Despite Challenges, Delta Determined to Keep FlyingPublished: November 19, 2003 in Knowledge@Emory
When caught in such a knotty tangle of problems, good executives are willing to listen to new ideas wherever they can find them, which is how Lee Macenczak, senior vice president of sales and distribution for Delta, ended up in front of 200 first-year MBA students recently at Emory University’s Goizueta Business School describing the fix Delta is in.
“We have a very large work force that doesn’t want a pay cut. We have too much capacity in the industry, which is forcing down prices, which means our revenue is falling off. And, by the way, we need to make investments in technology but we don’t have a whole lot of money available,” he said briskly. “What do we do?”
Divided into management teams of five, the students had been handed a data set drawn primarily from information all domestic carriers must file with the federal government and the results of a survey of the flying habits of 1,000 consumers to analyze. They were given just four days to create a strategic plan to fix Delta and present it to Macenczak.
The exercise was the brain child of David Wessels, a professor of finance and Patrick Noonan, a professor of decision and information analysis, and was designed to give the students a real-world analytical experience but also to provide Macenczak and Delta with a different perspective on its business and perhaps a new way of looking at the challenges facing the airline industry.
"Given the myriad of presentations from management consultants to Delta’s executives over the last 5 years, I don’t expect to solve Delta’s problems in 4 days,” says Wessels. “However, if there is one chart, one idea, from all the student presentations which changes Lee’s way of thinking, I would consider the week a success."
Macenczak, who has worked at Delta for 19 years, says that September 11 took 10 years of evolution and crammed it into one long year. Consequently, the current dire straits of the airline industry have put every assumption in play.
“There are so many opinions about what the network carriers like Delta need to do to survive,” he says. “I think in 10 years we are going to look back and it is going to be a great Harvard Business Review book about exactly who survived and why and what were the critical decision points.”
Until then, Macenczak told students, “This is a great opportunity to get some outside input on how we need to perform in the future. I’m hoping to see some fresh perspective that I haven’t thought through before.”
One new idea Delta has employed recently was to bring most of its advertising in-house and hire well-known Atlanta ad man Joey Reiman and his firm BrightHouse for advice. Reiman’s first idea was to work less on advertising and more on bettering relations between the company and its employees. “Delta doesn’t need more ads. They need more happy customers,” Reiman noted last summer.
Of the 35 student teams, one team was chosen to present to Macenczak and a squad of junior Delta executives – several of them Goizueta alumni.
"The students really enjoy the week, " Wessels says. "They came to business school to solve complex problems. Why not start with a challenge?"
The team’s presentation highlighted two major problems hurting Delta: high variable costs and weak consumer demand.
Profit margins at Delta and the other large network carriers like American and United suffer from high variable costs - particularly labor - when compared with low-cost carriers like Southwest Airlines and Jet Blue Airways.
Employee costs at Delta, American and United represent just under 50% of total expenses, but less than 40% at Southwest and less than 30% at JetBlue. In particular, pilot salaries at Delta far outpace the rest of the industry, and Delta flight attendants don’t work as many hours as their Southwest or Jet Blue counterparts.
The team suggested seeking a 20% wage concession, enough to reverse Delta’s 2002 operating loss. While Macenczak acknowledged the need to renegotiate the pilot contract, the company’s strategy to remain union-free throughout the rest of the workforce made wage concessions a tricky maneuver. Why? “Because we have a $600 to $800 million productivity advantage over the rest of the network carriers,” Macenczak noted.
“The fundamental tenet of Delta is that we are in the customer service business. You can’t have your people focused on internal things. You have to have them focused on the customer.”
Macenczak emphasized that simply looking at hourly pay rates for mechanics or other job categories can be misleading. For instance, Delta mechanics are trained to fix multiple problems rather than specializing in a single type of repair like at other airlines.
“I think you have to broaden your outlook beyond just cost per hour and look at how much labor it takes to fix an aircraft or overhaul an engine. We are more productive than United or American, even at higher hourly rates.”
The team also noted that processing ticket purchases costs Delta approximately $500 million a year. Assuming an Internet transaction cost 25 cents and the same purchase through an agent or call center cost an average of $6, Delta could save $200 million annually if it could raise Internet sales to 50% of the all tickets sold.
In truth, the potential savings are even greater, according to Macenczak, because the true cost of processing through an agent or call center is closer to $16 a ticket.
