US_Airlines_Presentation_Version1

United States Airline Industry: 

A Cost Analysis United States Airline Industry Subharata Banerjee Vijay Dhingra Rishi Pahuja Rahul Puri Vikram Kataria Tarun Adhikari

U.S. Airline Industry- Quick facts: 

U.S. Airline Industry- Quick facts Since the start of deregulation in 1979, the U.S. airline industry has grown tremendously During 2009 the passenger air traffic declined by 2 percent The US airline industry has returned to its long-term growth rate of 5 percent per year In 2010, the number of domestic and international passengers on US airlines increased by 2.4 percent to 720.4 million compared to last year As the Airline industry recovers from the crisis, it now faces another threat to its profitability, the rising crude oil prices In case of budget airlines such as JetBlue and AirTran this cost can reach up to 50 percent of the overall cost Source: http://newsystocks.com/news/4043458/US-Airline-Industry-Is-Growing

Data Analysis of Delta: 

Data Analysis of Delta Scenario 1 Delta Route: New York to Tampa Flight 1247 Distance (in Miles) 1011 Seats per Plane 142 One way ticket price ($) 102 Load Factor (Ratio) 1.00 Food and Beverage ($) 10.00 Cost per Seat ($) 0.08 Total Cost ($) 13,479.21 Total Revenue ($) 14,484.00 Total Profit ($) 1,004.79 Total Profit Margin (%) 7.45 Very low profit per flight. Turns to loss if load factor reduces below 92% . Break-even seats at this price level is 132 . Losses at reported load factor. Would incur a loss of 21% if prices reduced to $75 . At current levels of pricing, need to look at alternative means of revenue generation like hotel bookings, car rentals etc. Mainline Load factor reported for 2011 is 74.9% Source: http://news.delta.com/index.php Scenario 3 Delta Route: New York to Tampa Flight 1247 Distance (in Miles) 1011 Seats per Plane 142 One way ticket price ($) 75 Load Factor (Ratio) 1.00 Food and Beverage ($) 10.00 Cost per Seat ($) 0.08 Total Cost ($) 13,479.21 Total Revenue ($) 10,650.00 Total Profit ($) (2,829.21) Total Profit Margin (%) (20.99) Scenario 2 Delta Route: New York to Tampa Flight 1247 Distance (in Miles) 1011 Seats per Plane 142 One way ticket price ($) 75 Load Factor (Ratio) 0.75 Food and Beverage ($) 10.00 Cost per Seat ($) 0.08 Total Cost ($) 13,122.79 Total Revenue ($) 7,976.85 Total Profit ($) (5,145.94) Total Profit Margin (%) (39.21)

Data Analysis of JetBlue: 

Data Analysis of JetBlue Scenario 1 JetBlue Route: New York to Tampa Flight 53 Distance (in Miles) 1011 Seats per Plane 162 One way ticket price ($) 75 Load Factor (Ratio) 1.00 Food and Beverage ($) 5.00 Cost per Seat ($) 0.05 Total Cost ($) 9,490.45 Total Revenue ($) 12,150.00 Total Profit ($) 2,659.55 Total Profit Margin (%) 28.02 Very low profit per flight. Turns to loss if load factor reduces below 77% . Break-even seats at this price level is 125 . Low margin at reported load factor. Early bird and loyalty initiatives would work well. Scenario 2 JetBlue Route: New York to Tampa Flight 53 Distance (in Miles) 1011 Seats per Plane 162 One way ticket price ($) 75 Load Factor (Ratio) 0.82 Food and Beverage ($) 5.00 Cost per Seat ($) 0.05 Total Cost ($) 9,345.46 Total Revenue ($) 9,975.15 Total Profit ($) 629.69 Total Profit Margin (%) 6.74 Mainline Load factor reported for 2011 is 82.1% Source: http://money.msn.com

Delta Vs JetBlue: Do Nothing Strategy: 

Delta Vs JetBlue: Do Nothing Strategy Not feasible because of: Delta has higher break-even seats 132/142 Vs 125/162 seats of JetBlue Delta needs to have a at least 92% load factor against 77% of JetBlue Profit Margin of 7.5% of Delta against 28% of JetBlue at 100% load factor Total Cost of JetBlue is 30% lower than Delta at 100% load factor Total profit of Jet Blue is 165% higher than Delta at 100% load factor Proposed by VP Operations

Delta Vs JetBlue: Drop Fares: 

Delta Vs JetBlue: Drop Fares Not feasible because of If prices dropped to $75 Delta would incur 21% losses at 100% load factor Total revenue of Delta is 14% lower than JetBlue at 100% load factor JetBlue remains profitable due to its costs lower than Delta by 30% at 100% load factor Proposed by VP Marketing

Delta Vs JetBlue: Cut Costs: 

Delta Vs JetBlue: Cut Costs Feasible? because of Total Cost of Delta is 30% higher than JetBlue at 100% load factor Cost per Seat of Delta is 37% higher than JetBlue at 100% load factor No. of seats per plane is 15% lesser for Delta Cost of Delta needs to be reduced by a staggering >37% Need additional information if such high cost cutting measures would be feasible like aircraft efficiency, fuel, staff per aircraft etc…. Proposed by CFO

Delta Vs JetBlue: Budget Airlines: 

