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Customer Concerns

By John McCormick  |  Posted 2003-04-01 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

Customer Concerns

In 1998, Delta hired Wayne Hyde, a business intelligence expert, to help assemble its data warehouse. The warehouse collects information from all across an organization and puts copies in one place. This lets business managers spot patterns and trends across departments. Operations get improved, productivity goes up, costs go down.

At Delta, the warehouse also boosts revenue and helps customers at the same time.

Hyde, who had worked at Frito-Lay, a consumer goods business, and Burlington Northern Santa Fe Railway, a transportation network, knew pulling the data together wasn't going to be easy. The airline had three data marts—similar to data warehouses, but smaller and built to serve just a particular operation or a particular group within an organization. On top of that it had scores of databases, scores of analytical tools and no standard way to store or access data.

The challenge, he says, was huge.

Delta chose a Teradata data warehouse platform on which to build, then made connections to the Delta Nervous System and brought in standard analytical tools from Brio and SAS Institute. Those tools can dig into 10 trillion bytes of information. It took 18 months and, by Hyde's estimate, between $30 million and $36 million to complete.

Delta didn't waste any time putting it to work.

Airlines, including Delta, assumed that the members of their frequent-flier programs, like Leaf, were their best customers. But Hyde and the other managers at Delta knew that frequent fliers could pile up mileage even when flying discount tickets. Delta decided to find its real best-paying customers instead.

The company pulled its passenger records from the warehouse and ranked them by criteria such as who was flying first class, who was paying full fare, and who was flying on long hauls and overseas. To its surprise, Delta found that only 18 of its top 100 frequent fliers were on the list of its top 100 paying customers.

"It changed the way Delta marketed," says Hyde, who now works for Bank of America. Now, Delta concentrates on serving—and keeping—its highest-margin customers.

On Dec. 16, 2002, Delta announced a major change to its SkyMiles frequent-flier program. The airline said it was no longer going to award customers with "Medallion" status for just racking up miles, but instead would "…reward members who contributed the largest share of revenue to Delta." Now, the price you pay for your tickets adds so many points toward Medallion membership, the perks of which include priority boarding, complementary upgrades, preferred seating and access to Delta's airport lounge.

Delta also is using the Nervous System to take care of its best customers. Say, for instance, a flight is canceled in a hub. Gate agents now grab the records of passengers affected.

With that information, says Kevin Strange, a Gartner Inc. vice president and data warehouse expert, "the [Delta] person at the gate has the passengers scored by value—with the company's most-valued customers getting preferences on connecting flights."

The Nervous System and the data warehouse are two contributing factors in Delta's ability to sell seats at higher prices than its major competitors. For every mile a paying customer travels on a Delta flight, Delta collects 12.08 cents. Southwest collects 11.69 cents; American, 11.51 cents; United, 10.77 cents; and JetBlue just 9 cents.

In addition to refocusing the company's customer-service programs, Delta is using the data warehouse to save money.

Fuel is one of the airlines' biggest nonlabor costs—and it's becoming more of a factor as prices continue to skyrocket. The Air Transport Association, the airline industry trade group, says jet fuel rose from about 60 cents per gallon at the end of February 2002 to more than a $1.20 this past February.

Every drop counts. And, just as the way someone drives a car affects gas consumption, the way a captain pilots a jet can waste fuel. A pilot might take more time taxiing a plane or asking for an unnecessary topping of the tanks. Looking at pilot, flight, craft, and fuel-consumption records, the airline was able to spot a few gas hogs, offer advice, and change behavior. Last year, Delta spent $1.68 billion on fuel. Figuring out how to shave just one percentage point off that figure could put $16.8 million back into the company's coffers.

Lewis Elsworthy, a senior consulting partner at Teradata and a former vice president of marketing at Northwest, notes that Teradata works with most of the major airlines, including American, Continental, and US Airways. Still, he says, "Delta has the most comprehensive data warehouse in the airline industry." Elsworthy says most airlines get about 20% of their transactions into a data warehouse. At Delta, he says, "almost every transaction is in there."

The Bottom Line: Delta can cut costs—and increase revenue—by exploiting its data warehouse, which cost between $30 million and $36 million. The airline has been better at determining rebates to travel agents, saving $25 million; better at matching broken parts and warranties, saving between $10 million and $15 million; and better at eliminating wasteful fuel practices, saving an estimated $8.4 million. In addition, by some accounts, the company is using its data warehouse to better audit ticket sales and ticket transfers to other airlines, saving $27 million, and to better schedule flights and routes, saving $24 million.

