR is producing solid revenues it must not loose sight of its
core customer. Business travelers within AMR account for a large portion of their
overall revenues. Currently AMR has been loosing some of their business
travelers due to cheaper fares and technology that allows them to reduce their
amount of travel. With this said it is important for AMR to establish ways to
retain their current business travelers and get back those who have left.
(Datamonitor, 2007)

Opportunity:

Passenger Traffic in Asia- Pacific:

Through the economic boom in Asia, the demand for travel there has
grown to 7% above the world average of 5%.(Datamonitor, 2007) As the Asia
Pacific area is forecasted to increase AMR can “leverage existing operations to
drive top line growth.” (Datamonitor, 2007)

Fuel Efficiency:

As the majority of the economy is becoming environmentally friendly, it

opens up an opportunity for AMR to develop technology that is more
 39

economically beneficial. Although not everyone is environmentally conscious it

could open up a huge market for those who are.

Growth in Latin America:

Latin America accounts for around 17.8% of AMR’s revenue. As Latin

America has grown in overall tourist travel and is expected to have a 4.7%
average growth over the next three years, (Datamonitor, 2007) AMR can use this
information as a tool in order to penetrate this market heavily.

Increase in Trans-Pacific Cargo:

As American, is AMR’s largest scheduled air freight carrier around the

world. It can look to its subdivision of trans-pacific cargo which accounts for 15-
20% of the world air cargo volume (Datamonitor, 2007) to improve upon its
revenues.

Threats:

Rising Aviation Fuel Prices:

As the supplier of oil is in a monopolistic situation they have been able to

raise global oil prices. Aviation fuel has doubled since 2000 going from 78 cents a
gallon to $1.81 a gallon. (Datamonitor, 2007) This increase in fuel prices has
played a major role in the continual drop of margins in the airline industry. With
huge overheads in low-volume destinations AMR may find that the fuel prices
could really impact their overall margins. (Datamonitor, 2007)

Reduction in Business Travel:

As developing technology has opened new doors for business people to

communicate via video conferencing and internet rather than travel, you can see
why this poses a threat to the airlines as business account for the majority of
AMR’s as well as other airlines revenues.

Security Obligations:

Since the terrorist attack on September 11th “the US government issued

The Aviation and Transportation Security Act.” (Datamonitor, 2007) This act was
put into place in hopes of getting travelers to regain their trust in the airlines as
well as the obvious of providing security for them. The negative affect to AMR is
that the implementation of safety measures is accruing more costs to the
companies, which is essentially cutting down on their margins.
 40

Foreign Currency Fluctuation:

As AMR provides service on a global scale in areas such as “the US,

Mexico, Puerto Rico, Caribbean, Canada, Latin America, Europe and the Pacific,
(Datamonitor, 2007) it makes them exposed to the currency fluctuations in those
areas. Currently 37.2% of revenues are generated outside of the U.S in these
foreign areas so AMR tries to use the “natural hedge strategy,” which means that
their revenues in an area pay for the expenses in that area so that the currency
remains the same. (Datamonitor, 2007) In addition to this the fluctuations and
inflations could have an impact when dealing with exchange rates between the
multiple areas. (Datamonitor, 2007)

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