Business Strategy
MAJAN UNIVERSITY COLLEGE
FACULTY OF BUSINESS MANAGEMENT
STUDENT ASSIGNMENT
COVER SHEET
Module Name and Level
|
Foundation
to Business Strategy- Level 2
|
Module Code
|
BC12-2
|
Foundation
to Business Strategy
Read the attached case and write a report(word limit
2500 +/- 10%, excluding references) that addresses the following tasks:
1. A
review on the need and importance of environmental analysis by organizations
using relevant academic literature.
2. An evaluation of the trends in the macro environment
that would influence the global Airline Industry using PEST Model.
3. Analysis of the competitiveness of Airline Industry using
Porter’s Five Forces Model.
4. Analysis of the SWOT for Delta Air Lines Inc.
Delta Air Lines -Navigating an Uncertain Environment
Delta Air Lines Inc. (Delta), headquartered in Atlanta, Georgia, was the
world’s second-largest airline providing air transportation for passengers,
cargo, and mail. Delta operated an extensive domestic and international network
across all continents in the world except Antarctica. It was also a founding
partner of the Sky Team airline alliance.
Delta had used mergers and acquisitions (M&A) successfully to
solidify its strong position as a leader in the airline industry. It had gone
through five M&A since 1953, including the most recent acquisition of
Northwest Airlines (Northwest), which turned Delta into an airline with major
operations in every region of the world. On the other hand, the Northwest
merger took a toll on Delta’s financial position by contributing to its high
long-term debt.
In 2012, top management was cautiously exploring opportunities for
entering new markets, routes, and partnerships in order to boost market share.
Company
History-Delta Becomes the World’s Second-Largest Airline
Delta’s history
begins in 1924 with the formation of Huff Daland Dusters in Mason, Georgia.
Huff Daland Dusters was the first commercial, agricultural flying company in
the US and commenced carrying passengers and mail as its business expanded.
Recognizing the success and value of the company, C.E. Woolman, acquired the
firm and renamed it Delta Air Services.
Throughout the
1930s and 1940s, Woolman focused on defining Delta’s mission to ensure that it
would be a viable company in the long term. During this period, Delta broadened
its services and expanded its horizons: It secured a contract with the U.S.
Postal Service to carry mail, participated in the war effort by modifying over
one thousand aircraft, developed a regularly scheduled cargo service, and
introduced night service. The company changed its name to Delta Air Lines. All
these events laid a solid foundation for Woolman and his young company.
Over the next
few decades, a series of mergers and key alliances enabled Delta to expand its
operations and gain market share in the airline industry. The first merger took
place in 1953 with Chicago and Southern Airlines, allowing Delta to become the
first service provider in the United States with flights to the Caribbean and
South America. The acquisition of Northeast Airlines in 1972 gave Delta a major
presence in the north-eastern United States ‘in’1984, Delta formed a strategic
partnership with Comair Airline, which soon became a Delta wholly-owned
subsidiary and connection carrier. Between 1986 and 1991, Delta acquired both Western Airlines
and Pan American World Airways. With these acquisitions, Delta gained routes
and became a major carrier on the U.S. West Coast and across the Atlantic to
Europe. Finally, Delta was able to emerge from bankruptcy by acquiring
Northwest Airlines in 2008, which made it the airline with the most worldwide
traffic.
In 2012, Delta
serviced 572 destinations in 65 countries on six continents, including North
America, South America, Europe, Asia, Africa, and Australia. It operated 714
aircraft in 5,766 daily flights and employed more than 80,000 employees
worldwide. With over 160 million customers every year, Delta was the world’s
second-largest airline. Delta was named domestic “Airline of the Year” by the
readers of Travel Friendly magazine
and was named the “Top Tech-Friendly U.S. Airline” by PC World magazine for its innovation in technology.
Delta attempted
to operate low-cost carrier subsidiaries through launching the Delta Shuttle in
1991, Delta Express in 1996, and Song in 2003. None of these subsidiaries were
successful, however, and were discontinued not long after being established. In
2010, Delta sold Compassand Mesaba, two regional subsidiaries of Northwest
Airlines. Delta continued to operate Comair as a wholly-owned subsidiary (based
in Cincinnati) as part of its Delta Connection. Delta had originally bought 20%
of Comair in 1984, followed by full ownership in 1999 for US$2 billion, but by
2012 many of Comair’s 50-seat turboprop aircraft were getting old and had high
unit costs per flight hour.
