Delta's Last Stand

By John McCormick  |  Posted 2003-04-01 Email Print this article Print
 
 
 
 
 
 
 

Before its industry went into a tailspin, Delta Air Lines invested $1.5 billion in an instant information network to serve customers better and save millions of dollars. Will that be enough to make it the last major airline able to attract price-conscious

For Delta Air Lines, its best customers are its worst nightmare. Take Robert Leaf. The small-business owner likes to provide great customer service. In fact, Leaf believes so much in the "touch factor" that his business card carries no e-mail address. If you want to talk to him, you get him. Leaf typically books eight business trips a month. He has racked up more than 100,000 miles in most of the major airlines' frequent-flier programs—including Delta's SkyMiles.

In late February, the New York native squeezed his middle-aged frame into a center seat in a Delta 767 in Atlanta for a flight home. He was stuck between two other passengers. But that's not what bothered him. It was the airline.

He can't stand Delta.

His list of reasons: lackluster service, insufficient legroom, an unrewarding frequent-flier program, the food (or lack thereof)—and the expense.

Between Atlanta and New York, he now flies AirTran, a lower-cost carrier. On other routes, his first choice is JetBlue. Why? "Price," he says.

Last year, in key New York-to-Florida markets, JetBlue had grabbed 80% of the market from Delta. JetBlue and other low-cost carriers fly a single type of airplane, offer few frills, and avoid the expensive hub-and-spoke networks of airports that require complex calculations to connect passengers and bags with flights. A major hub-and-spoke airline such as Delta has costs that can be 150% higher than those of a carrier that only flies from one city to the next.

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AirTran, JetBlue and low-fare leader Southwest are putting the squeeze on all the network carriers, but none is feeling it more than Delta. The Atlanta-based company, which lost $1.3 billion in 2002, estimates 40% of its customers can choose service from the upstarts—more than any other major airline.

Delta faces this low-fare competition during the worst financial period in its history. The company expects to report more bad financial results due to the soft economy, rising fuel costs, and, of course, war-related travel curtailments. Jamie Higgins, an analyst with Credit Suisse First Boston, wrote in March that war could cost Delta $99 million per month in losses. That could put the company in bankruptcy in 2004. Its two major rivals aren't in much better shape. United Airlines is operating under bankruptcy-court protection and American Airlines avoided a bankruptcy filing by winning concessions from its major unions last month.

But Delta is not just idling its planes, even after a massive cutback of flights in March in the wake of the war in Iraq.

On April 15, Delta will try a "Hail Mary" to fight the inroads of the low-cost carriers. It's scheduled to launch a new low-cost airline of its own called Song. Delta, however, isn't playing the percentages: No major carrier has ever successfully launched a lasting, low-cost competitor.

Song will duplicate many of JetBlue's lean business practices. Song will fly only between selected cities, it will use one plane type, the Boeing 757, and it will try to operate that plane at 20% below Delta's current costs of flying. It will also offer pay-per-view TV, interactive games, and online shopping on planes—decorated in fun colors like lime green—that fly frequently from the Northeast to Florida. And ticket prices will range from $299 down to $79.

The new airline is a $75 million gamble, but Delta thinks it has an ace in the hole that could make it the last major airline to survive terror, war—and the inexorable onslaught of low-cost competition.

Over the past five years, Delta spent $1.5 billion on a computer and communications infrastructure, called the Delta Nervous System, that cuts inefficiencies out of virtually every area of its operation—an investment that Delta chief information officer Curtis Robb notes Delta could not afford to make today. A study by Baseline finds Delta is realizing about $700 million this year in savings and is generating $150 million in new revenue from such things as maintenance, which previously hadn't been a profit center.

The Delta Nervous System linked some 30 to 40 customer and flight databases that track everything from reservations and ticketing, to check-in and baggage handling, to flight and crew operations. Delta in February flew 2,100 flights, carried almost 300,000 passengers, used 7.3 million gallons of fuel, served 87,000 cans of soda, and, to keep that soda cold, boarded 219,000 pounds of ice. Every day.



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