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Airline Mismanagement

If at first you don't succeed, try again - or so seems to be the motto at Delta Airlines.

No other high cost airline has succeeded in launching a low cost subsidiary operation.

The fares might be lower, but they don't seem to realize that competing low cost carriers (such as Southwest and JetBlue) combine low fares with high quality and responsive customer service.

 
 
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This Bird Won't Fly

It will take not just a different name but a totally different ethos and appreciation of customer service for Delta's new venture to succeed.

 

 

On Wednesday, Delta announced plans to create another low cost subsidiary airline. This will replace its already existing low cost subsidiary, Delta Express, which apparently is not a commercial success.

Is there any reason to expect that Delta's next attempt will be any more successful?

Other Carriers Have Failed

Do you remember United's Shuttle? United proudly claimed that this was its winning answer in response to Southwest, and created an extensive network of Shuttle flights around the west coast. But, where is the Shuttle now? Closed down, presumably a failure (while Southwest's presence on the west coast has strengthened).

Do you remember Metrojet - the US Airways low-cost carrier operation, also described as an answer to Southwest? Probably you don't, because it, too, has disappeared after failing.

Or how about Continental Lite? Another vanished attempt by a major airline to replicate the Southwest type business model. Or, for that matter, what about Delta's own (and still existing!) operation, Delta Express? After the 9/11 collapse in air travel, Delta cut back its Delta Express operation by 50% to 'conserve cash' (which sounds like a polite way of suggesting that it was losing money!) and has not fully restored its service. Although Delta does not admit that Delta Express was (and is) a failure, consider the previous cutback in Delta Express 'to conserve cash' and the fact that Delta are now to replace it with this new operation and draw your own conclusions....

A Flawed Operational Model

There is no secret to operating a successful low cost airline. You just copy what successful low cost airlines are already doing!

And there is one thing that such airlines, everywhere in the world, generally agree on. They operate smaller sized jets with a large percentage of the seats sold on every flight. Typically these jets are Boeing 737s or Airbus 319/320s, and carry about 125-150 passengers. When these jets are 80%+ full, they have been proven to give a low operating cost, and the airline can offer frequent services while filling each plane.  This is true of Southwest, JetBlue, and even of United's new 'Ted' operation (156 seat A320s).

So what is Delta going to do? Presumably one of their clever analysts, in a corporate backroom, discovered that a larger 757 (capacity of 200-250 passengers) is cheaper to operate than the smaller plane - if all seats are filled. So Delta has decided to base its discount operation on 757s, each with 199 seats, so as to get a lower operating cost per passenger mile flown.

But, remember the important qualifier. The 757 is only cheaper, per passenger, if it is full of passengers. For example, a 757 with 200 people on board costs less, per person, to fly from Point A to Point B, than does a 737 with 100 people on board. But this is not the most relevant comparison. The most important comparison is that a 737 with 150 people on board costs a lot less than a 757 with 150 people on board.

And, from a marketing point of view, it is preferable to operate four flights a day with smaller planes than only two planes a day with larger planes.

Delta has crippled its new operation, right from the get-go, by requiring itself to either operate fewer flights between the cities it will serve, and/or needing to fill many more seats per plane than its competing low cost carriers. Additionally, the need to fill large 757s will mean that it can't realistically service smaller cities at all, restricting the development of an extensive route system.

There are some other operational limitations with the 757 as well - for example, it takes longer to unload and load a 757 than it does a 737/A320, simply because more passengers have to get off and on, more bags need to be unloaded and loaded, more cleaning and reprovisioning needs to occur.

Another consistent feature of the successful low cost carriers is fast turnarounds. A turnaround is always very much faster with a smaller plane than with a larger plane.

A Futile Act of Self-Cannibalization?

Where will Delta get the customers for its low cost low fare airline?

For sure, going head to head with Southwest is something that none of the other high cost airlines have ever succeeded at, with their earlier anti-Southwest competing subsidiaries. Southwest will not just passively look the other way while Delta tries to take passengers away from it, and Southwest, with the absolutely lowest cost base of all the airlines, can win any price game that Delta chooses to play.

The most likely passengers for Delta's new subsidiary will be those who are currently unhappy paying high fares for their travel. Indeed, as part of Delta's self-congratulatory and very optimistic announcements about its new service, CEO Leo Mullins conceded that 70% of airline passengers today base their choice of airline exclusively on price.

And so, obviously (?) the lower fare airline will steal customers from high fare carriers. Like, for example, Delta itself! Ooops!

Yes, Delta's latest attempt at operating a low-fare low-cost airline will merely serve to validate, in the marketplace, the inefficiency and marketing obsolescence of high-fare high-cost airlines. By choosing to create this new airline subsidiary, rather than trying to re-work its name-brand, some industry observers might even think that Delta is conceding defeat and almost abandoning its main carrier, while hoping to rise, Phoenix-like, from the ashes, in the new form of this new discount airline.

