Delta Airlines Essay, Research Paper

Delta Airlines

Who would have thought that a major airline of today could contribute it’s success to Boll Weevil insects that decimated the cotton fields of the south. Some say there would not have been a Delta Airlines at all if it were not for the Boll Weevil infestation of the early 1920’s. Even the name came from the Mississippi Delta where the Boll Weevil’s plagued many cotton fields. According to the book Delta Airlines by Jones, C.E. Woolman was the assistant district agent working for the U.S. Department of agriculture’s bureau of Entomology laboratory in Tullulah, Louisiana. Woolman was an agricultural engineering graduate from the University of Illinois and could be categorized as an aviation enthusiast. Along with Dr. B.R. Coad, Woolman developed a promising weapon against the insect but needed a more efficient means to spread it across a vast area. Congress gave the researchers a small grant that allowed them to acquire two ex-US Army Curtiss Jenny Aircraft. However, it was not until 1923 that things started to happen for the two researchers. A man by the name of George Post, a New York Businessman from Huff-Daland Airplanes, Inc. was flying south when he was forced to land because of mechanical problems with his airplane. He landed in Tullulah and discovered Coad and Woolman’s experimental dusting operation. He considered this to be a commercial opportunity he could not pass up. After convincing management, the Huff-Daland Dusters started at Macon, Georgia, in 1924. However, there was not much success so the operation moved to Monroe Louisiana. From Monroe, the business quickly grew but it was only seasonal so Wollman decided to diversify and set up operations in Peru. It was while in Peru that Woolman and his company secured South American airmail rights to fly between Peru and Ecuador. This was when Woolman first appreciated the possible value of a passenger service in 1927. When back in Monroe, Woolman secured some private financing from private businessmen and started his own Aviation Company. Delta’s first aircraft were three five passenger Travel Air 4000s. On March 15, 1940, Delta added it’s third crewmember, the Stewardess, to its air service on the DC-2 Aircraft. In 1941, Delta moved its general offices and overhaul base from Monroe to Atlanta. Through the years Delta merged with Northwestern and Western Airlines to become one of the largest airlines in the world. Up until deregulation, Delta Airlines was one of the most profitable and successful airlines around.

Today, at the center of the Delta operation, is its fleet of aircraft and the chart below, according to their 1999 annual report, illustrates it.

Delta’s Fleet at June 30, 1999

Leased

Aircraft Type Average Age Owned Capital Operating Total

B-727-200 21.9 110 10 120

B-737-200 14.6 1 45 8 54

B-737-300 12.6 3 23 26

B-737-800 0.6 7 7

B-757-200 9.6 59 41 100

B-767-200 16.1 15 15

B-767-300 9.4 4 24 28

B-767-300ER 4.1 43 8 51

B-777-200 0.3 2 2

L-1011-1 19.9 13 13

L-1011-250 16.7 6 6

L-1011-500 18.4 11 11

MD-11 5.4 8 7 15

MD88 9.0 63 57 120

MD90 3.6 1616 16

Totals 12.3 358 48 178 584

Delta’s point to point carrier known as Delta Express was launched on October 1, 1996. Delta Express offers its customers nonstop, low fare, high value service between Northeast and Midwest cities and destinations in Florida. Passengers on Delta Express are provided with advanced seat selection and earn SkyMiles on each flight. Delta’s Express fleet size and type is 37 B-737-200 and there are plans to increase to 41 B-737-200 aircraft during Fiscal Year 2000. Delta Express has 168 daily flights between 17 Northeast and Midwest cities to five Florida cities (Fort Lauderdale, Fort Myers, Orlando, Tampa, and West Palm Beach). They also claim that their on-time arrival rate is 86 percent. Delta also has a specialty product that provides its business customers who travel between Washington DC, New York and Boston. It is simply known as the Delta Shuttle. It owns 58 percent of the Northeast Corridor Market Share and it has carried over 14 Million passengers since September 1991. It operated 25,000 flights in fiscal year 1999 and they claim a 97 percent on-time departure rate. The Delta Shuttle fleet consist of 16 specially designed B-727-200 aircraft which offer all leather seats and more leg room than any of its competitors (Annual Report, 1999, pg. 20). At the center of Delta’s regional fleet is Atlantic Southeast Airlines (ASA). ASA became a wholly owned subsidiary of Delta on May 11, 1999. According to Delta this acquisition of ASA enables both airlines to allocate aircraft more efficiently across their respective route system. ASA is Atlanta’s largest regional airline with service to 44 markets, furthermore the Dallas/Fort Worth hub serves 17 markets and they have an average of 2,500 employees working for them. As of August 1, 1999 ASA provided Canadair Regional Jet service to 32 cities from Atlanta. Some of their recent additions include Austin, Daytona Beach, Houston Hobby, Long Island, Melbourne Florida, Montgomery Alabama, San Antonio, Des Moines Fort Wayne, and Toledo Ohio. ASA operates 3 different types of aircraft and they break down as follows:

