Supply Chain Matters has commented on several occasions regarding Delta Airlines and its strategies to understand and more efficiently manage the major cost drivers of the airline supply chain. That included the bold move to actually acquire its own oil refinery to control the largest determinant of Delta’s operating costs.
We call reader attention to a detailed profile article, Delta Flies New Route to Profits: Older Jets, published in today’s Wall Street Journal (paid subscription required or free metered view).
After reading this article, this author has a strong sense that Delta management understands how leveraging integrated capabilities in deep operations and supply chain expertise can influence business outcomes. It is also a great study in bucking accepted industry practices and thinking outside the norm.
Case in point, the WSJ points out that while emerging discount carriers pursue a strategy of standardized aircraft and are in a rush to acquire the latest in more fuel efficient and technology sophisticated aircraft, the Delta aircraft fleet is both old and complex, with an average fleet age at over 16 years. That compares to Jet Blue’s average fleet age of 6 years, or Southwest Airlines average of 11 years. According to the WSJ, among Delta’s total of 725 aircraft, there are over 10 different models, including 19 DC-9’s with an average age of 34.4 years. Delta just acquired and is refurbishing 49 used McDonnell Douglas MD-90 aircraft to add to its feet, along with 88 Boeing 717’s formerly flown by Air-Tran Airways, now acquired by Southwest, whose fleet is standardized on the Boeing 737 aircraft. Thus far this year, the airline has run 86.3 percent of its domestic flights on-time, fourth among the top 15 U.S. air carriers, and according to the WSJ, the largest fleet profile airline to be most punctual. Delta is eschewing the much higher capital costs of new aircraft acquisition with a belief that older aircraft, while older and more expensive to operate, can be more reliable if supported by a robust maintenance and inspection program. While the majority of the industry favors a fleet lease strategy, Delta has a belief that owned aircraft provides greater flexibilities in supporting flight needs in good times, or not so good times. Leased aircraft need to be operated at full capacity, regardless of customer demand, in order to compensate for total leasing costs. While some of Delta’s competitors pursue a strategy of outsourcing smaller flight segments to regional carriers operating smaller sized aircraft, Delta’s current aircraft acquisition strategy allows the airline the flexibility to operate its own regional flights, with its existing pilot workforce.
The airline’s insourced 2.7 million square foot Delta TechOps operation plays an important role, providing maintenance and spare parts services not only for Delta, but other airlines, and even the U.S. military. Last year, TechOps had over $600 million in revenues and is a profitable operation. The WSJ points out that mechanics average 19 years of experience and understand that DC-9’s and MD-90’s are “workhorses”, as well as fairly reliable.
Since emerging from bankruptcy in 2005, Delta has been re-making itself, bucking industry norms and practices. The company is in its third year of profitability and cutting long-term debt, which stands apart in the current airline industry.
The airline consumes nearly $12 billion annually in aircraft fuel. The acquisition of the Trainor Pennsylvania refinery was motivated by the management sponsored study of the aircraft fuel supply chain, which uncovered that refiners were benefiting from increased margins on fuel sales. Delta’s goals are save at least $300 million annually as well as insure a reliable fuel supply for 80 percent of its domestic flight needs. The refinery, which re-stated in September, has been reconfigured to produce maximum jet fuel output. The WSJ also reports that Delta is now exploring purchasing more inbound crude from more U.S. domestic sources such as the Bakken formation in the Dakotas, vs. importing crude from Europe and the Middle East.
If you can, read this article, since it provides an argument that understanding your supply chain, bucking standard industry thinking with bold thinking, and aligning the supply chain to support required business outcomes can yield measurable benefits that can set a company apart from its competitors. That applies not only to manufacturing but to service focused firms as well.
As I pen this posting, the weekend is approaching is there is lots of breaking news concerning industry supply chains.
Probably the biggest bombshell was that The Wall Street Journal reported today (paid subscription or free metered view) that both FedEx and UPS have been targeted by the U.S. Drug Enforcement Agency (DEA) in that agency’s continued crackdown on illegal prescription drug sales. The WSJ report indicates that according to company disclosures, each has have been served with subpoenas starting as long as four years ago, and the latest probe is reaching a head. The WSJ quotes Fed-Ex’s in-house legal counsel as indicating that that company could soon face criminal charges related to this latest probe. A spokesperson for FedEx is further quoted as indicating that the ongoing investigation has become “absurd and deeply disturbing” and that the government wanted to “deputize” FedEx personnel to report on suspected illegal shipments. UPS on the other hand, seems to be in talks about settling the case with the U.S. Justice Department.
Our Supply Chain Matters readers might recall that in our 2012 Predictions issued almost a year ago, we predicted stepped-up efforts in 2012 to mitigate supply chain unscrupulous activities. Many industries would be impacted not the least of which was the pharmaceutical industry which was already reeling from a number of significant supply chain related supply and enforcement issues. Throughout 2012, U.S. regulatory and legal authorities have been, as the WSJ rightfully describes, moving up the prescription drug supply chain in its current enforcement crack-down efforts concerning the flow and distribution of illicit prescription drugs. Administrative cases were pursued with retail drug chain CVS and Walgreens, each targeted for suspected large volumes of potential illegal prescription drug sales in Florida. The DEA took the unusual step of targeting the supplier to these pharmacies, Cardinal Health Inc., the second largest U.S. wholesale pharmaceutical distributor, by seeking to block distribution of controlled substances from Cardinal’s distribution facility located in Lakeland Florida. The DEA alleged that Cardinal has failed to follow agreed-to procedures to monitor misuse of controlled substances such as oxycodone. Cardinal has since agreed to a settlement.
More developments concerning legal proceedings involving the two largest global shipment carriers will most likely come to the attention of business media in the days to come. The timing is not exactly deal, given the height of the holiday buying and shipping period.
In any case, one thing is certain, the U.S. Justice Department is serious about cracking down on either the knowledge and/or aiding of the sale and distribution of illegal prescription drugs, and the enforcement path involves multiple members of the overall supply chain.
For the past three years, this author has contributed guest postings on the Infosys Supply Chain Management Blog. An annual tradition has been guest postings that both set the stage for supply chain and B2B challenges in the upcoming holiday fulfillment surge, as well as well as post commentary on how supply chains actually fared.
As was the case last year, the 2012 holiday buying season will be very much about the continued leveraging power of consumers in exercising multi-channel buying preferences and technology-enabled online tools. An equally important test as we swing into the 2012 surge will be how online, brick and mortar retailers, along with their respective direct ship suppliers, exercise capabilities in multi-location stocking and fulfillment capability. From this author’s lens, expect the 2012 holiday buying surge to yet another stress test for managing fulfillment complexity among online, retail and B2C goods providers.
Supply Chain Matters readers can read the remainder of my pre-holiday commentary by clicking on the link: Headline for the 2012 Holiday Buying Season- Overcoming the Challenges of Fulfillment Complexity.
Readers are also encouraged to share their own observations and predictions as supply chains approach another challenging stress period.