How Delta Uses Cost Advantages to Soar Above Competition

December 5, 2012 at 12:28 pm | Blog

Richard Anderson had his work cut out for him when he took over as Delta’s CEO in 2007. Gas prices were soaring, the economy was on the verge of crumbling, and operating costs were nearly suffocating the multi-billion-dollar airline. Smaller, more flexible airlines were pouring salt in the wounds of industry giants by picking up domestic routes and capturing shares of the market which others were leaving behind.

These days, however, Delta is showing signs of promise.

Enjoying its third consecutive year of profitability, and slashing debt like a ninja – from $17 billion in 2009, to $10 billion in 2013, if it stays on projected track – Delta is definitely making a habit of doing things differently, states Susan Carey’s recent piece in The Wall Street Journal. Sara Rouf, a Fitch analyst, said she believes Delta to currently be “the strongest player in the much improved airline industry in the U.S., as it continues to march ahead of its peers on many fronts.”delta planes

So how did Anderson turn Delta around? He reevaluated the company’s operations and focused on repaving the path that was originally set when Delta was first started. Anderson monopolized on previously-neglected economic advantages to create competitive advantages that would allow the airline to climb out of the red and surpass their highest growth point. Let’s take a look at a few examples.

 

How Delta Created a Competitive Advantage to Thrive, Not Just Survive

  • Oil. It’s no secret that volatile fuel prices wreak havoc on the airline industry. Delta was the first airline to buy its own oil refinery. According to Carey’s article, “Delta figures it can save at least $300 million a year, supply 80% of its domestic fleet’s fuel needs and avoid the punishing refining margins it is paying today.”Delta was able to get a jump on the competition by paying off debt, investing in more planes and expanding international routes. Michael Porter, refers to these kinds of moves as cost advantages.
  • Older planes.  While most airlines are investing in new planes, Delta flew the opposite route and purchased 49 usedMcDonnell Douglas MD-90s from other airlines that were happy to get rid of them. The MD-90s were rehabbed for use and Carey reports that Delta believes it is saving a minimum of $1 billion on the MD-90 purchases, when comparing the cost to buying brand new.

With the money Delta saved, it commissioned Boeing to supply 100 new 737-900s to replace those it was retiring. But true to Delta fashion – it didn’t purchase the newest version.

  • Owning Vs. Leasing. Anderson prefers Delta own, rather than lease its planes. Currently, Delta owns 75% of its fleet. Anderson explains the advantage of owning; “when you hit softness or an economic downturn, you don’t (have to) fly empty planes with high monthly payments.”
  • Labor Agreement. Delta is the only major U.S. airline that is mostly nonunionized. Its near non-union-status facilitates higher flexibility in negotiating with workers. With their new cost-cutting savings, Delta gained the support of its 12,000 pilots and reached a new labor agreement last summer; according to Carey’s WSJ piece, Delta pays most workers more than competitors for equivalent jobs. Planes will be flown by Delta pilots, not pilots that fly on Delta’s behalf, and Delta cockpit crews will enjoy the opportunity for greater upward mobility.
  • Maintenance. Most major airlines have outsourced maintenance. Delta realized it wouldn’t be able to cut costs by flying second-hand aircraft without sufficient support to upkeep the fleets. The company ensures cost-savings and additional revenue streams by employing its own maintenance division of 10,000+ workers – this department repairs, paints, and modifies their own aircrafts as well as those of other clients. They solved a need and created a profit center. Delta’s maintenance business took in $650 million in revenue last year, up from $25 million in 1995.

How Cost Advantages can foster Competitive Advantages

  • New ownership strategy facilitated a relevant selling tactic – Delta was able to better tailor flight schedules to demands of customers versus demands of leasing companies.
  • Purchasing second-hand planes helps to prevent Delta from having to charge customers higher prices to pay off new aircrafts.
  • With greater opportunities for advancement, crewmembers are more likely to be satisfied in their positions. Satisfied employees often result in satisfied customers.
  • An in-house division that saves money as well as brings in additional revenue fosters growth.

Financial smarts helps Delta thrive – Delta is dominating the airline industry. Companies need both – clearly defined differentiation the customer values and meaningful cost advantages that don’t hinder the product/service delivery to their customers – but enhance them.

Reflection:

  • What cost advantages can you consider that would not detract, but add benefit to your customers?
  • In what ways might smart cost-cutting advantages translate into competitive advantages for your company?