delta's new song case analysis from baidu

8/12/2019 Delta's New Song Case Analysis From Baidu

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applying simple regression using each of the possible drivers and comparing R2and residual errors of

each driver, we choose two most reasonable cost drivers: revenue passenger milesand available

ton miles.

The salaries consist of payments to pilots, flight attendants and ticket agents. They are determined

not only by the number of passengers and cargoes but also the miles or hours flown. In fact, milesand hours are correlated. So we choose revenue passenger miles and available ton miles as cost

drivers. Revenue passenger miles is a major indicator in the airline industry, so its reasonable to be

a driver. Available ton miles, however, seems not so good. But after calculation we find that R2of

the former is 0.1764, and R2 of the latter is 0.5577. For more obvious comparison, we draw the

following scatter plots.

The scatter plot between revenue passenger miles and salary

The scatter plot between available ton miles and salary


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Salary = -1144.55 + 1.05 available ton miles - 72.30 revenue passenger miles

R2= 0.5577, and standard deviations are much smaller than coefficients, so its statistically valid and

significant.

This technique takes more cost drivers into consideration, and the results calculated are more close

to the data given, so its an improvement over the model estimated in Question 2. The accuracy of

estimation thus serves as its top advantage. However, it might be more costly, time-consuming andcomplicated to be implemented than other techniques.

4. The usefulness of analysis in Question 1-3

The cost functions estimated in Question 1-3 are based on the assumption that the wages per hour

remain the same and there is no additional labor needed, so its useful only under certain

conditions. Taking the background of the industry and the companys circumstance into

consideration, we think these are important:

The first one is that the present equilibrium between Delta and the labor unions is notinterfered. That is, endeavors concerning lowering pilots salaries to industry level will not beobstructed by union forces, and employees other than pilots will not join labor unions to require

higher payments. If not, adjustments on cost structure will be futile and Song will only turn out

to be another Delta Express.

Secondly, no harsh regulations regarding reducing staffs or cutting salaries are to be formulated.Restrictions about layoffs will directly lead to weak control over budgets, and in turn creates

similar problems as high salaries do. Nevertheless, regulations of this kind are almost inevitable.

According to precedents, large scale furloughs have already been blocked once by ALPA, thus we

have no reason to remain optimistic as long as the recession of the general economics stay as a

fact.

The last point we come up with is the new fixed cost caused by new security directives after theSeptember 11 terrorist attacks. However, since security costs can be expected amid the whole

industry, it shall not become a major concern for Song, although our prediction model may

overall shift upwards.

If the conditions are not met, the cost functions will be less useful.


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5. Estimate the salary cost for JetBlue

According to Question 1, available ton miles should be used to estimate the salary cost. However,

available ton miles of 2002Q3 is eccentrically low. So we draw a scatter plot:

In this situation, available ton miles and salaries are not linear. The scatter plot of revenue

passenger miles and salaries is as follows:

Revenue passenger miles and salaries are quite linear. We use the high-low technique to estimate

the salary cost with revenue passenger miles as cost driver.

Low point (599.4, 16000), high point (2016.2, 49000)

Salary = 23.29 revenue passenger miles + 2038.83


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6. Estimate the salaries cost for Song in its first year

To estimate the salaries cost of Song is quite difficult because there is no historical data for

reference. Because JetBlue is a successful example in the low-cost market, we use its historical

salaries cost to predict Songs salary. For simplicity, we make some assumptions:

Song can achieve the same revenue passenger miles as JetBlue in every quarter JetBlues salaries are linear with time seriesThough the first assumption is very strong, the second one can be easily verified. We number each

quarter in 2001 and 2002 from 1 to 8, and make simple regression between the time series and

salary.

Simple regression between the time series and salary:

JetBlues salary = $ 4761.91 number of time series + $ 9571.43

The scatter plot of number of time series and salary is as follows:


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R2 = 0.9900 and standard deviations are much smaller than coefficients, so the estimation is

statistically valid and significant. The scatter plot also supports this predication.

With the formula above, JetBlues salary of each quarter in 2003 can be calculated.

To determine Songs salary, three deviations must be taken into consideration:

1) Song pilots per hour wage rates are $100 more than those of JetBlue on average.

From the material, we know that a Boeing 757 captain is paid $254 per hour in Song, so a pilot is

paid $154 per hour in JetBlue. Since Song is supported by a single-airliner fleet of 36 Boeing

757s, the additional salary to pilots can be calculated easily. But before that, we need to know

how much is paid to pilots in JetBlue.

As the material indicates, pilots are paid for hours flown. The question is how to predict revenue

hours for JetBlue.

As is done before, we number each quarter in 2001 and 2002 from 1 to 8, and make simple

regression between the time series and revenue air hours.


