PROBLEMS AT DELTA AIRLINES

HISTORY
1924 - Started as aerial crop dusting company in Georgia (USA) 1929 - Diversified passenger airline service 1955 - Pioneered Hub and Spoke Flight System 1978 - Commenced Trans - Atlantic service 1984 - Delta Connections - Tie up with regional airlines 1991 - Acquired Pan American Airways Was largest acquisition in airline history 2003 - Launched low cost subsidiary SONG

PROBLEMS AT DELTA AIRLINES

Accumulation of loss - $ 5.6 billion since 2001 Posted losses of $ 2 billion in 1st and 2nd Quarter of 2004 biggest in Deltas history Rapidly depleting cash reserves Moving towards debt trap
Total debt liability as on 2nd quarter of 2004 is $ 20 billion. Outstanding debt repayment by early 2005 is $ 1.2 billion

Heading towards bankruptcy Downgraded Credit Rating

QUARTERLY PROFIT/LOSS
500

-500

-1000

1 2 3 4

-1500

-2000 2000 2001 2002 2003 2004

Causative Factors
External
9/11 WTC TERRORIST ATTACK
50 45 40 35 30 25 20 15 10 5 0 2002 2003 2004 Fuel Prices (in $/barrel)

RISING FUEL PRICES

Causative Factors
Competition from low cost airlines
Market Share 1995
5

Market Share 2004

30

95

70

Low Cost

Conventional

Low Cost

Conventional

Causative Factors
Internal
High cost of Labor
Highest pilot salaries in industry Lowest pilot flying time per month High percent of operational costs 43%

Operational Inefficiency
Complexity of fleet mix High training and maintenance cost

Burdensome Legacy Costs

Old and inefficient operational process (hub and spoke model) Pension and retirement plans

Cultural Shortcomings
Rigid and bureaucratic culture Relations with agents and partners

PROBING QUESTIONS
IS MORE INVESTMENT NEEDED IN SONG? HOW TO IMPROVE OPERATIONAL EFFICIENCY AND CUT DOWN COSTS?

Delta should fly between Hubs and Song Flies on the spokes Loyalty Programs with Employees according to retirement age Relaunch FFP Cut down Salary and pension benefits Stock based options on performance Agency visit and promote company through road shows Decentralizing and salary based units Reduce complexity of fleet Recruit top mgmt from outside the industry Pay pilots on per hour basis E-Brokers and E-ticketing 24X7 availability Reduce spokes with less occupancy Song targeted to leisure travelers and Delta for Business. Reschedule timings of song to suit travelers Fuel Hedging Flight synchronization Wait time reduced Outsource maintenance activity Reduce retirement benefits Phase out hub and spoke model to point to point. Improve Credit Rating Catchy advertisements Do not go for bankruptcy as it would hamper image Increase notice period before retirement New pilots to be inducted on Contract basis Lease financing Dilute the powers of the pilot union

THE WAY OUT

Open to negotiations with pilots in respect to wage cuts Generate faith that pension schemes wont be scrapped Inculcating flexible work culture Fixed contribution to participatory pension plan Reduction of complexity of fleet

THE WAY OUT

Rejuvenate commission policy with travel agents Gradually phasing out Hub and Spoke model Reduction in labor costs to match industry standards of 28% Simplicity in operations Depeaking to make better use of aircraft and crews

Delta Solution
Updating & upgrading customer products and services Redesigning Atlanta hub Dehubbing Dallas operation and redeployment of resources Addition of destinations and non-stop flights Growing low-cost subsidiary Song Reducing fleet complexity Downsizing manpower Creating employment reward program

REFERENCES
Business Strategy ICFAI (February 2005) http://www.delta.com http://en.wikipedia.org/wiki/Delta_Air_Lines