Reference no: EM131847190

Delta Air Lines Plays Catch-Up The airline industry has a well-deserved reputation for creative use of IT. American Airlines is known as a leader in using IT to drive its business, and United Airlines is known as a fast follower. Delta Air Lines, while highly regarded as a well-run airline, has been a slow follower in IT.

Recently, however, this has changed. In the past few years, Delta has invested more than $1.5 billion in technology, automating everything from gate and boarding tasks to baggage-handling, inventory control, and revenue accounting. The airline reservation systems introduced by American Airlines and United Airlines, respectively, Sabre and Apollo, were the earliest examples of significant forays into business driven IT in the airline industry. The programs are inventory control systems that sell and manage available seats on upcoming flights. Travel agents received a special computer terminal from the airline when they signed up for the programs. Usually, a travel agent would sign up for one or the other system, but not both. Airline companies that did not have their own reservation systems (Frontier Airlines, for example) could become "co-hosts" on Sabre or Apollo. A fee was charged to cohosts for the privilege of listing their flights on the reservation systems.

American and United obtained significant competitive advantages as owners of the reservation systems for several reasons. First, the systems were very profitable. Second, they gave American's and United's IT and operations personnel early and valuable experience with online transaction processing (OLTP) systems. Finally, they gave American and United access to information on the sales volumes of their competitors, such as Frontier, because the information was available in the reservation system's database.

For example, if American wanted to consider adding a flight from Denver to Chicago, it could simply examine the historical information in the Sabre system to see if there was enough demand for the new route. It could also see what sort of traffic a competitor such as Frontier was generating on the same route in order to pick the best time to schedule a new flight along with the best price. American and United offered the same competitive intelligence information to their co-host airlines, but charged them for it, and often took weeks to provide it to them.

American and United soon realized they had a gold mine of customer-related information available in their reservation systems. They conceived and rolled out hugely successful frequent-flyer programs, which increased the likelihood that frequent business travelers, their most profitable customers, would fly with them instead of with a competitor. Frequent-flyer programs require sophisticated computer systems to properly account for and manage the flight activity of millions of customers, together with their eligibility for awards-another noteworthy example of business driven IT.

Ultimately, frequent-flyer programs became an entry barrier for the industry because all airline companies felt they could not compete for the best customers without having their own frequent-flyer systems. Follow-on IT Innovations Yield management systems alter the price of available seats on a flight. The systems operate on a minute-by-minute basis as the date of the flight approaches, depending on the number of seats sold compared to the number expected. This is why an airfare quoted over the phone can be $100 higher if the airfare is quoted again an hour later. Most airlines use yield management systems to sell as many seats as possible at the best price. From the airlines' standpoint, it is better to sell a seat at a lower price than to have a plane take off with a vacant seat.

At the same time, airlines want to avoid selling a seat for a price lower than what a passenger is willing to pay. Yield management systems are a great example of solving a business problem with IT because they help business managers maximize the revenue generated by each flight. American Airlines went so far as to sell some of its systems, such as yield management, to other airlines. When asked why, American's then CIO, Max Hopper, said American might as well recover some of its development costs by selling systems to competitors because eventually competitors would develop their own systems. Besides, Hopper believed that by the time lagging competitors such as Delta figured out how to use the systems, American would have reached the next plateau of IT innovation. Delta's IT Success Delta always had a reputation in the industry as a slow follower, being reluctant to give up its paper-based systems for modern IT systems.

The company did a turnaround when "CIO for Hire" Charlie Feld, a former Frito-Lay CIO, joined Delta in 1997. Feld quickly addressed some of Delta's most pressing IT issues including projects and people in disarray, departments hiring their own IT consultants to develop systems with no attention given to coordination with other Delta systems, as well as the pending Y2K problem. He established a separate wholly owned subsidiary called Delta Technology, and set out to replace Delta's antiquated IT systems with new applications to run the airline. Feld began by building the gate and boarding application along with the supporting technical hardware, software, and network infrastructure.

