Delta airlines and the trainer refinery case study

Strategic Management Case Study

Delta Air Lines, Inc

By Frank T. Rothaermel & David R. King

As if dealing with economic cycles, fuel price volatility, organized labor, changing customer demographics, and increased competition was not enough...

Delta CEO Ed Bastian assumed the role of Delta’s CEO in May 20161 at a time when the airline had successfully rebounded from the “great recession” of 2008–09 by investing in an oil refinery to insulate itself from higher fuel costs for operating older, less efficient aircraft.2 However, at his first anniversary, Delta was brought low twice by computer problems. In August 2016, a power outage in Atlanta disrupted Delta’s operation for more than three days leading to the cancellation of over 2,000 flights that lost the airline over $100 million in revenue.3 Another computer glitch on January 29, 2017 led to canceling 170 flights.4 These and outages at other airlines reveal a largely overlooked vulnerability to airline operations—cyber security.5 Delta took the first steps to correcting that deficiency by creating a new Chief Information Security Officer and the hiring of former bank executive Deborah Wheeler.

Historically, Delta had focused more on activities associated with aircraft operations and maintenance, and customer service. While attention was paid to procuring aircraft, spare parts, and fuel, and ensuring access to airport gates, less attention was paid to Delta’s technology infrastructure and human resource management. In the start of April 2017, Delta cancelled over three thousand flights over several days during spring break due to one day of thunderstorms at its Atlanta hub.7 In a digital age, an internal investigation revealed problems were compounded by overwhelmed telephone switches that kept aircrew from learning about new assignments.8 In addition to cancellations from computer glitches, the month after he became CEO, Ed Bastian had to deal with Delta pilots picketing the firm’s headquarters for increased pay.9 During the recession, pilots accepted 50 percent pay cuts and they wanted a 37 percent raise now that Delta had returned to profitability.10 After six months of mediation, Delta’s pilots agreed to a 30 percent raise implemented in stages through 2019.11 Wage pressure is also fueled by a looming pilot shortage as pilots are forced to retire at age 6512 leading to a projected shortfall of over 100,000 pilots for North America in the next 20 years.13

Even if internal operations are executed well, Delta could still face problems. An improving world-wide economy led many airlines to invest in new aircraft that contributed to industry overcapacity. For example, Cathay Pacific reported its first annual loss since 2008 in 2017.14 There is also airline overcapacity in Europe15 and the U.S.16 New entrants offering long-haul budget airline service are further contributing to price pressure. For example, a new airline, Level, began service in Europe in 2016 and offers a $149 one-way ticket between Europe and the U.S. West Coast, adding an international dimension to budget carriers already operating within the U.S. and Europe.17 An affiliate of Singapore Airlines has also announced plans to offer budget flights between Asia and Athens.18 This is addition to Emirates Airline and Norwegian Air that already offer low-cost international airline service.19 In response, American Airlines created a new “basic economy” airfare.20 In considering everything going on internally at Delta and in its industry, CEO Bastian wondered—what other challenges have been overlooked? And how should he prioritize the challenges he faces, and how should he address each one of them?

As he took a Diet Coke from his office fridge, he sat down at his desk, and started to boot-up his laptop...while looking out of his office window, he saw a brand-new Airbus A-380 operated by Korean Air, Delta’s partner in the SkyTeam alliance, take off from Atlanta’s Hartsfield-Jackson Airport...

History of Delta Air Lines, Inc.

From Crop-dusting to Mail and Passenger Services. Before Delta Air Lines existed, HuffDaland Dusters was the world’s first commercial agricultural flying company. They sprayed pesticides to control the boll weevil population in cotton fields over Macon, Georgia. In 1925, HuffDaland Dusters moved its operations to Monroe, Louisiana. By then, they had created the world’s largest privately owned fleet–18 aircraft–and provided aerial dusting service to Florida, Arkansas, California, and Mexico.

