Delta Airlines: Strategy, Technology, and Global Environments

Domestic and Global Competitive Environments

Delta operates in the airline industry and competes with other industry leaders including Frontier Airlines, United Airlines, American Airlines, and Southwest Airlines. These are the dominant firms in the industry, and Delta ranks second highest in terms of passenger volume. Delta's overall performance has improved recently compared to previous periods. However, one customer service issue that has gained public attention is the airline's propensity to bump passengers off flights due to overbooking. This practice is fairly pronounced and drags the airline down in customer satisfaction ratings (NY Post, 2014). Customer service is especially relevant because the domestic airline industry is highly competitive and consumers have multiple options when booking flights. Airlines in the domestic environment typically try to offer service differentiation in order to create consumer value and build brand loyalty.

The government tends to regulate the industry primarily through safety requirements and coordination efforts within the airport network. For example, Delta must remain in compliance with the FAA, or Federal Aviation Administration. For the most part, the government allows companies to decide their own operations. However, Delta's practice of overbooking flights could place the company in a position where future regulations become a concern. It is suggested that Delta explore other options to optimize flight capacity. For example, if there is sufficient demand to justify new routes to the same city, that option should be explored. However, if there is more demand than available seats but not enough to justify additional departures, Delta should still not sacrifice customer service for the sake of capacity optimization. Profit maximization and marginal cost considerations are important, but so are customer service standards — and the negative publicity associated with failing to meet consumer expectations carries real costs.

Because of restrictions in the airline industry, airlines are barred from servicing domestic routes in foreign countries. Therefore, the domestic U.S. market is effectively closed to non-U.S. airlines for travel between American cities. Likewise, Delta and other U.S. carriers cannot expand to routes that do not include an American city in the flight plan. On international routes, however, Delta must still compete with the other major U.S. airlines as well as any foreign carriers that service the same route. For example, the New York–London route is served by several American and British airlines, and competition on such routes is intense. Delta does have the opportunity to service niche markets: it is, for instance, the only U.S. airline flying to Johannesburg, South Africa. Other carriers also fly to the U.S. from South Africa, but not to Atlanta as Delta does. Nevertheless, trade restrictions on airlines in the global market are among the strictest in the world, a fact that significantly constrains Delta's ability to achieve profitability through global expansion.

Technology at Delta

Delta Airlines relies on a range of hard and soft technologies in its business operations. Hard technology includes aircraft, baggage-handling facilities, airport infrastructure, and telecommunications systems. Soft technology for Delta includes scheduling software, which is critical to maximizing aircraft uptime and determining how frequently the company should fly particular routes. Pricing algorithms help Delta achieve the optimal balance between ticket prices and passenger miles flown, all of which contribute to the company's ability to be profitable in a highly competitive market. There are also algorithms that assist the company in determining how much fuel to hedge. Much of the critical software Delta uses is not developed in-house but is instead sourced from third parties such as Sabre, which produces schedule management software (Sabre, 2015).

It has been noted that Delta does not have a particularly strong technology management strategy. The company has not invested significant resources in developing its own proprietary technology and has relied heavily on industry-standard solutions. For example, Delta typically adopts third-party technology that is common across the industry. There have been exceptions, however. In 2014, the company acquired one of its third-party technology providers, Travelport LP, as a means of gaining control over critical technology innovations (Carey, 2014). These innovations could potentially provide a measure of service differentiation for Delta in a crowded marketplace.

Several recommendations can be made for how Delta might improve its approach to technology management. First, there is relatively little to differentiate major airline service offerings, so technology that meaningfully influences service quality has the potential to be a key market differentiator. Delta should therefore consider increasing its investments in in-house technology development. It is also recommended that any such development focus on aspects directly relevant to the customer experience — a tactic that has worked well for companies like Amazon. Finally, Delta could license any proprietary technology it develops, potentially to partner airlines around the world, as a means of recouping the investment costs associated with development.

Political and Legal Barriers

Delta Airlines is headquartered in the United States, where the domestic airline industry is heavily regulated, particularly with respect to public safety. The industry was also transformed in the late 1970s by market deregulation, a process that opened up competition and created the conditions for the ongoing industry consolidation still visible today (The Economist, 2013). The legal and political environment for Delta stems primarily from the Federal Aviation Administration, the body that governs the airline industry and sets the standards by which all airlines must operate. There is no discrimination between airlines by the FAA. The Department of Justice is also a relevant factor, as it governs airline mergers to ensure a competitive market. Thus far, airline mergers have been permitted, and FAA protections remain in place with respect to foreign carriers and their ability to operate on domestic U.S. routes.

In general, the political environment can be considered largely neutral. The restrictions placed on the industry — including increased costs and safety regulations — have been applied evenly across carriers. Airlines have largely been permitted to merge, though competition in the industry has made it difficult for many carriers to operate profitably on a consistent basis following such mergers. Non-aviation operations are subject to considerably less stringent regulation than aviation activities, giving Delta some flexibility in how it manages certain business operations.

There are other significant aspects to the legal environment for Delta. The company was able to declare bankruptcy in order to restructure its pension obligations, a development that helped the company remain in business (Foust, 2009). Its merger with Northwest Airlines was also a critical milestone in the company's history. Delta exists in its current form in large part because of a favorable political environment that it leveraged approximately a decade ago. The legal environment also governs labor issues, including rules regarding hiring, firing, and union activity that the company must observe. The government is additionally involved in regulating employee health and safety through OSHA, which can increase the costs associated with human resources management.

For Delta, the central issue is access to expansion, whether through organic route growth or through the ability to merge with another major airline. However, opportunities in the short term are limited. The international political environment with respect to airlines is unlikely to change significantly in the near future. Domestic competition is diminishing as the industry consolidates around larger players, and there is a genuine risk that the Department of Justice will not permit any further mergers among major airlines. Without the ability to grow through acquisition or to expand internationally, Delta will face difficulty finding growth opportunities through traditional channels. The company will also face diminishing returns on domestic routes due to price competition, though some international routes may still hold potential for niche development.

References

Carey, S. (2014). Delta Airlines to take control of its data systems. Wall Street Journal. Retrieved October 6, 2015, from http://www.wsj.com/articles/SB10001424052702303480304579575891541812918

Foust, D. (2009). Delta/Northwest merger. Bloomberg Businessweek.

Hofstede, G. (2015). Japan. Geert-Hofstede.com. Retrieved October 18, 2015, from http://geert-hofstede.com/japan.html

Hofstede, G. (2015). United States. Geert-Hofstede.com. Retrieved October 18, 2015, from http://geert-hofstede.com/united-states.html

NY Post. (2014). The worst airlines in America. New York Post. Retrieved September 20, 2015, from http://nypost.com/2014/08/08/the-worst-airlines-in-america/

Sabre. (2015). Schedule management. Sabre Airline Solutions. Retrieved October 6, 2015, from http://www.sabreairlinesolutions.com/home/software_solutions/product/scheduling/

Solomon, M. (2015). How Delta uses anticipatory customer service technology to make flying less miserable. Forbes. Retrieved October 6, 2015, from http://www.forbes.com/sites/micahsolomon/2015/03/17/escape-from-voice-jail-how-delta-uses-customer-service-technology-to-improve-life-for-passengers/

The Economist. (2013). Airline industry consolidation. The Economist.