Aircraft Average Leased

Type Age Owned Capital Operating Total

EMB-120 10.0 56 1 57

ATR-72 5.7 4 8 12

CRJ-200 0.9 2 21 23

Total 7.2 62 30 92

Delta also has 4 other connection carriers and they are Comair out of Cincinnati, Skywest out of Salt Lake City, Business Express (BEX) in Boston and Trans States Airlines (TSA) from New York City. Delta is also worldwide partners with Aer Lingus, Aero Mexico, Austrian Airlines, Finair, Korean Air, Malev (Hungarian Airlines), Sabena, Swissair, Air Portugal, and Trans Brazil. Delta has five major hubs and the statistics breakdown as follows (Delta Airlines, Jones, pg. 59):

Atlanta, Georgia

No of No of No of No of Nonstop Passengers

Gates employees daily flights destinations (end Dec ‘97)

97 27,926 620 120 23,894,884

Cincinnati, Ohio

No of No of No of No of Nonstop Passengers

Gates employees daily flights destinations (end Dec ‘97)

50 4,500 221 73 7,143,890

Dallas/Fort Worth, Texas

No of No of No of No of Nonstop Passengers

Gates employees daily flights destinations (end Dec ‘97)

27 4,984 131 41 5,018,540

John F. Kennedy, New York

No of No of No of No of Nonstop Passengers

Gates employees daily flights destinations (end Dec ‘97)

28 3,897 45 37 2,362,865

Salt Lake City, Utah

No of No of No of No of Nonstop Passengers

Gates employees daily flights destinations (end Dec ‘97)

32 4,379 168 49 7,241,631

Since the inception of Delta Airlines in 1935 they have been a main stay in modern commercial aviation. Delta is a traditional style airline with a traditional hub and spoke system and prior to deregulation in 1978 they showed five decades of profitability and were a powerhouse in the Commercial airline industry. Their management philosophy has been to promote from within, mentor their employees and developing a logical progression of advancement, to make Delta Airlines a family atmosphere. From 1950, Delta Airlines has showed a 1/2 to 1- percent growth per year and by 1977, Delta made up 10 percent of the entire industry. It also has grown from 12 million in value to over 1.4 billion in Assets. Its net income in 1950 was $815, 000 and has made a profit every year and in 1977 it had made over 92 million dollars in profit for that year. However, deregulation was just around the corner, which would change the very foundation of this airline giant. Before deregulation, the airline industry was seeing phenomenal growth in both domestic and international air transportation (Airline deregulation, pg. 5). Delta was no stranger to this phenomenal growth however, with the implementation of deregulation, as many other airlines, had to shift gears to stay competitive in a newly formed free market. Despite remarkable advances under the regulatory scheme established in 1938 and broad public satisfaction with the airline system, airline regulation gradually came under increasing criticism, particularly from academic economist. This gained strong momentum in the mid 1970’s and between 1977 and 1979. A veritable revolution was accomplished in both domestic and international policy (Airline Deregulation PG 8). The desire of free competition in this industry outweighed the need for tight governmental control of entry, exit, pricing, and other competitive matters. Delta soon realized, that it had to change the way it did business

With deregulation, the airline industry had to re-think the way it did business. One of the immediate affects deregulation had on Delta was the pricing chaos. With the deregulation pricing, the airlines had to increase their staffing to keep up with the fairs changing on a daily basis. Delta hired an additional 147 employees to keep track of these frequent fare changes, increasing its tariff department staff, five times the number of personnel needed before deregulation. The Wall Street Journal reported that on a typical day, the tariff department compares at least 5,000 industry-pricing changes against Delta’s 70,000 fares. These changes in fares to compete for filled seats resulted in record airline losses for the first quarter and are blamed on unrestricted deep discounted fares that generated little traffic. (Aviation Week July 26, 1982 P. 34). Delta Airlines was not able to escape the affects of deregulation and in 1983 lost a substantial amount of money and from 1991-1993 it showed losses on average of a half a billion dollars a year. Delta turned this around by what was called “Leadership 7.5″. Under its Leadership 7.5 program, Delta’s goal was to cut its cost to fly one seat one mile for 7.5 cents. To do this Delta had to cut operating cost by approximately two billion dollars per year. What this meant in some respects, was a cut in the workforce of approximately 15,000 employees, or 15 percent of it’s workforce, quarterly dividend plunged from 17.5 cents to a nickel, and they capped commissions on domestic tickets at $50 for a round trip ticket. They also identified that over 50 percent of its domestic US-origin and destination traffic were traveling in markets where there was competition and as a result the fares were lower. Also, they sought to gain access to London through a code-share agreement with Virgin Atlantic, which came to fruition in 1995. This strategy produced results because Delta was a profitable company again and the stock was up 61 percent (USA Today February 1996). However, it seems that deregulation has caused Delta Airlines to become more of a threat to job security for it employees than it has been in the past. It has made Delta into a bottom line driven company verses the traditional company built from years of company loyalty and promoting from within. As a result, Delta has had to bring in outside financial minded leadership to include it’s present CEO, to make sure Delta still makes a profit and can compete in competitive markets.