Service for the region it served, the Mississippi Delta.21 By the end of the 1920s, Delta had established passenger services to and from Jackson, Mississippi and Dallas, Texas. Flights were limited to one pilot and five passengers. Mr. Woolman insisted on strong customer service, a trait for which Delta is still recognized today. Delta started flying mail for the U.S. Postal Service in 1934, ferrying letters and packages from Fort Worth, Texas to Charleston, South Carolina for 24.8 cents per pound. It also resumed passenger service (which had been temporarily suspended in 1930), changing its name to Delta Air Lines.22 With the purchase of brand new Stinson Model A aircraft in 1935, Delta upgraded its flight capacity to carry seven passengers and two pilots. Delta acquired the new aircraft from American Airways (later American Airlines) for one-quarter of the price of a new plane–a tactic that continues to play out in Delta’s fleet strategy today. Delta’s history is summarized in Exhibit 1.

WWII. In the early 1940s, Delta relocated its headquarters to Atlanta and started utilizing even larger aircraft (Douglas DC-2 and DC-3). With the increase in airplane size, Delta added flight attendants to provide in-flight passenger services. From 1942 to 1944, Delta aided the war efforts by modifying over 1,000 aircraft for the military and training pilots and mechanics in the Army.23 Shortly after the war, Delta changed its official name to Delta Air Lines Inc. and named Mr. Woolman president and general manager.24 In 1945, the National Safety Council (NSC) recognized Delta for flying 300 million passenger miles over ten years of service without a single fatality. Soon thereafter, Delta started regular cargo service and also became the first airline to offer non-stop flights between Chicago and Miami. With a fleet capacity totaling 644 seats, Delta started its first coach service in 1949.25

Post-War Expansion. During the 1950s, Delta created the hub-and-spoke model in which passengers are routed through major hubs before connecting with flights to their final destinations. Delta’s modern hub-and-spoke model is visualized on the North American route map in Exhibit 2a. The company gained its first international flight with the acquisition of Chicago and Southern Air Lines in 1952. By the end of the decade, Delta became the first airline to utilize DC-8 jets in its fleet. The Delta widget–a red, white, and blue triangle mimicking the swept wing of a jet–also made its first appearance as part of Delta’s aircraft livery.

Exhibit 2b shows Delta’s European route network; noteworthy is the fact that this follows a point-to-point rather than a hub-and-spoke model, mainly because of existing international regulations (so-called cabotage rules, i.e., foreign airlines are generally not allowed to fly domestically; for example, while Singapore Airlines is allowed to fly from Singapore to San Francisco; it is not allowed to fly from San Francisco to other destinations in the U.S.). Exhibit 2c shows Delta’s Asia Pacific route network. This network also operates mainly by a point-to-point model, but also uses several hubs such as Tokyo’s Haneda and Narita airports, allowing for a hub-and-spoke operation in collaboration with Delta’s alliance partners.

Delta continued to expand its operations throughout the 1960s with non-stop routes and new destinations. Continued high growth in passenger volume made the company’s manual reservation system increasingly difficult to handle. The advent of computing technology led to the development of the Semi-Automated Business Research Environment reservation system (SABRE), which Delta adopted in 1962, greatly decreasing the costs and increasing the efficiency of the reservation process. Symbolic of Delta’s changing focus, the company closed its crop-dusting operations in 1966, the same year that C.E. Woolman died and was succeeded by Charles Dolson as chief executive officer.26 By 1970, Delta’s fleet consisted entirely of passenger airplanes, including the new Boeing 747. However, Delta diversified its offerings again one year later by adding Delta Dash, a small package cargo service. In 1975, the company added a high priority cargo service called Delta Air Express.27

Industry Deregulation. President Jimmy Carter signed the Airline Deregulation Act in 1978, removing government control over commercial airlines’ fares and routes and permitting the entry of new airlines into the market. Up until this point, major airline carriers had been guaranteed to receive a 12 percent return on any flight filled at 55 percent capacity or higher. Access to routes was closely regulated and limited service, therefore airlines had few incentives to offer discounts. The Act was intended to increase competition and decrease ticket prices.28

