OM in the News: How Delta Manages Airline Capacity

The Wall Street Journal’s (Oct.25, 2012)  two articles describing how Delta Air Lines is effectively addressing capacity issues are useful classroom tools as you cover Capacity Planning in Supplement 7. In the first, Delta describes its plan to cut $1 billion from its costs through a revamp of its domestic fleet, maintenance savings and productivity initiatives–with no layoffs. Delta has been one of the most aggressive in the U.S. industry at cutting capacity to retain pricing power.  In the 3rd quarter, it offered 1.5% less capacity than a year earlier, and it expects its capacity to fall by  1% -3% in this quarter.

Delta is also the first U.S. carrier to buy its own jet fuel refinery to reduce the volatility of its largest expense. And as part of its  realignment, Delta will begin taking delivery of used Boeing 717s next year, along with new Boeing 737-900s. It will reduce the number of unprofitable 50-seat regional jets.

The second article describes how Delta uses sports charters to help keep planes occupied in the winter, when regular passenger travel slows. The planes fly regular service in the busy summer months, then convert to charter planes. This year, Delta has been flying 21 of the 30 NBA teams, 15 of the 30 Major League Baseball teams and 15 of the 32 NFL teams. The airline also carries 2 NHL teams, 35 college football teams and 40 college basketball teams. “We wanted planes for only four months a year. It was a perfect fit,” says Delta. Delta takes 8 of its Airbus A319 jets out of regular passenger service in October and installs special interiors. Instead of 126 seats, there are only 54. The plane is segregated into three cabins—the front for players, with seats that fold out into beds,  seats in the middle for coaches, and the rest in the rear for team staff, security and reporters.

Discussion questions:

1. Why is capacity a critical OM decision for airlines?

2. What are the dangers of vertically integrating, such as buying a refinery?