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Simple regression between the time series and revenue air hours:

Revenue air hours = 6.2821 number of time series + 3.3095

The scatter plot of number of time series and salary is as follows:


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R2 = 0.9936 and standard deviations are much smaller than coefficients, so the estimation is

statistically valid and significant. The scatter plot also supports this predication.

With the formula above, revenue air hours and additional salary to pilots of each quarter in

2003 can be calculated.

2) Songs salaries paid to flight attendants, ticket agents and other workers might be higher, too.

Considering Songs poor performance in controlling the salaries, its reasonable to assume that

Songs salaries of other workers is also higher. However, there is no enough evidence in

material, so we use a compromising method. Firstly, we assume the other workers salaries are

the same and calculate a floor. Then we assume the other workers salaries are also higher

and calculate a ceiling.

A. Floor

The additional salary cost of Song is just the additional salary paid to pilots.

B. Ceiling

The additional salary coast of Song includes additional salary paid to pilots and other

workers. To get the maxim, we assume that Songs salary exceeds JetBlues by the same

percentage. That is to say,

=

=

= 1.6494


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3) Song began service on April 15, 2003

Salary cost before April 15, 2003 should be deducted, which includes salary of the first quarter

and the first 14 days in the second quarter. Number of days in the second

quarter=30+31+30+31=122. The adjusted salary is as follows.

A. Floor

B. Ceiling

In conclusion, Songs salary for 2003 lies between $191649and $292636, taking the higher wage

rates and the date of beginning service into consideration.


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Solutions to problems & suggestions

1) Cutting Salaries

The restructure of cost will primarily lie in the reduction of salaries. As implied in the background, its

main competitor in low-cost market, JetBlue, enjoys the lowest labor fraction of 25.5%. Thus, Deltashould no longer persist in its previous strategy on salaries.

Delta has the superiority of being the least unionized one in the industry, which makes asubstantial competitive advantage. Since un-unionized employees are not restricted to fixed

working hours, salaries cost can be largely eliminated through condensing working time, since

all of the personnel are paid by hours. (1). Effective training programs are expected to enhance

efficiency and accordingly reduce time needed per hourly personnel to get work finished. (2).

Flexible working hours should be launched especially for the women personnel like flight

attendants and ticket agents. As women are more inclined to family and personal life, an unpaid

leave program should be launched for them to better achieve a balance between life and work.

Furthermore, the humanistic vacation plan will nurture employee loyalty and thus enhance

productivity in the long term.

Delta provides the highest salary for pilots, combined with the block from furlough.Consequently, pilots salaries take up a majority of their cost. Since pilots are unionized with

fixed working time, salary reduction will be the only way. As JetBlue s cost function might be

impractical for Delta, Southwest Airlines figures might be an appropriate goal. (1). Attain

concession from the labor union as other companies. (2) Since Deltas salary level is currently

above the industry average and, moreover, contracted maintenance work creates additional

flexibility in salaries cost, there is no need to worry about brain drain.

2) Omit traditional service frills

Apart from lowering salaries, Song needs to omit traditional service frills so as to adjust to the low-

cost business mode. Concrete measures can be simplifying aircraft services, cancelling flight meals

for short-term flights, refusing to return airfares for late passengers and so on. To compensate for

the relatively inferior service, it becomes an essence for Song flights to enhance in-flight

entertainment. Approaches such as introducing satellite televisions, which has become a favorite for

JetBlues customers, ought to be on the agenda of Songs operation.

3) About its business model

Delta plans to base its new business model on the low-cost model of Southwest Airlines.

Southwest Airlines retain a leading role in the low-cost airline industry by innovation in businessmodel. The condensed flight schedule and a good reputation of punctuation allow it to generate

revenue from business men. More importantly, its planes are all Boeing 737s, which enormously

decreases the maintenance cost. Southwest Airlines choose the landing airport in secondary

cities to further cut the operating expenses, meanwhile enables the business customers to reach


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the destination by expressway in time. All the features can be copied by Song to reach its cost

controlling goals. Since Song is facing the challenge of insufficient investment, the strategy of

Southwest Airlines simply meets its current need.

In addition, Southwest Airlines key to success is its highly -centripetal culture. The financingpolicy provides dividends to every employee, creating an efficient team with a high sense of

company loyalty. The dividend institution acts as an effective incentive which motivates the

personnel to contribute more efforts to the company especially in difficult times after the 911

incident. Nevertheless, company culture cannot be nurtured in one day. Delta might need to

develop its own culture which better matches its own history and enterprise background.

Reference: http://wenku.baidu.com/view/885cb61ea300a6c30c229f32.html

delta's new song case analysis from baidu

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