Delta initiated its first frequent flyer program at the start of the 1980s, made possible by its computer reservation system (CRS). Unfortunately, the U.S. economy tanked in 1982, hitting the major airlines hard just as they were starting to adapt to their new regulatory environment. As a result, Delta reported its first financial loss ever. During the lull, Delta employees banded together and accepted $30 million in payroll deductions to purchase the first Boeing 767, named “The Spirit of Delta.” As financial conditions improved, Delta resumed its expansion efforts, creating the Delta Connection program for its regional partner airlines, strengthening the spokes of its hub-and-spoke model, and opening its first routes to Asia in 1988.29

Earnings dropped again at the start of the 1990s, but this did not deter Delta from expanding even further. The airline purchased several new gates, aircraft, and routes in 1991. Among those added to Delta’s route portfolio were Canadian flights from Eastern Airlines, a New York-to-Boston flight run by Pan Am, and more European routes including a hub in Frankfurt, Germany. While the expansion made Delta a major international competitor, it was costly. Delta incurred such a severe loss that it had to prune multiple routes and 15,000 jobs between 1994 and 1997. Despite morale being at an all-time low, Delta had to continue its cost-saving measures. Delta Express, a low-cost alternative with no in-flight meals or entertainment, was launched in 1996 and administered separately from mainline operations.

Partnerships proved to be a useful tool for competing in the post-deregulation era. Under a new CEO, Leo Mullin, Delta formed the first international cargo alliance with SwissCargo in 1997.30 After Continental Airlines broke off takeover talks with Delta to join with Northwest Airlines, Delta retaliated by creating a joint frequent flyer program with United Airlines. In 2000, Delta, Air France, Aeromexico, and Korean Air founded the SkyTeam alliance in order to combat the other emerging global code-sharing groups, Oneworld and Star Alliance. Exhibit 3 shows which carriers are in the three alliance networks.

Post 9/11. Terrorist attacks on September 11, 2001 led to the closing of U.S. airspace for two days and significantly affected air travel thereafter. Delta suffered its first financial loss since 199513 and was forced to rationalize flights and reduce its workforce by 15 percent. Low-cost carriers (LCCs), how-ever, thrived in the aftermath of 9/11. Delta fought back against the low-cost threat from companies like Southwest and JetBlue by launching its own budget service, called Song, in 2003, only to merge it back into its mainline operations three years later. At the same time, Delta continued to innovate by offering a new passenger check-in model, redesigning its lobbies, and expanding the number of kiosks.14 The federal government approved the largest code-sharing agreement between domestic carriers (Delta, Continental Airlines and Northwest Airlines) in 2003.15, 16

Before the 1978 Deregulation Act, airline bankruptcy was unheard of for interstate carriers because of the regulatory protection provided by the Civil Aeronautics Board (CAB). In fact, the CAB often joined failing carriers with survivors in an effort to maintain routes and assets. However, since deregulation, the air travel industry has been highly competitive with many new entrants and very low mar-gins on fares, leading to almost 200 airline company Chapter 7 and 111 bankruptcy filings by 2013. Since then the airlines consolidated through horizontal merger activity. Exhibit 4 shows industry dynamics over time during periods of regulation, deregulation, and consolidation.