The second half of the team’s action plan recommended that Delta try to transfer some of its market share to Song – focusing on price competition with the discount carriers -without also exporting Delta’s cost structure.
Macenczak praised the team for spotting the favorable economics of on-line sales and opportunity for expanding Song - Delta's new low fare air travel service - but added two caveats. The first was that driving more business on-line would increase the power of on-line travel agencies and help create more formidable competitors. Second, he said the Song model wasn’t designed to work in a hub-and-spoke environment and the number of domestic routes with enough passengers to support point-to-point service are limited.
After reminding the students that any one of the problems simultaneously afflicting Delta – September 11, a weak economy and a war – would be a major challenge by itself, Macenczak opened the floor to dialogue and was peppered with questions and ideas.
Q: Can Delta turn their planes faster?
“Yes, Southwest can do it in 20 minutes,” said Macenczak. “We are looking at how we can be faster. But Southwest doesn’t have a hub-and-spoke operation. They don’t care how long you have to sit in the airport to connect. At Delta, we have an initiative around turn time that’s just one piece of productivity initiatives designed to help us save $2.5 billion in costs by the end of 2005. The goal of the turn time piece is to turn our airplanes faster, allowing us to improve aircraft use, lower costs and add revenue. We’re already testing this process in Raleigh-Durham, Norfolk, Pittsburg and Miami. We’ll also test it in one of our hubs soon.”
Q: Why not deliver luggage faster?
“We could use conveyor belts – magic carpets we call them – to load the plane and remove one guy from the baggage crew but that costs money. Is it a big enough return for the risk? We only have $3 billion in cash and a lot of debt coming due in 2006.”
Q: Has Delta thought about distinguishing itself as a premium brand?
“I think the day we give up on making Delta a premium brand is the day we go out of business. But at the end of the day, nobody buys an airline ticket because they like to fly. You buy a ticket because you have something you need to go to. What has happened is that it’s become a real hassle to fly since 9/11, and the perception in the customer’s mind is that I’m not getting value for what I’ve paid. We have to bring that cost down so we create that value equation in people’s minds again. That’s going to take breaking the model apart in some ways. Branding is important but we have to be smart about it.”
Q: Why not simplify the fleet and fly only one or two plane types?
“Fleet simplification is a 20-year strategy, not a two-year strategy. We finance our planes over 20 or 30 years. Delta is optimizing the fleet around our network need, and fleet simplification is just one part of the fleet strategy.”
Q: Why not simplify the fare structure?
“A simplified fare structure with very flexible rules like some of the low cost carriers flying today would cost us another $500 million. We are always testing new fares, but usually in a single market, not nationally. American tried “value” pricing back in 1992 and we all nearly went out of business.”
Q: Aren’t there service improvements that would increase customer satisfaction?
“Last month we sold about 31% of our tickets online. Online sales are growing at around 20% a year. But what other parts of the travel process can we automate? We have kiosks for boarding passes. We use bar codes for boarding. The next phase is using radio frequency tags on luggage so that when a bag is lost we will know where it is instead of having to search the whole airport.”
Q: Are you doing anything else with technology?
“We are making investments into voice recognition technology so that when you call us we’ll know who you are because of your voice print. It’s scary stuff, but it actually helps simplify the customer experience.
“We believe the next big wave of technology in the customer process is going to be digital in-flight entertainment we can use to sell you stuff while you are on board and then we’ll have your purchases waiting for you at the airport. You’ll also be able to create a CD, watch live TV or see a movie on demand. We are trying it out on Song. If it works, we’ll put it on Delta.”
Q: Why can’t you do something to reduce the hassle of flying?
“You’re right. Flying on a network carrier has been a hassle since 9/11. Like anything, I guess we had to realize how big a problem the hassle factor was before we could begin fixing it,” Macenczak notes. “But I believe Delta is now on this situation. I fly a lot and I’m seeing a difference in Delta service. People are starting to offer better customer service. Our average flight attendant has worked for Delta for about 17 years. At JetBlue it’s about 18 months. How you reenergize your people is always something to think about.”
No matter what the short-term outlook is, Macenczak believes the air travel industry will survive. “This industry is at a very, very dangerous point right now. We are either going to see it expand or we are going to see it contract dramatically. But there will always be airlines, and Delta will remain a competitor. The industry is too important to the national economy.”