OIl Refinery...again....Vertical Integration

http://www.bloomberg.com/news/2012-04-19/delta-s-oil-refinery-plan-flies-against-economic-sense.html

Delta Airlines acquired a Philadelphia refinery in hopes of saving over $200 million a year in fuel costs but it could prove costly. This is a huge risk for the company. The article above also describes a scenario where Delta would have to choose between selling high priced fuel to their competitors and cancelling flights, vice using the high priced fuel for its self. 

The more I read about this vertical integration move, the more I become wary of this strategy. I feel that an airline has no business owning a refinery. It seems silly and I find it hard to believe that they will be able to refine oil better than an oil company.

I also feel that the hierarchal costs associated with owning a refinery will be astronomical. There is just so much more red tape and administration because the two different hierarchies really have nothing in common with each other; the efficiency factor is going to be extremely low.

However, I do see why Delta did this. Page 282 talks about vertically integrating into areas where the firm already posses a competitive advantage. Delta doesn’t really have a competitive advantage per-se, but they are currently making larger profits and conducting business more efficiently than the other guys. Buying a refinery will give Delta the competitive advantage to really pull away from their competitors.

Owning a refinery for yourself is also rare, valuable, and costly to imitate. Delta will have the competitive advantage for quit some time until another airlines decides to follow suit. I would image that other airlines are banking on Delta failing and will not follow their lead.

Overall, this doesn’t seem like a great idea. There seems to be more risk than reward. However, because there is so much risk, there is also more reward. If this works, it will payoff it in the end. 

Tacit Collusion

The link below is a great article about the recent merger between American Airlines and U.S. Airways and how there are just three major domestic and international airlines left in the US.

The Airlines argue that the recent merger is good for business but any business expert will tell you that it is now easier than ever to partake in tacit collusion.

Tacit Collusion: Circumstance where two companies agree upon a certain strategy without puttin it in writing or spelling out the strategy explicitly.

The article has a really good analogy about the competition and tacit collusion, “It’s not illegal. But it’s like having a few big people in a small boat. Anyone’s decisions tie you all together.” Tacit collusion is already happening the airline industry. It seems that as soon as one airline adopts a new fee for traveling, the other major airlines immediately follow suit. There really isn't any competitive advantage over one airline and the airlines know that. They are all cooperating with each other and sharing a piece of the pie rather than trying to destroy the competition. Waging war on each other would be too costly for the industry and they are in no position to wage war because they are finally starting to make a decent profit by working together. 

South West is really the only major airline that is attempting to operate on cost leadership and product differentiation, as they are normally cheaper than the their competitors and do not offer baggage fees. South West does not serve international routes though. 

Airline Consolidation: Tacit Collusion

Airline Product Differentiation

This is a really good article about Delta airlines trying to differentiate themselves from other airlines and partnering with other travel corporations like hotels and car rentals.

Delta Airlines wants to further their retail product by customized the travel experience to the traveler. Delta Airlines has a wealth of knowledge that could be useful in customize the travelers experience. Addresses, type of traveler, married/not married, etc... could be used to market partnership services to the traveler. The article talks about only giving hotel offers to that have overnight flights and offering deals to "day trippers."

Knowing information about a passenger and customizing deals that are tailored to that individual's needs will allow the customer to be better satisfied with the airline and the other company. This is a win win for both companies.

It wont be long before other companies copy this strategy and the differentiation will be eliminated. Excess profits will also disappear. The real question is whether or not this strategy will actually cause a differentiation enough for a passenger to chose Delta over cheaper substitutes.

Datalex and Delta AIr LInes Retail Strategy

Airline Identity Crisis

The 4 major airlines have a real problem on their hands when it comes to having an identity. No one can really tell one apart from the other based on how they interact with their customers. The average person will chose their flight based on who ever has the cheapest flight available. This is how the 4 major airlines are competing, low cost low quality.

These larger airlines don't have an identity and are riddled with massive amounts of bureaucracy and management which significantly already cut into their profits. These airlines are teetering on the edge of entering into the diseconomies of scale region.

The smaller airlines are getting the job done fast and better than the bigger guys. Southwest airlines allows its employees to be creative and to have fun with their job. They let them be funny. Southwest has a reputation to be fun, young, different, and low cost. If you had the choice to fly Delta or Southwest, what would you chose?

http://management.fortune.cnn.com/2012/02/17/the-real-threat-facing-the-airlines/
http://usatoday30.usatoday.com/travel/flights/2009-11-10-airshuffle10_CV_N.htm

Human Capital

I can relate almost everything in this chapter to Delta's oil refinery acquisition but I don't want to beat a dead dog.

This week I am going to talk about the recent American Airways and U.S. Airways merger that was voted on last week. The $11 billion merger creates the world's largest airline. The U.S. now only has 4 major carriers. The biggest difference between Delta and the other three is that Delta made a billion dollars and the new merger would have lost $1.2 billion.

Delta is clearly doing something right is in their human capital department. This may be there greatest resource. Their employees and management are doing something right because they are one of the only airlines that made a decent profit last year. According to Yahoo Finance, Delta took in .5 billion less than United but somehow made $1.7 billion more in net income. The leadership at Delta is making the right decisions for the company.

The employees are even above the cut when it comes to the other 5 big airlines in 2011. Delta ranked the best when it came to customer satisfaction, baggage handling, on-time arrivals, and involuntary denied boardings.

Side Note: The refinery acquisition concerns me a little because refining oil is not their core competency.

Delta also has the largest market cap, operating margin, and earnings per share.



http://www.pbs.org/newshour/rundown/2013/02/american-airlines-us-airways-merger-by-the-numbers.html
http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=DAL
http://travel.usnews.com/features/Americas_Meanest_Airlines_2012/

Previous Post May not be 100% Correct

According to the article below, airline mergers don't significantly affect flight prices and competition. It appears that having only 6 or 7 major airlines is enough to prevent the industry from price gouging and becoming an oligopoly.

http://www.usatoday.com/story/travel/flights/2012/12/13/airlines-merger-fares/1767647/

Delta: Airline Monopoly & Oligopoly

Delta Airlines recently acquired a 49% stake in Virgin Airlines which now allows Delta to delete & merge flights from NY to London. The deal in the merger was that Delta and Virgin Airlines would share costs and revenues on transatlantic routes. This works out well for both companies because the companies can legally share pricing strategies and slowly hike the fares up. Even though they are two entirely different companies, they are essentially the same company when it comes to pricing.

The US airline industry is an Oligopoly because there are only 6 major airlines in the US. (US Air, American, South West, Delta, Jet Blue and United. It is also extremely costly to enter and exit the industry. To add to the Oligopoly, most airports only service a couple of these airlines (Memphis). This creates a service and price monopoly on the airport location.

Essentially, the airline industry is a monopoly inside of an oligopoly. Unless you happen to live in Philadelphia, New York, Chicago, Atlanta, Dallas, Charlotte, LA, etc...


http://www.nbcnews.com/business/delta-air-lines-buys-49-stake-virgin-atlantic-1C7546210
http://www.bizjournals.com/memphis/blog/memphis-in-motion/2013/01/nate-silver-calls-out-memphis-airfares.html