Not even some of the largest carriers could weather the combined effects of worldwide economic recessions, rising fuel costs, and the 9/11 terrorist attacks.31 Delta filed for Chapter 11 bankruptcy in September 2005.32 As a drastic measure, Delta sold Atlantic Southeast Airlines, which it had purchased in March 1999.33 Ultimately, a $2 billion financing deal from its creditors helped Delta to emerge from bankruptcy and continue operations. The road back to profitability was a long journey, but Delta’s pilots shortened the trip by agreeing to several changes in their benefits and compensation packages, saving the company $280 million annually. Seeing Delta in a weakened state, US Airways made a bid to cover Delta’s debt (about $8 billion in cash and stocks) and to acquire the company; the offer was rejected by the Delta Board of Directors. A few months later, US Airways increased its offer to $10 billion but was still unsuccessful in swaying the board. In April 2007, Delta re-emerged from bankruptcy with Richard Anderson, former CEO of Northwest Airlines, as CEO. In April 2008, Delta initiated its largest, most profitable acquisition to date, purchasing Northwest Airlines. Delta had to negotiate with unionized pilots and persuade antitrust regulators in order to complete the acquisition. Consolidation and integration of the two companies continued through 2010. Delta paid $2.8 billion to become the airline with the highest traffic in the world.34 Exhibit 5 shows the mergers and acquisitions since 2004 in both the domestic U.S. as well the global airline industry, highlighting the trend towards further consolidation.

Delta Air Lines Today

CUSTOMER EXPERIENCE

Since 2010, Delta has re-invested $2 billion to upgrade its airport facilities and the aircraft within its mainline fleet. For example, by 2015, the Business Elite sections of all long-haul aircraft were equipped with lie-flat seating. In 2016, Delta was the first U.S. airline to purchase Bombardier’s new C series regional jet.35 Overall, Delta boasts more first-class seating, in-flight entertainment options, access to power sources, and inflight Wi-Fi access than any of its domestic competitors. Exhibit 6 shows Delta’s recent key financial data.

STRUCTURE

Since its 2012 acquisition of the Trainer fuel refinery from ConocoPhillips for $150 million, Delta has partitioned its operations into the airline and refinery businesses. The refinery unit is responsible for the supply of jet fuel and works with Delta’s fuel partners, Phillips 66, and BP. The airline unit includes air transportation of passenger and cargo items as well as all maintenance, repair, and overhaul (MRO) activity. There are multiple strategic business units (SBUs) within the airline segment, including airport customer service, private jets, cargo, global services, technical operations, flight operations, inflight services, among others. More information is available on these different SBUs in Exhibit 7.36

MARKETS

Delta currently serves its passenger and cargo customers domestically and internationally through major hubs in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis, New York, Salt Lake City, Amsterdam, Paris, and Tokyo. Delta’s Atlanta hub alone boarded 13 million passengers per month during calendar year 2013.37 Regional connecting flights radiate from these central locations, filling in the spokes of Delta’s hub-and-spoke network strategy. In a hub-and-spoke network, smaller aircraft fly shorter routes on the “spokes” to a central hub where passenger traffic is aggregated for connecting flights to create economies of scale.

LEADERSHIP

Ed Bastion, the current CEO of Delta Air Lines, replaced Richard Anderson who had over twenty-five years of experience in the aviation industry. Mr. Anderson led a recovery at Delta following the 2008 recession, and the results led to Delta placing at the top of Fortune’s Most Admired airlines list in 2011 and 2013 because of its rankings in people management, quality management, innovation, long-term investment, social responsibility, quality of products and services, and global competitive-ness. In 2016, Delta climbed nine spots to 30 on Fortune’s most admired companies and only fell one spot in 2017.38

Still, Edward Bastian’s tenure as CEO has involved multiple challenges. However, his long preparation to be CEO included executive vice president, chief financial officer, chief restructuring officer during the Chapter 11 bankruptcy, and president.39 Ed joined Delta’s Board of Directors in 2010, and he oversaw the growth of Delta Cargo, TechOps, Delta Private Jets, and DGS (Delta Global Services). He was also heavily involved in the acquisition of Northwest Airlines and the Trainer refinery. All of these initiatives are part of the company’s strategic focus on reducing debt and enhancing the Delta experience, as a means of decreasing Delta’s vulnerability to economic cycles.