Delta’s selected its current president and CEO, Leo F. Mullin on August 15, 1997. He replaced the retiring Ronald W. Allen who had been with Delta for 35 years. This was a surprise move because Delta has historically promoted from within. He is a Harvard College and Harvard business school graduate. Receiving a degree in engineering and applied physics, a degree in applied mathematics and an MBA. From the book Delta Airlines by Jones, he was chosen because of his past strategic planning expertise in highly competitive consumer business. Mullin worked for Conrail in Philadelphia, then in a senior position at First Chicago Bank for 15 years, and he served as Chairman and CEO of the American National Bank in the early 1990’s. Recently he served as the vice-chairman of Unicom and its chief subsidiary, Common Wealth Edison, the Chicago-area Utilities Company. He is also a member of the Air Transportation Association of America (Delta Airlines, Jones, pg29). This in my opinion, was a smart move for Delta in that they needed new direction and new ideas to chart a successful path through the highly competitive deregulated airline industry.

Many people and experts think that deregulation has helped the industry and in an article from the Heritage Foundation, it is hard to argue. It states that airline ticket prices are almost 40 percent lower today than in 1978. The average fare per passenger mile was about 9 percent lower in 1994 than in 1979 at small community airports, 11 percent lower at medium-sized airports, and 8 percent lower at large community airports. From 1939 to 1978 there were an average 6 fatal accidents per year. After deregulation 1978 – 1997 the average was only 3.5 fatal accidents per year. Air carriers flew roughly 2.5 billion miles in 1978, but they logged more than twice that amount last year, and flying approximately 5.7 billion miles in 1997. The airlines served approximately 250 million passengers in 1978 and roughly 600 million in 1997. Delta has fared equally well and compare with these statistics. However, there are a few skeptics and Delta is one of the airlines that is accused of monopoly power and pricing.

In an article written by Robert Kuttner in 1999, he states that the results of deregulation are mixed. He blames President Reagan’s administration for letting the Anti-trust enforcement to collapse, which permitted large dominant airlines to crush upstart competitors. He goes on to say that the revival of the dormant antitrust policy is the only program that has allowed competition to even exist at all in the airline industry. Delta is used as an example in an article written by Fred Allvine of Bizjournals.com. It states that Delta’s market share over the last decade has increased from about 50 percent to 78 percent of the passengers flying through the Atlanta Airport. This means that Delta can raise fares at will on a large portion of its flight. The article goes on to say that Delta’s fares are 30 percent to 50 percent higher than in competitive markets. It used an example of a recent round trip fare to Washington National airport was $856 but it was only $352 to the nearby Dulles Airport. Eventhough, Delta has done this and increased its profits 250 percent since 1994 the high fares hurt air travel to Atlanta and the local economy. To combat this the metro Atlanta Chamber of Commerce recently asked for bids to study how to increase airline competition in Atlanta, eventhough the chamber realizes that Delta is its largest employers and the high fares are good for Delta. This is an illustration of how one airline has dealt with the deregulation act. Monopolizing markets with high fares and only cutting prices in competitive markets, is the simple strategy of supply and demand.

Although Delta has monopolized some markets, it knows it cannot continue to over charge passengers to make up for losses in competitive markets. Local economies will suffer and they will be forced to bring in competition to lower fares and increase traffic to their cities. That cannot last forever because it is not good for those local economies. Delta built a reputation of quality customer service and presenting a professional atmosphere. In 1997 Delta became the first Airline to carry 103 million passengers in one year and in 1999 they carried a record 106 million passengers. Furthermore, Delta and its worldwide partners operate 5,465 flights each day to over 364 cities in 61 countries. Finally, from 1938 Delta’s Growth of certificated Domestic route miles grew from 1,091 to over 50, 380, the largest in industry.