The gate and boarding application was chosen because it was most visible to Delta's 104 million passengers. The new system provided gate agents' information on which passengers had checked in, seat assignments, and standby status, and saved an average of 8 to 10 minutes of gate activity per flight. As Chief Technical Officer (CTO) Dean Compton recalled, "I remember when we put in the systems in Jacksonville. I saw an overbooked wide-body 767-where there is normally a lot of confusion around the gate-boarded by two agents on time and ahead of schedule. I'd seen a similar situation in Salt Lake City where we hadn't put in the technology yet, and they had to use nine agents to board the plane, and it still left late."

Delta Technology continued to roll out applications, but by early 2001, the airline industry began to feel the effects of the economic downturn. Delta's board of directors questioned the need to spend additional funds on IT when the airline was under great pressure to reduce its costs. After Delta Technology executives gave an overview of projects they were working on, Vickie Escarra, the chief marketing officer, spoke up in support of the IT initiatives like the gate and boarding application by saying, "Man, we couldn't have done what we're doing today if it wasn't for the technology." The overview from IT coupled with the endorsement from a satisfied business unit customer convinced the board that the IT projects should proceed. They insisted, however, that all projects be supported and justified by a solid business case analysis with emphasis placed on either lowered operating costs or increased revenues.

After September 11, 2001, when traffic fell off even more, Delta began to postpone projects showing a longer payoff (like new HR systems) and to speed up projects showing a faster payoff (like increasing the number of self-service check-in kiosks and replacing call center technology). Currently, Delta processes almost 300 million transactions on its IT infrastructure each month. The company installed SAP software for inventory management, but altered the "flight plan" for Delta's new technology platform. "Today, we're working only on projects that pay off in 12 months and have ongoing impact for at least three years-either building revenue or lowering operating costs," said current CIO Curtis Robb.

"I see this work going on for another five years. We'll be done when we run out of ideas." Delta's Problems Even after making great strides through IT, Delta could not shake financial woes caused by the 9/11 terrorist attacks and high oil prices. By staving off bankruptcy for a year, the carrier thought it was taking the high road. Unfortunately, it has not worked out that way. Delta CEO Gerald Grinstein stood before 1,700 retirees-men and women whose benefits and pensions will be slashed in Chapter 11 proceedings-and swore he shared their pain. "Bankruptcy is beyond strange," he told them in late 2005 at an Atlanta convention center. "I now know why we fought so hard to avoid it."

It is amazing that his remarks did not spark a riot. After all, Chapter 11 has become a lastresort management tool: a way for airlines to slash labor costs, offload pension obligations, dump unwanted jets, and reemerge as moneymakers. United Airlines, for instance, which exited bankruptcy in early 2006 after more than three years, projected more than $1 billion in profits by 2007. Yet Delta's retirees ended up giving the 73-year-old Grinstein, who outlined the airline's financial straits but made no promises about their benefits, a standing ovation.

"That took a lot for [him] to be willing to come over and answer our questions," explains Cathy Cone, a retired flight attendant. While the Delta "family," as its workforce still calls itself, evinces plenty of hostility toward Grinstein's predecessor Leo Mullin, the current management team has avoided most of the blame. Bankruptcies are notoriously unpredictable, and Delta's is still early in the process. CFO Edward Bastian insists the airline has a leg up on previous legacy carriers in Chapter 11, having entered it "with a transformation plan we've been working on for the past two years." The carrier also has an ace in the hole: GE, the world's biggest aircraft lessor and a major jet-engine maker.

Sometimes called the "patron saint of failing airlines," GE knows that liquidations are bad for business. It helped keep US Airways aloft until that carrier finally merged with America West, and it is unlikely to let the third-biggest U.S. carrier disappear. (GE is already the lead provider of Delta's bankruptcy financing.) The real question is whether Delta's management will get its strategy together in time to ensure a post-Chapter 11 existence as a stand-alone carrier or whether Delta will survive only as part of another airline.

Questions

1. What business risks would Delta be taking if it decided not to catch up with industry leaders in using IT to gain a competitive advantage?

2. What competitive advantages can an airline gain by using DSS and EIS?

3. What other industries could potentially benefit from the use of yield management systems?

4. How can American and United use customer information to gain a competitive advantage?

5. What types of metrics would Delta executives want to see in a digital dashboard?

6. How could Delta use supply chain management to improve its operations?