Glen Hauenstein moved up from Executive Vice President to replace Ed Bastian as President, and he has been with Delta since 2005.40 In this role, he provides oversight of Delta’s marketing, sales, and customer engagement and loyalty. In his tenure, Glen has added 70 worldwide destinations to Delta’s network of flights and enhancing Delta’s Sky Clubs for frequent flyers. Gil West serves as Chief Operating Officer, and he directs 70,000 employees in providing safe and reliable operations of Delta’s flights across the globe.41

PERFORMANCE

Delta has operated in the black with net income exceeding $4.37 billion in 2016, though revenue fell to $39.6 billion in 2016 from $40.7 billion in 2015.42

The Air Travel Industry

SHAREHOLDER VALUE DESTRUCTION

Historically, airlines have teetered between periods of profitability and bankruptcy–with the out-come highly dependent on the health of the economy. Major problems include the fierce, price-dominated rivalry among competitors, price sensitivity of customers with a diminishing need to travel, and clout of suppliers. The primary economics (perishable commodity product, volatile demand, and the slow nature of capacity changes) put pressure on prices such that airlines tend to match price with marginal cost and ramp up capacity to meet prospective demand.43 It is only in recent years that airlines have begun to demonstrate consistent profitability.

BUSINESS MODELS: HUB-AND-SPOKE VS. POINT-TO-POINT

LCCs (Southwest, JetBlue, Virgin Atlantic, and Alaska Airlines) compete with traditional or “legacy” carriers (Delta, United, and American Airlines) for passengers and profits. The legacy carriers, which offer many more routes than LCCs, utilize a hub-and-spoke business model allowing them to efficiently service a vast selection of routes and destinations. Passengers are routed through major hubs before connecting with flights to their final destinations. For example, anyone flying from Seattle, Washington to Miami, Florida would be routed through Delta’s main hub in Atlanta, Georgia. In contrast, LCCs use a point-to-point network of heavily trafficked city-pairs that minimizes cost while sacrificing the variety of destinations served. Baggage transfers and coordination with other airlines is unnecessary with the point-to-point system, which helps keep costs down.

LCCs also save money by using a limited number of jetliner models. For instance, Southwest and JetBlue exclusively use 737s and A320s, respectively. As a result, they have lower expenses than legacy carriers for maintenance and training. JetBlue further reduces costs by carrying more passengers per flight over longer distances. Exhibit 8 shows detailed revenue, cost, and profit data for U.S. domestic airlines over time.

Traditional carriers have higher cost structures which leave them especially vulnerable during periods of recession and high fuel prices. Their main advantage lies in the international market where there are a limited number of competitors and profits are protected by governmental restrictions. For example, so-called cabotage rules prohibit foreign airlines from one country traveling into another country and picking up passengers and providing transportation between points within that foreign country.44

In addition, higher barriers to entry in the hub-and-spoke system reduce some of the competition for traditional carriers while LCCs face a higher threat of new entry from start-ups. Also, hub-and-spoke airlines face diminished buyer power by airline customers in the global market because of their protection from foreign competition. Point-to-point networks face a far greater threat of substitutes because of their regional nature and the availability of alternate modes of travel (car, train, or bus). Power exerted by suppliers on LCCs tends to be higher because of their small size and a resulting lack of bargaining power. Rivalry within the point-to-point strategic group is likely more intense than in the hub-and-spoke group.

RE-CONSOLIDATION

The U.S. commercial airline industry started out under strict government regulation. During this era, airline profits were protected by legislation that controlled airfares and routes. The federal govern-ment also directed airlines that performed poorly to merge with airlines that did well. Government-led consolidation of the airlines focused control over the airways in the hands of a few major carriers.

Once Congress passed the Airlines Deregulation Act of 1978, new airlines rapidly entered the mar-ket. Competition increased sharply as a result of deregulation, causing a dramatic decrease in pricing power accompanied by a rapid rise in the number of airline bankruptcies. As time progressed, air-lines started to re-consolidate in an effort to create larger networks and regain pricing power. In the last decade, North American carriers have seen a number of significant mergers including Delta and Northwest (2010), Southwest and AirTran (2011), United and Continental (2012), American Airlines and US Airways (2013), and Alaska Airlines and Virgin America, as shown in Exhibit 5.