Oh, by the way - you may have noticed that I haven't mentioned the name of their new discount brand. That is because Delta haven't disclosed it yet! All they have said is that they won't use a name associated with Delta, so that people don't confuse it with their main airline brand. As Delta President Fred Reid explained "We really found out that customers want to see something distinctive. We still found that people had this edge of skepticism that it (Delta Express) was just part of Delta ... This is truly different."

Some people might think that the real problem here is the skepticism potential customers have when they hear the name Delta, and the real solution is to improve the image of the main brand, rather than to leave that brand struggling with a morass of curtailments in service, while hoping that an independent seeming second brand can avoid the apparently bad Delta reputation.

Delta plans to announce the name for this new operation in February, and says that it will start operation - initially between Boston, New York, Orlando and Fort Lauderdale, in Spring of 2003.

The good news is that Delta has indeed identified a large pool of potential customers. The bad news is that its new customers, who will pay a low fare to fly on Delta's new subsidiary, are, in large part, Delta's current customers who are presently paying higher fares to fly with Delta.

Why Not Just Fix the Main Delta Operation?

In announcing their new subsidiary, Delta executives found themselves, perhaps unwittingly, also explaining the problems with their present operation. For example, they conceded that their passengers don't like the current fare structure on Delta. Fred Reid said that passengers want stable fares year round, and said that passengers did not like the hugely varied 'accordion like' fares on bigger, hub and spoke type carriers.

Shouldn't someone tell Fred that he is actually President of the third largest hub and spoke airline in the country, and if people don't like his fares, perhaps the best approach is to re-jig the fare structure on his existing airline, rather than turn his back on that and start up yet another 'low cost' airline?

But maybe there is another reason for opening up the separate subsidiary - a lower cost basis. But this reason is far from a sure success, either.

Low Cost?

Did someone say 'low cost'? That remains to be seen. For example, Delta's pilots union has not been asked for wage concessions to support the new venture. And while Delta says that the startup will have 'a separate workforce' it is unclear how the unions will react to what they may consider to be a strategy on Delta's part to run down its high labor cost operations while growing a parallel lower labor cost alternate carrier.

Delta also wants to cut the cost of selling tickets, with a goal of having 70% of tickets being sold through its Web site or via its reservation centers. But it is unclear how this will actually save money - now that Delta (and the other airlines) pay no commission to travel agents, one would think that Delta would be keen to get as many travel agents selling their tickets, for free, as possible!

Delta's Other Little Problem

In the first three quarters of 2002, Delta lost $913 million. This would tend to suggest that its total loss for the year might exceed $1 billion. It has recently announced a cost cutting program that will reduce its costs by $2.5 billion - over a three year period. But, if it is losing money at the rate of $1 billion or more a year, surely it needs to cut costs by more than $3 billion over three years, not just 'only' $2.5 billion?

  • Update - in 2003, Delta lost $773 million.

The Stock Market Responds

Delta's stock opened trading at around $11 on Wednesday. After Delta announced its low cost subsidiary plans, the stock closed at the end of the day nearer to $10.50.

Maybe I'm not the only one who feels that this bird will not fly.

  • Update - in 2003, Delta's share price varied between $6.56 and $16.05.  On 5 Feb 04, it is trading just under $10.

In Fairness - Some Subsequent Comments

At the time I wrote this article, little was known about Delta's new subsidiary, not even its name, and there was little reason to be positive about what promised to be another 'me too' type operation.

However, the airline - Song, as it was subsequently named - has generally exceeded expectations.  Delta took the 'high road'.

It didn't just recycle its old planes and old staff (!) unchanged.  Instead, it spruced up the planes, upgraded the seats to leather, slightly increased the space between seats, has promised to add state of the art personal seatback entertainment systems, encouraged the staff to be more friendly, and generally tried, every which way, to make a Song experience more positive and pleasant.

Delta is to be commended for all of this.  While one suspects that the main driving force behind this strategy is a desperate attempt to compete with jetBlue, the fact is that passengers can now get a more consistently pleasant flying experience on Delta's so-called low-cost subsidiary, Song, than on the main Delta operation.

Does it seem strange to you that the low-cost airline gives better service than the full-fare airline?  Well, let's not question our good fortune, and happily accept the good features of Song!

Song's Swansong

After some equivocation and deferred expansion, on 28 October 2005 Delta announced the end of Song, blending its operations back into its regular services.  From first flight to the official announcement of its demise, Song lasted only a short 2.5 years.

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Originally published 22 Nov 2002, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 

 


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