Delta Air Line - the Launch of Song

Manh Hoat Nguyen

Delta Air Line (B): The launch of Song

Three tests (external consistency, internal consistency, and dynamic consistency) need to be applied to evaluate Song has an effective strategy or not.

1. External consistency:

Macro environmental analysis:

After terrorist attacks of September 11, 2011, the requirement for security led many additional costs on airlines, from the installation of bulletproof cockpit door to an airport security tax. Insurance costs skyrocketed. Additionally, the demand for air travel decreased sharply. The following years after the terrorist attack, the global economic slowdown and oil’s price fluctuated. All these factors affected directly and indirectly to the airline industry and make airline companies were harder to survive and develop.

The use of advanced aircraft technology leads to lower fuel consumption. That increases efficiency and the cost of air operations.

Five Forces Analysis:

Bargaining Power of Buyer: High

- Low switching cost and loyalty: customers can choose service from many carriers without any switch cost. Therefore, airline firms have to invest more in the advertisement, sale, and services, which increase costs. They also have to decrease their prices to meet their competitors.

- Information technology permits clients to do comparison shopping, so carriers must lower prices, and spend more on advertisement to attract consumers.

- Product in the industry is undifferentiated, so airline firm competes on prices.

- A part of customers (leisure travelers) are price sensitive. Therefore, carriers must reduce prices to attract these clients.

Intensity of Competition: High

- There are many competitors in the market, so price-base competition is intense.

- Commoditization, perishable product and high fixed cost so that carriers try to sell as many tickets as possible. To do that they have to lower the prices to attract clients.

- The industry is mature with excess capacity, so companies try to steal customers from each other to survive in the market airline. To achieve that purpose, they have to incur more cost and lower their ticket prices.

Bargaining Power of Suppliers: High

- The unions in the market are strong, and the products are perishable. Additionally, employees such as pilots and flight attendants are skilled and scarcity. Therefore, the unions have the balance when they negotiate with carriers.

- Gates in the airports are limited, but the demand is high. So airports’ owners have the advantage to set leasing prices.

- There are few big airplane suppliers. However, these suppliers also compete fiercely, so their powers are moderate.

Threat of new entrants: Medium

- There are many barriers that prevent the new player to enter the market such as regulation, standard, high in capital investment, economic of scale, and retaliation from existing carriers. However, the fact is that many new plays have entered the market the last 30 years. Therefore, the barriers are not such high as people thought.

Threat of Substitutes: Medium

- Ground transportation such as buses, trains, cars, and boat competes in the short distance.

- Information technology leads to decrease in business’s travel.

Under the difficulty in the macro environment and high competitive industry with high in the bargaining power of buyer, bargaining power of suppliers, and intensity of competition, the best way for airline firm to survive and have the profit is to lower its cost. Song tries to pursue both cost advantages and differentiation advantages to neutralize the threats and capitalize the opportunities. The company chooses narrow scope when it focuses on Northeast-to-Florida routes, with city pairs and flight frequencies already pinpointed. In the intensively competitive market with both legacy and low-cost carriers, Song targets a particular group of leisure travelers that no airline had ever targeted before. It is women who are successful, age 45; have a household income of $75,000-plus; was interested in fashion, Heath, and design. By choosing that segment, Song can enjoy the less competitive environment. Strong unions are the huge problem for firms in the industry, learning from Delta Express, Song operate relatively independent from Delta. Therefore, they have the balance to offer less payment per hour for flight attendants. That eventually cut its costs. To neutralize the power of airports when Song need rent gates, it shares gates with Delta. Information technology brings power to clients but Song also uses IT to lower its cost by selling its tickets online.

All above reasons imply that Song meet external consistency test.

2. Internal consistency:

Firm infrastructure:

- Song uses a fleet of 36 757s, which was rearranged to accommodate 199 seats. The maximum allowed with four flight attendants while a typical Delta 757 flew with 183 seats with six flight attendants. By doing that, Song can increase the number of customers in each flight. That eventually decreases the cost per available seat mile.

- Song and Delta shared automated check-in terminals, so the cost decreased.

Human resource management:

- Song staffed its flight decks with pilots from mainline Delta, working under the same Delta labor contract and at the same pay rates.

- Flight attendants were employees of Song itself and were paid less per hour at Song than at mainline Delta. However, they are allowed to work more hours so they can earn more at Song than at mainline Delta. This policy helps Song cut a lot of cost in salary payment. Additionally, the policy also helps Song to have balance when it negotiates with its employees because employees already have something in return.

- Song operates with its own culture. Song flight attendants were less conservative and more outgoing than attendants on most legacy carriers. They are high style, high fashion, frisky and fun. These things make customers fell more comfortable and eventually contribute to customer retention rate.

- Employees