All told, Delta is realizing almost $100 million in savings a year through better data analysis.

But, analyzing its customer base has meant the airline also could collect more ticket revenue. Delta collected 12.08 cents per revenue seat mile in 2002—0.57 cents more than American and 1.31 cents more than United. It also collected 0.39 cents more per paid seat mile flown than Southwest and 3.08 cents more than JetBlue.

Delta's passenger revenue in 2002 declined by $733 million, compared to a $1.4 billion decline for American and a $1.9 billion decline for United. That translates into an advantage for Delta of more than $600 million.

However, Delta is losing ground to the low-cost carriers. In 2002, Delta collected 3.08 cents more than JetBlue—down from 3.28 cents—on every paid seat flown. Its advantage over Southwest shrank from 0.58 cents to 0.39 cents.

Can Delta Survive?

Song president John Selvaggio has been through a lot: the industry's deregulation in 1978, the waves of airline consolidations and bankruptcies that followed, the rise and fall and rise again of low-cost carriers trying to undercut the majors, and, through it all, the steady growth and uninterrupted profitability of Southwest Airlines.

But even Southwest, Selvaggio says, has not solved what he sees as the fundamental problem confronting the airlines—that hub-and-spoke carriers, despite their complexity and cost, are the backbone of the industry.

"Most cities in the United States cannot support point-to-point service to every place you can go," he says. "Very few cities can support that. So all major airlines are relying on hub and spokes, and they've gotten very expensive to maintain."

Delta CIO Robb believes that the carrier of the future will be a combination of Delta as it is today and Southwest.

Song is Delta's attempt to create a Southwest. Yet, the low-cost startups of other airlines have come in for very rough landings. Continental had Continental Lite, United ran Shuttle by United, and US Airways owned MetroJet. All are shut down. (Delta is still operating Delta Express, but that, too, will close as soon as Song launches.) While they all offered lower fares, they were still saddled with high labor costs, old and inefficient aircraft and the high cost of running a hub operation.

Delta says it will set up Song as a separate subsidiary, with its own profit-and-loss responsibilities. But Delta is not the only network carrier trying to get back into the game—United, for example, claims it is submitting a proposal for a low-cost carrier as part of its restructuring under Chapter 11 bankruptcy.

Plus, it's not a great time to launch a new airline of any type. Fuel and security costs are skyrocketing. Passenger demand is low. And, while there have been givebacks, labor and labor costs can still slow changes the airlines want to make.

Delta, for instance, has yet to get buy-in from its pilots—a rare group of Delta workers who are unionized—for Song. Delta hopes to persuade its pilots to accept changes in their contract that would permit Song to assign them more flight time—thus improving productivity—but the pilots are not obligated to do anything until their contract expires in 2005.

The pilots have agreed to take the first step in considering whether they should talk to Delta by examining Delta's books, but Capt. Mike Pinho, the pilots' communications committee chairman, says the process could go on until the end of April—past Song's launch date.

Another huge factor weighing on Song's success is the war in Iraq, which is expected to curtail air travel. On March 24, Delta became the last of the five big network carriers to reduce flights, cutting capacity by 12% in response to lower demand.

In the end, the long-term survivability of any airline comes down to managing costs.

However, Michael Roach, the former president of America West airlines who now works as a consultant with R2A, says Song still cannot fly as cheaply from New York to Florida as JetBlue and Southwest without either getting more ticket revenue, or filling more seats, or both. JetBlue may be within Song's reach, he adds, but Southwest probably is not.

But Selvaggio is confident his airline will be able to cut its costs. "People don't know everything we're thinking," he maintains.

No, but by tracking Delta's information technology initiatives, the outlines of its strategy emerges. The company has used information technology to radically alter the way it does business from sales to customer service to flight operations.

Yet, after all that, Delta's survival depends on its ability to cut costs, and, in so doing, winning back disenfranchised customers, such as New York businessman Leaf. While price is important, Leaf says service still counts. And many of the improvements Delta is making are designed to speed the check-in process, reduce flight delays and ensure that its best customers are taken care of when travel difficulties arise.

Will it be enough? There are a lot of variables—such as the turnaround of the economy and the end of the war—that are out of Delta's control.

But Roach, for one, is cautiously optimistic. "If anyone is going to be a survivor, I think it's going to be them."

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