Competitors
Over the past
decade, there have been a number of mergers and acquisitions among the major
airlines in North America and Europe. For example, Air France and KLM merged in
2004, US Airways and America West in 2005, Delta and Northwest in 2008, plus
Southwest and AirTran, and British Airways and Iberia in 2010. According to
industry analysts, US Airways and Delta were expressing some interest in each
other in early 2012, while independently considering American Airlines.
Delta’s major
competitors in the United States were United Airlines and American Airlines at
the high end, US Airways in the middle, and carriers such as Southwest and
JetBlue
at the low end. American Airlines, United Airlines, US Airways, and
Delta had similar business models with hub-and-spoke service, extensive hubs
and network infrastructure, global operations, broad service portfolios and
relatively high ticket prices.These carriers did not offer many of the
amenities that major carriers offered, but were known as budget airlines
because of their low fares.
The
Airline Industry
Deregulation
The U.S.
domestic airline industry was largely deregulated in 1978, and entry barriers
for new entrants were lower from a legislative standpoint. Airlines were free
to negotiate their own operating arrangements with different airports, enter
and exit routes easily, and set fares and flight volumes according to market
conditions.
Deregulation did
not free airlines from oversight by a number of domestic and international
agencies. A shortlist included the U.S. Department of Transportation, the U.S.
Department of Homeland Security, and air transport and safety organizations of
the various countries the airlines served. For example, Delta was a member of
the International Air Transport Association (IATA) and was subject to
applicable conventions such as the “Warsaw Conditions of Contract and Other
Important Notices.” It was also subject to scheduling and landing slot rules by
the foreign countries it serves and various airport management authorities.
Entry
Barriers
There was a
large amount of bureaucracy involved in setting up a new airline. For example,
a new company in the United States must apply to the Federal Aviation Authority
(FAA) for an air carrier certificate. In order to operate aircraft, new
airlines must obtain an operating license, which was usually a lengthy process.
These procedures dissuaded many from entering the industry because the generation
of revenues can take a long time.
The large
capital outlay that was required to start an airline business can also be a
serious deterrent for new entrants. An entrant must have sufficient resources
to pay the staff required and to either lease or buy a fleet of aircraft.
Even if a new
entrant had the capital to launch a business, it would encounter obstacles in
accessing airports. Established airlines had an edge over potential entrants,
for they held a monopoly over time slots at certain airports, making it harder
for new airlines to gain entry to those airports. This created immense
difficulties for new airlines to negotiate prime slots at busy airports and may
result in a new airline being restricted to offering flights only at off-peak
times, or having to fly to airports further away from popular destinations.
Established
airlines formed strategic alliances such as Sky Team, One world, and Start, in
order to be more competitive both locally and globally. Airlines partnered with
one another not only to achieve network size economies through initiatives such
as code sharing, but also to achieve scale economies in the purchase of fuel
and even an aircraft.
Fuel
Economy
The cost of fuel
had become a significant and growing cost of doing business for the entire
airline industry. If oil once again significantly rose in price, the effects
could be profound and long lasting. Analysts openly contemplate the end of mass
international air travel, an event that could reconfigure world economics and
make flying an option for only the wealthy. A flight across the Atlantic can
easily consume 60,000 litres of fuel—more than a motorist would use in 50 years
of driving—and generate 140 tons of carbon dioxide. The world fleet of
jetliners burned about 130 million tons of fuel each year.
Supplier
Power
Fuel suppliers,
aircraft manufacturers, and skilled employees were the key suppliers in the
airline industry. The industry was characterized by strong supplier power,
given the duopoly of the large, jet engine–powered aircraft manufacturers of
Boeing and Airbus. Airlines entered into contracts when buying or leasing
aircraft from suppliers, and breaking these contracts often invoked heavy
financial penalties.
Fuel suppliers
were also in a strong position, since no viable substitute for jet fuel had yet
been discovered. Staffing costs for an airline were substantial, with large
numbers of highly trained flight and ground personnel, including mechanics,
reservation, and transportation ticketing agents being required in order to
provide an efficient service. Labour costs were difficult to cut, given that
most large airlines were unionised.
