Realizing that Delta faced a huge problem, based on the current low cost environment,

Delta assimilated a task force whose primary responsibility was to develop a strategy to respond
to the current competitive set. The strategic options available to the cross-functional team that
Mark co-leads included continuing with Deltas current status quo which could pit Delta, Delta
Express and Deltas fleet of regional jets directly against the current low cost carriers (LLCs)
currently in the market (while this was a viable option, there was great concern given the fact
that Jet Blue flew on routes that provided 6.5% of Deltas revenue; further competition from the
current LCCs could result in more of Deltas routes being compromised), modify Delta Express
in some way to make the brand more competitive especially in the low cost market (look at
opportunities where Delta could increase its average fare especially on those routes where they
competed with Jet Blue and Deltas fare was considerable lower than the average fare),
reintegrate Delta Express into the overall Delta brand (especially since due to Deltas
renegotiation with all of its pilots, it resulted in the erasure of the pay differential between Delta
and Delta Express) or Delta could launch a new low cost subsidiary (Delta had success in the
pass with Delta Express initially before the pilot negotiation in 2002).
The steps that the team should consider in deciding the best options and making a
recommendation to the board are current compensation of pilot (is there a way to incorporate a
new type of airframe, such as the airbus A320, and lower the current pilot compensation), is
Delta too competitive as it pertains to average fairs in key markets (is Delta to low in terms of
average fare compared to other LCCs), Delta should look at opportunities beyond salary/benefits
to minimize expenses (food costs are 480% higher that the LCCs in addition, fuel should be
analyzed considering what JetBlue is paying) and lastly, assuming that more people are flying, is
there an opportunity to increase Deltas load capacity; JetBlue is at 76.9% at higher average rates
than Delta, why are people willing to pay more on JetBlue which doesnt offer food versus Delta
which does. Another statistic that Delta could review is its average stage length, it is 24% less
than JetBlue, which would support but 45% greater than Southwest; what is a financially healthy
average stage length for Delta to own that increases its income per available seat.
For example, when you took into account the Florida market, which accounted for 30%
of Deltas revenues, Delta was well under the average fare (in one case over 7% lower for the
NYC to Palm Beach market). On the other hand, Jet Blue was higher than the average fare (in
once case 7% greater for the NYC to Orlando route). When you considered the financial
comparisons of Delta versus the low-cost carriers, Jet Blue had the lowest revenue per available
seat mile (at 7.52) and the lowest cost per available seat (at 6.69). Jet Blue, in addition to the
other low cost carriers delivered a higher income per available seat mile better that the legacy
carriers. The primary reason for this can be found in two areas, salary/benefits and food. The low
cost carriers paid in some instances 100% less in salary/benefits versus the legacy carriers. It
represents 41% of the costs for Delta as well as the other legacy airlines. However, when you
review the financials of the cost airlines, salary/benefits represents 27% of the costs for AirTran
and 32% of the costs for Jet Blue. An interesting side note, is that although Southwest had a
profitable income per available, salary/benefits accounted for 40% of their total costs. They were
profitable because their revenue yield was 12.48 with a 68% load factor; also, they have
perfected the art of the stage length with 515 miles with a very short turn time and high aircraft
utilization. Southwest Airlines is not competing with other airlines, they are competing with the
auto traveler, that focused competition has enabled them to set their prices very low with
transparent pricing to travelers, few classes of fares and few ticket restrictions.