A Sweet Song? Delta Aims at the Low-Fare MarketPublished: February 12, 2003 in Knowledge@Wharton
On April 15, 2003, a lime-green plane will depart New York City for Florida. On it ride the hopes of America’s third-largest carrier, as Delta’s new subsidiary, Song, takes wing. With a new staff and new attitude, Delta is hoping to break into the burgeoning low-fare air travel market to an extent that United, American and Continental haven’t been able to achieve.
For Song to succeed, it will have to fly in the face of 20 years of airline-industry precedent. Major airlines have tried to spawn low-fare subsidiaries before: Continental had Cal Lite, United had Shuttle By United, US Airways had MetroJet, and Delta itself is discarding Delta Express for its new venture. All of these attempts have failed. “No sub-brand has ever succeeded at any carrier anywhere in the world,” says airline consultant and writer Joe Brancatelli.
Delta needs the boost. Although it’s in a stronger financial position than United and US Airways (both of which are in Chapter 11) and American Airlines (teetering on the edge of bankruptcy), the airline still lost $10.44 per share last year. At the beginning of February, the airline announced 8-10% pay cuts for all its top executives.
Song Sung Blue
Song’s first routes will be between New York’s JFK airport and south Florida, as the sub-carrier tries to stem the flow of business to JetBlue, the trendy, three-year-old airline that has been a thorn in Delta’s side even as it turns a profit in an unprofitable industry.
Wharton public policy professor Elizabeth Bailey, who has studied competition in the US airline industry, approves of Song’s initial choice of routes. With their combination of business and vacation travelers, “they are the densest routes,” she says.
Responding to JetBlue’s satellite TV and trendy blue potato chips, Song will offer leather seats, seatback televisions and MP3 music, and various branded food items for purchase on the plane. One of the key elements in Song’s product strategy is ‘choice’ – flyers will get to vote on what sort of food items will be offered over the long term, airline representatives say.
JetBlue isn’t fazed. In a typically gutsy move, the startup christened its 39th airliner “Song Sung Blue” – a direct poke at its new rival. And the New York-based carrier has fended off big airlines before. In January, American Airlines gave up on the JFK-Oakland, Calif., route that it started in an attempt to choke JetBlue out of the Bay Area market.
“JetBlue’s success is due to our crew members and their dedication to customer service. Delta can try to copy our product but they can’t match our people,” JetBlue spokeswoman Fiona Morrisson says.
So what’s low-cost about Song? Fares will be lower and simpler than mainline Delta flights, but that’s not going to make the unit profitable. More crucially, Delta is committed to reducing costs by 23% per flight with a combination of better utilization of equipment and lower labor costs, Song executives say.
Delta starts with larger planes. Song will use Boeing 757s configured with 199 seats. Compared to the 119-seat Boeing 727-300s used by Delta Express, these planes will cost 30% more to fly but have 70% greater revenue potential, says Song spokeswoman Stacy Geagan.
To shorten the time planes spend at the gate, cleaning and catering crews will work on one end of the plane while passengers board at the other end. Flight attendants will help stow bags, speeding the boarding process, and conveyor belts will be set up in cargo holds for the speedy unloading of checked luggage.
And with point-to-point flights, Song won’t have to wait for connecting passengers or deal with congestion at Delta’s Atlanta hub. Atlanta was the world’s busiest passenger airport during the first 10 months of 2002, the latest time period for which data is available, according to the Airports Council International.
But the labor issue is the murkiest – and one of the most critical, according to Wharton management professor Peter Cappelli, director of Wharton’s Center for Human Resources. “Labor costs hover around 40% of total costs, but they are the most controllable costs, so they really matter,” he says. Fortunately for Delta, it’s the least-unionized airline in the industry; only the company’s pilots are represented by a union.
Where Delta Express cut pilots’ salaries but made no changes to other crew costs, Song is taking the opposite approach. Song’s 771 flight attendants and 86 dedicated ground crew will be offered new, more “flexible” compensation packages, Geagan says. Pilots and some other ground crew members will stay on their Delta compensation plans.
Possibly more importantly, Song will use as few staff as possible. Check-in will be handled by one gate agent instead of Delta’s two, and four flight attendants will handle 199 passengers – the absolute minimum mandated by the FAA. “That’s a significant cost savings,” Geagan says.
The Right Attitude
According to Wharton business and public policy professor W. Bruce Allen, Delta faces a challenge more intangible than cutting labor or equipment costs: Can Song employees infuse the new airline with the sort of effervescent cheer that has made Southwest and JetBlue fun to fly?
“Southwest and JetBlue have a real can-do attitude,” Allen says. “Song has to divorce itself from the culture of the larger airlines. That’s the tricky business.” The attitude shift is about more than making passengers feel good, he adds. More positive attitudes mean higher productivity, faster turnaround times for planes and lower costs. “The employees [at large airlines] are these old, grizzled veterans, and they’re set in their ways. [Song] has to get productivity up from these guys, and that involves a real cultural change,” Allen points out.
The new sub-carrier is being run as a wholly-owned subsidiary, rather than as a brand within the main company, to make sure cultural changes can take hold, Song representatives say. But the new airline will still share pilots and some ground crew with Delta.
Bailey suggests that the ongoing air travel recession may prove to Song’s advantage. In a tough economy, people are willing to do harder work for less. “It does strike me that there are an awful lot of people who would be very happy to have something as opposed to nothing,” she says.
Delta’s staff seems ready for the challenge. On a Delta Express flight on Feb. 7 from JFK to Palm Beach – the exact flight that’s going to be replaced by Song’s first offering – a flight attendant who asked not to be identified said he was “interested” enough in Song’s terms to interview with the new subsidiary. To show Song he’s got the right attitude, he plans to ride from his Florida home up to Song’s Atlanta headquarters by motorcycle. “I’m going to wear my leather,” he said.
A Delta pilot who also asked not to be identified said pilots are willing to pitch in to keep their carrier afloat. “I don’t mind giving them some concessions. I look at United where [pilots] have just taken a 29% pay cut and [the airline] may not survive.” Delta isn’t at that point yet, he added, “and I don’t want to get there.”
Will Song Fly?
Several Wall Street analysts are giving thumbs-ups to Song’s plan. “We … applaud management for being proactive with respect to responding to low fare competition,” Deutsche Bank Securities analyst Susan D’onofrio says. Lehman Brothers analyst Gary Chase calls Song “a step that Delta needed to take … and a clear improvement over Delta Express.”
Independent analysts and investors, on the other hand, are not quite as enthusiastic. Delta’s stock languished at $9.38 on Feb. 10, affected far more by worries over terrorism, fuel prices and war in Iraq than by the Song announcement. And airline analyst Bob Mann points out that Song faces major challenges in its very structure.
“It’s almost impossible for big companies to manage entrepreneurial, new-entrant startups without imposing big-company overheads, processes, points of view and other costs. That’s one of the reasons none of these entities works particularly well,” Mann says.
Allen is also skeptical. Song’s got great plans, he says; the test will be in the execution. “Can these guys do it? They can say [they will lower costs], and they have said it before with not very impressive results. They’re going to have to show me.”