Delta Vs JetBlue: Budget Airlines Feasible? because of Cost of JetBlue is 30% lower than Delta Cost per Seat of JetBlue is 37% lower than Delta at 100% load factor The load factor reported for Delta is 8% lower than JetBlue Need to look at lower pricing models to compete with JetBlue Need to look into additional pricing mechanisms like early bird, loyalty etc which are typically offered by budget airlines Proposed by CFO

Data Analysis of US Airways (Post Merger of America West): 

Data Analysis of US Airways (Post Merger of America West) Healthy profit per flight. Turns to loss if load factor reduces below 75% . Break-even seats at this price level is 93 . Healthy Margin at reported load factor. Merger of America Airline, a budget airlines has worked well. Bankruptcy of America West led to its merger with US Airways. Scenario 1 US Airways Route: New York to Tampa 1 Stop (1525+1631) Distance (in Miles) 1348 Seats per Plane 124 One way ticket price ($) 128 Load Factor (Ratio) 1.00 Food and Beverage ($) 10.00 Cost per Seat ($) 0.07 Total Cost ($) 12,104.88 Total Revenue ($) 15,872.00 Total Profit ($) 3,767.12 Total Profit Margin (%) 31.12 Mainline Load factor reported for 2011 is 86.2% Source: http://www.reuters.com Scenario 2 US Airways Route: New York to Tampa 1 Stop (1525+1631) Distance (in Miles) 1348 Seats per Plane 124 One way ticket price ($) 128 Load Factor (Ratio) 0.86 Food and Beverage ($) 10.00 Cost per Seat ($) 0.07 Total Cost ($) 11,933.76 Total Revenue ($) 13,681.66 Total Profit ($) 1,747.90 Total Profit Margin (%) 14.65

Data Analysis of SouthWest Airlines: 

Data Analysis of SouthWest Airlines Healthy profit per flight. Turns to loss if load factor reduces below 75% . Break-even seats at this price level is 104 . Low Margin at reported load factor. Integrated package deals for hotels, rental cars etc create additional revenue stream. Mainline Load factor reported for 2011 is 79.3% Source: http://www.southwest.com Scenario 1 Southwest Route: New York to Tampa 1 stop (121+2622) Distance (in Miles) 1059 Seats per Plane 138 One way ticket price ($) 99 Load Factor (Ratio) 1.00 Food and Beverage ($) 10.00 Cost per Seat ($) 0.06 Total Cost ($) 10,586.95 Total Revenue ($) 13,662.00 Total Profit ($) 3,075.05 Total Profit Margin (%) 29.05 Scenario 2 Southwest Route: New York to Tampa 1 stop (121+2622) Distance (in Miles) 1059 Seats per Plane 138 One way ticket price ($) 99 Load Factor (Ratio) 0.79 Food and Beverage ($) 10.00 Cost per Seat ($) 0.06 Total Cost ($) 10,301.29 Total Revenue ($) 10,833.97 Total Profit ($) 532.68 Total Profit Margin (%) 5.17

SWOT Analysis for South West Airlines : 

SWOT Analysis for South West Airlines Strength Short trips cutting down the frill cost is a reason for its popularity. • Best crew is offered and the services are very carefully monitored. • The teamwork and efficiency of the airlines aids the high ticket sales Weakness • Morning flights are usually unavailable. • Airline supervisors are comparatively less. • Seating is not segmented. • Online booking agencies are not fully approached. Opportunity • Longer flights are being introduced. • Business and leisure travel is being improved and enhanced. • Mainly it is operating its own booking services but also enhancing the web booking services. Threat • The political pressure is forcing the tickets cost to be higher. • Oil and gas price elevation needs to be pre accessed. • Air line operating cost is likely to increase.

SWOT Analysis for U.S. Airlines : 

SWOT Analysis for U.S. Airlines Strength Cost advantage ( Low Op Ex ) Innovation ( More Direct Flights / Larger Portholes ) Online growth for reducing distribution costs. Competitive & aggressive Pricing Weakness Not diversified ( Cargo Routes are untapped) Losing customers' baggage (Customer Complaints and resentments ) . lacking on time flights leading to customer dissatisfaction. Opportunity Acquisitions ( Huge Corpus to buy upcoming routes) Emerging markets and expansion abroad . Takeovers by buying stake in Jet Blue and Delta Threat Competition on domestic or international routes. Economic slowdown Lower cost competitors or imports

Low Cost Vs High Cost Analysis: 

Low Cost Vs High Cost Analysis Low Cost Airlines High Cost Airlines Low Op Ex by cutting on all the frills No gross cost cutting measures opted Target audience of low / middle income group Target audience of middle/high income group More direct flights for low operating costs More stop over flights to cater to all travelers A single passenger class Multiple passenger classes to cater to different needs. Aggressive fuel hedging programs Not much emphasis on fuel consumption savings. Employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents Separate employees for separate jobs with clearly defined roles. Fast turnaround times (allowing maximum use of aircraft) Exhaustive maintenance in the switch over time with low emphasis on max aircraft use. Development of one or more hubs to maximize destination coverage and defend their market Usually don’t follow the concept of hub development.

Other Relevant Factors: 

Other Relevant Factors Other sources of revenue like hotel, car deals etc Cargo handling apart from passenger services Other key ratios like Operating Unit Revenue (RASM) Revenue per Aircraft Revenue productivity per employee Revenue productivity per flight attendant Revenue productivity per pilot Fuel expense per passenger Aircraft block hours Apart from these the financial ratios would provide justification on the alternatives before Delta

Slide 15: 

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