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OM in the News: Comparing Operations Strategies at Delta and Southwest

November 23, 2012

If there were ever two airlines that had different OM strategies, it would be Southwest and Delta. When you discuss operations strategy (see Southwest’s activity map in Figure 2.8), note that a major part of Southwest’s approach to achieving low-cost competitive advantage is its standardized fleet of Boeing 737’s. This  allows for pilot training on one aircraft, reduced maintenance, constant updating of its fleet (only 11 years old on average), and close relations with Boeing.

The Wall Street Journal (Nov.16, 2012) provides a totally different–and industry unique–approach by Delta.  Delta, the nation’s 2nd biggest carrier, stunned the industry by becoming the first airline to buy an oil refinery, in a bid to trim its highest operating cost, aviation fuel. It runs a huge maintenance subsidiary that tends to its own planes and does third-party work, while other airlines have scaled down or bailed out of that business. But it also  has focused on an asset most airlines avoid: older planes. Today, Delta’s fleet is both old and complex. It has 10 different models among its 725-aircraft, and the fleet’s average age is over 16.6 years. Its 19 DC-9s, which came from the merger with Northwest, clock in at more than 34 years old!

Most of Delta’s rivals already have fewer aircraft types to simplify their fleets because that reduces the cost of training, maintenance and spare parts. They also are chasing every incremental reduction in fuel costs that new aircraft promise to deliver. Delta, by contrast, is picking up the 88 aging Boeing 717s that Southwest is shedding on planes it inherited in its merger last year with AirTran. Southwest was so anxious to maintain its single plane OM strategy that it took a $137 million charge to retrofit them for Delta. Yet even with the planes’ higher fuel and maintenance costs, Delta figures it is saving at least $1 billion on procuring these and other used planes, compared with buying new ones, making them roughly 10% cheaper to operate per seat than new 737s.

Discussion questions:

1. What are the plusses and minuses of Delta’s OM strategy?

2. Why does Delta prefer to purchase, rather than lease, its planes?

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