The wave of consolidation in the airline industry has enabled traditional carriers to manage their capacity and streamline their operations, resulting in a more cost-efficient structure. Other periph-eral effects were significant improvements in arrival and departures delays (17 percent and 8 percent decrease, respectively), flight cancellations (26 percent decrease), and baggage mishandling (31 percent decrease).45 The number of mergers and acquisitions and bankruptcies during periods of regulation, deregulation, and consolidation, respectively, are shown in Exhibit 4.

The 2015 merger between American Airlines and US Airways was contested by the Department of Justice because of worries over anti-competition. American Airlines and US Airways were required to sell thirty-four slots at LaGuardia Airport and eighty-six at Reagan National for $381 million.46 By order of the Department of Justice, these slots could only be offered to Low Cost Carriers (LCCs) in order to keep the oligopoly of traditional carriers in check. LCC growth has outpaced that of tradi-tional network carriers and now accounts for 30 percent of domestic traffic. Counting domestic and international passenger traffic, Delta is the third largest U.S. airline behind American Airlines and Southwest.47

COST CONTROL

Meanwhile, a series of exogenous shocks including terrorist hijackings (9/11), increasing fuel prices, and a deep global recession have further challenged the air travel industry in recent years. Because of the resulting volatility in demand, airlines have focused on controlling their costs through various means such as changing their fleet make-up to include more fuel-efficient aircraft, rationalizing their network of routes, and decreasing overall operating expenses.

Fuels costs account for 30–40 percent of an airline’s operating expenses. Because air carriers’ profits are highly sensitive to the fluctuating prices of jet fuel, they invest in fuel hedging strategies. One approach utilizes financial instruments, such as call and put options, to mitigate the risk of fuel price volatility. For instance, if an airline buys a call option on fuel while the price of fuel increases, the airline offsets the market price of fuel with the return on the call. However, if a company buys a fuel swap and the price declines, it ends up paying greater than the market price. Air carriers collectively lost millions of dollars in fuel hedging due to the rapid drop in jet fuel prices associated with the global recession in 2008 and 2009.

Taking a different approach, Delta backward integrated into fuel production and supply by pur-chasing the Trainer refinery in Pennsylvania from ConocoPhillips for $150 million in 2012. The facility is expected to provide significant fuel hedging capabilities for Delta’s operations. “According to Richard Anderson, Delta’s CEO, “Acquiring the Trainer refinery is an innovative approach to manag-ing our largest expense...This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel avail-ability in the Northeast.48

REVENUE MANAGEMENT

Airlines have developed sophisticated quantitative pricing analytics and revenue management tools to increase revenues amid harsh industry conditions. One approach is to draw upon vast customer information databases to derive dynamic price structures based on how early a purchase is made before the travel date and the type of seat being purchased. Another successful pricing strategy is the unbundling of services previously included as part of the ticket price. Customers must now pay extra to have access to such amenities as checked baggage, in-flight meals, preferred seating, priority board-ing, special facilities in airports, and automatic upgrades. Delta realized a 40 percent growth in rev-enue ($635 million) in 2013, in large part due to the income generated from ancillary fees.49 However, this has proven difficult to maintain with 2016 recording both a decline in passengers, revenue, and net income.50 Meanwhile, the real, inflation-adjusted ticket prices for air travel, shown in Exhibit 9, has actually decreased from approximately $450 to $250 since 1978. The nominal (or sticker) price has increased from approximately $200 to $350 over the same period. Exhibit 10 shows the current cost breakdown of the average U.S. domestic flight.

Revenue management techniques rely partially on overbooking as a means to maximize revenue by carefully balancing the expected cost of no-shows and flying empty seats with the expected cost of compensating overbooked passengers who are denied boarding. The more information that is avail-able to these systems, the more robust are the resulting pricing segmentation and revenue maximiza-tion algorithms. For this reason, the collection of consumer information and prediction of behavior has become highly valuable to airlines.