Consumer
Attitudes
Customers in
recent years had become increasingly hostile toward the airline industry as a
result of travel delays, intrusive screening, and “nickel and dime” issues such
as checked baggage fees and even a recent proposal by Spirit Airline to charge
for overhead baggage.Both Delta and United led the industry by charging US$100
for a second checked bag on international flights. U.S. airlines collected
US$3.4 billion in baggage fees in 2011, helping to offset fuel costs and
reducing the need for baggage handlers.
Technology
Delta had a
lengthy history of embracing technology, from early adoption of jet aircraft to
the use of mainframe computers, and more recently, integrating the Delta and
Northwest websites, operations and reservation systems. Delta was at the
forefront of developing technologies to increase the total customer experience.
Passengers were able to view, select, or change seat assignments at its online
website. They could also receive boarding passes via self-service kiosks.
Delta, along with the Transportation Security Administration (TSA), initiated
the paperless mobile check-in for domestic travel from some airports in the
United States. It was now offering upgraded video, music, game, and power
options on many of its newer aircraft.
Industry
Outlook
According to
IBIS World’s “2012 Domestic Airlines
in the U.S. Industry Market Research Report” the U.S. airline industry had been
unstable over the past decade with revenue growing marginally at an annualised
rate of 0.3% over the five years leading up to 2012. Revenue was up 9.0% during
2010 and 3.6% in 2011. The overall trend over the past five years had been an
increase in market share for low-cost carriers such as US Airways, JetBlue, and
Southwest Airlines, to the detriment of American and United Airlines.
The IBIS World report predicted that the U.S.
airline industry should experience a modest recovery and positive growth over
the next five years. Nevertheless, high fuel costs should continue cutting into
profitability. Major carriers were expected to continue merging in order to
boost profitability and gain a competitive advantage.
Outside the
United States, many nations had traditionally subsidized their national air
carriers. There had been an economic benefit in having a nationally branded
airline flying the flag overseas, bringing tourists into the country, and generating
income for local businesses. National pride also played a role. An increasingly
competitive global airline industry meant that small national airlines had
become less cost effective. Airlines had been forced to ask for more money from
their governments or else go out of business. This was why New Zealand stepped
in to prop up Air New Zealand in 2001. For their part, many governments no
longer had the money to support airlines as they did in the past. In January
2012, Spain’s Spanair and Hungary’s Malev foundered when their governments
reduced airline subsidies. State investors in Sweden’s SAS, Ireland’s Aer
Lingus, Portugal’s TAP, and the flag carriers of Poland and the Czech Republic
indicated in 2012 that because of the European debt crisis they would be
reducing financial support and seeking new investors. Turkish Airlines was
working to buy a stake in LOT Polish Airlines from the Polish government, which
had been trying to sell its 25% share of the carrier since 2009. These
state-supported European airlines found themselves falling behind Europe’s
three big airline groups: Air France-KLM
Group, Deutsche Lufthansa (including carriers in Austria, Belgium,
and Switzerland), and International Consolidated Group (merger of British
Airways and Iberia). It was logical to expect that mergers among
state-supported airlines would soon occur as governments chose to privatize
their national airlines by selling their ownership shares.
The
International Air Transport Association (IATA) forecasted that the global
airline industry would post a second consecutive year of net profit declines in
2012 as the deepening European debt crisis would offset lower fuel prices,
stronger-than-expected growth in passenger traffic, and an improved freight
market. Although the IATA expected modest profit growth for carriers in North
America, carriers in the Asia Pacific region should see the most increase in
net profits in 2012. In contrast, European airlines should report a US$1.1
billion loss. According to John Leahy, Chief Operating Office for Airbus,
“There’s no doubt about it that 2012 is a softer year than 2011 in terms of
orders and in terms of the health of some of the airlines.”
Challenges
Facing Delta
Delta had
emerged from bankruptcy and proven that it could be a profitable company. The
Sky Team Alliance, a substantial flight network, and the recent merger with
Northwest had contributed to its success in this industry. Like many successful
companies, however, Delta continued to struggle with how to remain a viable
company in the long term. While mergers and acquisitions had enabled the
company to become the world’s largest airline carrier, Delta still needed to
focus on maintaining its profitability. Significant challenges for Delta
remained.
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