Boeing and Airbus - Aviation Industry Casm

Jiahao Yin

7/23/2018

Delta Case Study A

1.industry analysis:

The marginal return of the aviation industry is lower than the average return of the US industry. The main reason is to cut costs to maximize seating and overcapacity leading to high levels of competition. First, the cost is measured by CASM, the cost of flying a seat, and the passenger load factor, which is the proportion of seats occupied by paying passengers. CASM is a fixed cost that cannot be changed, and the load factor is a key factor in determining the profitability of a flight. The fixed cost component is difficult to change because a large portion of the fixed cost includes labor costs. In 2002, employee salaries and benefits were the largest expenses, accounting for 40% of the total cost. The reason is that most of the workforce is unionized and has strict regulations on employee wages and labor flexibility. Since airlines can't cut most of their costs, they have to cut other variable costs, such as food and pillows, to keep the fare low. However, the problem of competition and declining demand still leaves airlines struggling with low-load factors.

Buyer power:

Passengers are now increasingly sensitive to fares, and because of the popularity of the Internet, they have the ability and power to choose from a number of alternatives. New technology makes it easier and faster for customers to compare fares. Therefore, the airline is offered the best fare.

Supplier Power:

The aviation business also needs to pay attention to the cost of aircraft and facilities leasing for Boeing and Airbus. The two leading aircraft manufacturers account for 15% of the total cost and fuel accounts for 20% of the total cost.

2.Southwest Airlines provides point-to-point services between secondary airports. Its advantages are low price and high load factor, so the Southwest can compete with cars and buses in a short distance. At the beginning of its growth, Southwest Airlines insisted on maintaining a limited growth rate in order to provide better management of the overall operation.

JetBlue, which has a similar service to Southwest Airlines, serves the point-to-point secondary airport. The distinguishing feature is that JetBlue is aimed at those who want to travel while retaining social meaning at a certain price, such as a banker, a fashion model or a finance office. This strategy provides JetBlue with a unique marketplace and allows it to charge an additional fee for all services it provides, such as long-distance car seats and personal video monitors on airplanes.

Since these limited liability companies choose to account for 5% of the total market at the secondary airports, they avoid fierce competition among other large airlines. But the 5% market provided them with 73% of passengers. Adequate passenger resources and successful strategies enable these LLC companies to survive in the industry.

1. With the introduction of Delta Express, Delta introduced a focus on Florida's major regional markets through the introduction of low-cost airlines through low labor costs and high aircraft utilization. To facilitate maintenance, management negotiated a 32% pay cut with the union and the simplified aircraft to the Boeing 737 fleet. As infrastructure management and inbound/outbound logistics are key to airline profitability, Delta Express initially achieved its goals. The failure was caused by Delta’s inability to clearly separate the subsidiary into a functional organization. As Delta Airlines shares its airline's marketing, control prices, routes and frequencies from a centralized location, and shares the same maintenance, pilot and flight attendance rates, it creates cognitive dissonance in the organization. The high level of flexibility in employee enthusiasm and roles and responsibilities is critical to maintaining cost advantages for low-cost carriers. Delta Express is known for its low-cost fare, but JetBlue is distinguished by offering higher cabin comfort and an in-flight entertainment system. Buyers seek additional convenience and additional bonuses due to the small difference in price and schedule. JetBlue is clearly targeted at senior managers with reasonable price sensitivity, while Delta Shuttle is focused on casual travelers. All LCS of traditional airlines, including Delta Express, Continental's CALite and United's Shuttle, apparently do not operate as an independent organization, but as a business unit of a large company. The same cost structure is applied as an overhead to smaller operations. This centralized control and management complicates operations and logistics, confuses passengers, creates cognitive dissonance in the minds of people, confuses overall organizational positioning, and introduces additional overhead for LCS. Another key point is that LCS has no control over unions and cannot eliminate cost differences with small companies.

1. Expenditure I think most effective strategy for Delta is to use a central radiation strategy and work with LCC airlines. The central radiation strategy means that airlines take passengers from lightly traveling cities to “hubs” in major cities and then transfer them to their final destination. Delta has the advantage of an aviation network in most major cities. It can focus on operations in these hubs and reduce the service and cost of these spokes by working with LLC airlines that have more advantages in these secondary cities. A very good potential partner is Southwest Airlines, which does not use a central radiation strategy. If this relationship can be established, Delta can have a more efficient system than it does today. Delta Air Lines can have longer distance flights, reducing overall costs. It may have a higher passenger load factor because its partners can help transport all passengers with different departure cities but share the same destination to the intermediate airport, and then Delta Airlines to their final destination.

In general, central radiation strategies help control costs without spending on other projects. Take advantage of the advantages of partners and low labor costs. Achieving overall performance will not only increase CASM, load factors, but also give Delta more opportunities to focus on its services at major airports and cities. Therefore, we can maximize the total utility of the entire company.