PROJECTED GROWTH

The Federal Aviation Administration (FAA) forecasts that total passengers using air travel will grow at an average of 2.9 percent over the next 20 years.51 The FAA identifies three major trends influencing domestic airlines: 1) consolidation, 2) capacity discipline, and 3) proliferation of ancillary revenues.52 While airlines were slow to add capacity following the “great recession” and this helped profitability, there are now concerns of potential overcapacity.53

Products and Services

According to Delta’s Investor Day presentation in 2013, “The customer experience has a different value for each customer and by tailoring our approach for different customers, we can improve over-all satisfaction and increase our revenues.”36 This comment alludes to the unbundling of services in order to offer a cheaper base fare to compete with LCCs, while generating additional profit from fees for ancillary services. Delta’s reports over $5 billion in ancillary revenue obtained from baggage fees and service charges, SkyMiles®, cargo, and other products and services.54

BOOKING

Booking is the first opportunity airlines have to interact with their customers, whether it is through an online or traditional travel agency, mobile application, the airline’s webpage, or at a kiosk in the airport. Differentiation in booking amongst the major carriers has been stunted because of online travel agencies (OTAs) and booking sites that eliminate information asymmetry. Since the advent of the Internet, travelers have many tools and a great deal of power to search for low-cost tickets. This trend also drives the unbundling of services because it has become critical to show an airline’s base airfare at the top of the list when customers use price comparison search engines such as Expedia, Kayak, or Priceline.

CHECK-IN

Passenger check-in is the airline’s next point of contact with travelers. Self check-in kiosks, mobile check-in, and self-drop baggage machines are all recent innovations used to differentiate a traveler’s experience through additional convenience. Online check-in was first introduced by Alaska Airlines but was quickly adopted by other carriers; it also paved the way for mobile check-in as mobile smart-phones became ubiquitous. Self-check-in kiosks and self-drop baggage terminals are now standard at nearly all U.S. airports, eliminating the need to wait in line to talk with an airline representative. These services appeal to the frequent business traveler, who maintains a strict travel schedule and relies on a mobile device for productivity.

BAGGAGE FEES

Baggage fees were initially instituted by airlines as a means to manage mishandled baggage rates and the costs associated with recovery. Now charged by nearly all airlines, baggage fees challenge customers’ frivolous use of free checked bags by causing more price-conscious consumers to bring a carry-on only. Waiving of baggage fees has become a loyalty tool for airlines; for example, Delta offers additional free bags through their American Express credit card loyalty program. On the one hand, baggage fees tend to reduce total airplane loading weight, which enhances fuel efficiency. On the other hand, passengers now bring oversized carry-on bags on board to avoid fees, causing delays when all the overhead bin space is taken up and carry-on bags have to be gate checked.

MOBILE BAGGAGE TRACKING

With the proliferation of mobile devices, airlines have started to offer mobile baggage tracking as an additional service. Passengers of most airlines can now track the progress of their checked bag-gage from origination, to the aircraft, and across connections until it reaches the baggage carousel. For years, air travel passengers feared parting with their luggage because of the high mishandled baggage rate across the industry. With the mobile bag tracking applications, consumers can now monitor their luggage from the point of departure to their ultimate destination.

AIRPORT FACILITIES

Delta and its major competitors have invested in special club lounges at many airports around the world. These restricted-access facilities are designed to give travelers a respite during layovers, and to provide a range of amenities including refreshments, full bars, entertainment, workstations, showers, and concierge-type services. Middle Eastern carriers have developed even more lavish services than their North American counterparts. For example, Emirates provides first-and business-class passengers access to cigar bars, a separate duty-free store, and direct boarding from the lounge to the upper deck business-and first-class cabins.55 In addition, many carriers are working with TSA and airports to create an expedited security pro-cess for frequent fliers. The TSA Precheck process is one example of the effort to make travel more convenient. TSA Precheck allows passengers who voluntarily undergo a more thorough background check (at their own expense) to walk through an expedited security line. While the airlines are not directly involved in the Precheck process, they realize the benefits to their business and support the efforts of the TSA accordingly. Additionally, Delta in 2016 invested $4 million to provide additional staff and other improvements at 32 airports to speed passenger screening.56

