This
Bird Won't Fly
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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?
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.
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
20 Jul 2020
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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