Now This is Just Crazy!

Note: this story doesn't exactly relate to SDA course concepts, but it's so ridiculous that I just wanted to share it anyway. Enjoy!

Awhile back, I had heard about Richard Branson's crazy idea of creating an airline that would fly people to and from space - but I never expected it to become a reality...

Sure enough, he recently revealed the design of the planes that belong to Virgin Galactic, a division of Virgin Atlanta Airways. Check out the plane in the images below.

The price for a flight to space - a mere $200,000 per person. Now really, how many people does he really expect to pay $200K for a short 2.5 hours in space? I have a hard time believing the company can survive, but then again, he's proven many people wrong with some of his other crazy ideas. With how expensive it must be to develop and build the space planes, I imagine that he does have some data to support the business idea but still, I can't quite figure out what the strategy is of adding space flight to an already successful airline. With the flights beginning in 2011, I guess we'll have to wait until then to see what happens.

Looking at an Airline-Airport Negotiation

Earlier this year, Delta Air Lines' VP of Corporate Real Estate sent a letter to Ben DeCosta, the GM of Hartsfield-Jackson Atlanta International Airport addressing the master lease agreenment between the parties that was set to expire in 2010. After reviewing the letter, it seems that there are many issues that the airport and airline each care about, therefore making the negotiation a somewhat complex discussion. Some of the important issues addressed in the negotiation:

• Enplanement costs (i.e. cost paid by an airline to the airport for every individual carried on their planes)
• Process for agreeing on major capital expenditures
• Construction of the new Maynard Holbrook Jackson Jr. International Terminal (MHJIT)
• Leasing costs and terms (i.e. common-gate vs. exclusive-gate rights)

From Delta's point of view, they would like to see the operation costs remain what they have been as the Atlanta airport's enplanement fee of only $5/passenger is one of the lowest of all major airports. Moreover, they do not want to continue supporting constructino of MHJIT until they confirm their financial situation for the future at the Atlanta airport.

From the airport's point of view, they would like to increase enplanement costs to fund future growth and improvements at the airports. They also would like to continue development of the International Terminal. Finally, they do not want to lose any of Delta's business to other Delta hubs because of the large financial impact the airline has on the airport and more importantly, the city of Atlanta.

After months of negotiations, Delta and the airport were able to reach an agreement. Shortly after their agreemen was published, the FAA contacted both parties with a letter that claimed the agreement may be somewhat anti-competitive, including terms that restrict Delta's competitors to enter or expand at the Atlanta airport. The FAA, Delta, and the Atlanta airport are still working to finalize the lease agreement.

Let's hope the three parties can figure something out soon!

Delta vs. American Airlines: JAL Bidding War

As Delta Air Line's increasingly focuses on international expansion for company growth, the company has indicated that it's imperative that they form a joint venture or at least find a partner with an Asian airline.

Enter: $1 billion attempt to get Japan Airlines, headquartered in Tokyo, Japan, to 'unfriend' American Airlines. JAL is in desperate need of cash, as it recently announced its fourth quarterly loss. Two weeks later, American Airlines publicly states that it can offer JAL a package of $1.1 billion to remain partners in the oneworld alliance.

According to an article on December 3, 2009 in the Wall Street Journal:

"Despite its mounting problems, JAL remains an attractive bet for both Delta and American, keen to bolster operations in Asia and maximize access to potentially lucrative regional routes. Last month Delta and its partners in the Skyteam alliance, a rival to oneworld, said they could offer a $1.02 billion funding package to JAL."

Is this becoming an English auction, as both airlines openly bid on the JAL partnership? More importantly, will Delta follow-up with a bigger bid to what was already a suprisingly large amount?

Looking Back: Was AirTran Making a Strategic Move?

Earlier this year, a Washington, D.C. law firm filed a lawsuit against AirTran Airways and Delta Air Lines, insisting that they engaged in anti-competitive behavior when they each implemented a $15 checked baggage fee.


In October 2008, neither Delta nor AirTran had implemented baggage fees however both airlines were certainly considering the idea at the time. During a phone call with analysts, AirTran Airway's CEO Bob Fornaro mentioned that AirTran did not want to be a first mover on the baggage fee because of the intense competition with Delta in Atlanta. He stated however that if Delta were to add a $15 baggage fee, AirTran would "strongly consider it."

This is where the lawsuit comes into play. The law firm argues that Fornaro's statement was a signal to Delta and therefore the airlines colluded on the fee increase. Now, why would AirTran and Delta do such a thing? To increase revenue of course. According to an article posted in USA Today, in Q2 2009, both AirTran and Delta each more than tripled their baggage fee revenue from the previous year.

So now the question is whether or not AirTran's CEO was intentionally making a strategic move by hinting to Delta that AirTran would match a checked baggage fee. Given the huge increase in revenue, it seems that might indeed be the case. What do you think?

http://blogs.orlandosentinel.com/business_tourism_aviation/2009/05/lawsuit-alleges-airtran-and-delta-unfairly-colluded-on-baggage-fees.html
http://www.usatoday.com/travel/flights/2009-09-24-airlines-fees-revenue_N.htm

Airline Pricing: A Classic Prisoner's Dilemma

Before business school, I worked in sales for a software company. I typically traveled at least once a week, flying around the U.S. to various companies to pitch our software product. Living in Atlanta, Delta Air Lines was normally my airline of choice because I liked accumulating the SkyMiles. On many occasions, I had to visit a company in Cincinnati. To get to Cincinnati, I had two options: fly between Atlanta (ATL) and Cincinnati (CVG) or fly into Dayton (about a 45 minute drive from downtown Cincinnati). Tickets to Dayton (DAY) were often as low as 1/3 the price of those to Cincinnati! Why? What could cause such a difference? Answer: Prisoner's Dilemma.

ATL-CVG: only Delta flew the route so they could charge as high a price as passengers would pay
ATL-DAY: Delta & AirTran compete; result was lower ticket price, explained by Prisoner's Dilema

To explain what I mean, consider the game table below.


If there isn't an Airline #2, Airline #1 will select 'High Price' to maximize their revenue. Once Airline #2 enters the picture, the competitive equilibrium is for both airlines to select 'Low'. The only way the airlines can reach the higher payout is by colluding on prices, which of course is illegal.

Given this dilemma, it's no surprise that the airlines struggle to remain profitable!

Decision to Unionize: How does Voting Method Impact the Outcome?

This morning I came across an article discussing Delta Air Line's recent merger with Northwest Airlines and the struggles the airline is facing in getting past the union vote. Historically, Delta's employees have been relatively non-union where as Northwest's employees were mostly unionized.

http://www.ajc.com/business/union-issues-still-vex-199500.html

Recently, a change was announced in the voting method for the union vote. Instead of requiring a majority of 'yes' votes from those eligible to vote, the decision on whether or not to unionize will only be made on those that actually vote. The article states:

"A switch in the election rules to a “yes-no” vote as proposed would mean that instead of needing approval from a majority of those eligible to vote in order to unionize, unions would only need a majority of those who actually vote — which generally is a far smaller number."

This brings up the concept that the voting method selected greatly impacts an individual's or group's strategy for strategic moves. In this example, Delta does not want to have unionized workers. In the past, the company has encouraged it's employees to tear up the union voting forms as a protest against the union. However, with the change in the voting method, Delta now needs all of its eligible employees to vote against the union. As this requires a big change in behavior, it's unclear if the airline will be able to motivate its flight attendants and ground workers to vote.

So the big question is: Will what was supposed to be an 'easy-win' for Delta become a battle between management and employees simply because of a change in the voting method?