BOARDING/DEPLANING

The mobile smartphone has created opportunities for differentiation in the boarding process. The emergence of electronic boarding passes, remote seat selection, mobile upgrade purchase options, and many other innovations have created a new level of convenience for passengers as well as additional avenues for incremental revenue. Many air carriers offer priority boarding as a perk to their frequent flyer programs and even allow customers to purchase priority upgrades on a per trip basis.

AIRCRAFT CABIN

Airlines and aircraft manufacturers have worked together over the years to design optimal cabin layouts to balance passenger comfort, airline marketing, and cost efficiency. One result of this process has been the extra legroom marketing by major carriers, such as Delta’s Economy Comfort offering. Airbus, seeing a new opportunity with the pressure on airline profits and passenger willingness-to-pay, is trying to sell a new design to airlines. By shrinking the widths of its A320s window and middle seats by two inches, they can create wider (20 inch) aisle seats. Airbus claims that everyone wins; not only does the passenger in the wider seat experience greater comfort, but the middle-seat passenger is happier with the increased shoulder room, and the window-seat passenger doesn’t mind because he or she ends up slumping against the wall. Airbus further pleads its case with Center for Disease Control statistics, which show that a third of Americans are obese and could benefit from an aircraft in which 33 percent of seats are wider.57 Some airlines (Singapore Airlines’ budget carrier Scoot, AirAsia X, and Malaysia Air System) have considered “child-free” zones as a point of differentiation. Frequent travelers know the unpleasantness of traveling trapped in a cabin with a fussy infant–or worse, with several fussy infants who cry in chorus. Etihad Airways, a Middle Eastern carrier, actually hires “flying nannies” to handle children during a flight. A British financial services comparison website survey found that its respondents would be willing to pay $78 for a child-free experience.58

INFLIGHT SERVICES

Typical in-flight services include meals, beverages, and entertainment. However, other carriers have sought more innovative ways to differentiate themselves. For example, Emirates offers an open bar and lounge atmosphere for their first-class passengers who like to mingle. Virgin Atlantic has employed comedians to entertain guests during a flight. In addition, many carriers are remodeling their fleet to offer wireless Internet connectivity in the cabin, particularly for business travelers who wish to continue working during a flight.

FREQUENT FLYER REWARDS

The goal of frequent flyer programs is to retain and increase traveler loyalty through various incentives. For example, SkyMiles are awarded for travel using Delta or any other participating airline. These miles may be redeemed for free travel, upgrades, access to Sky Club lounges and other perks. Miles may also be accrued by using the Delta American Express card at participating companies in everyday shopping. Before changing from miles flown to dollars spent, the SkyMiles program saw over 271 billion miles accrued in 2013, with 11 million awards redeemed.59 The change in reward system brought Delta more in line with Southwest and JetBlue as well as with hotels and credit cards, which have rewarded based on expenditures for years.60 In 2016, Delta became the first major airline to allow its frequent fliers to earn miles for bookings made on AirBnB.61

DESTINATIONS

Many airlines have teamed up to form alliances (shown in Exhibit 3) and other cooperative agreements in order to offer travelers more seamless global travel. The financial obligations between partnering airlines increase with the level of coordination they share. Interlining, the voluntary agree-ment between individual companies to handle passengers traveling on itineraries that require two or more airlines, represents the minimal level of cooperation. Airlines may also offer joint frequent flyer rewards or share lounge access and various other benefits. Codesharing is the practice of sharing route listings and marketing them to passengers under one’s own airline designator and flight number. Even though airlines do not cooperate on the prices for these routes, there is downward pricing pressure because of the increased passenger volume flying codeshare routes.