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More Evidence Concerning Delta Airlines Understanding That Supply Chain Does Matter

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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.

Bob Ferrari

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  1. As a former consultant who spent a lot of time flying around the country, I think Delta Airlines understand how to reshape their supply chain and create competitive advantages of their own. When I was a consultant many of clients ask me a same question “What is the industry best practice?” My answer is always same “Best practice is just a benchmark, you should think about your business first. Whatever the processes or the strategies work the best under your given internal and external circumstances, that should be your best practice”. Simply copying your competitor doesn’t gives you a competitive advantage in the market. As Jim Collins said, “Good is the enemy of great”. It is time to innovate your business by understanding your business first.