.Q1 Low rates of return on investment persist in the airline industry for several reasons, :involving several forces – Union, employees and suppliers From that point of view, Deregulation Act I 1978 by President Carter (line 16, p.2) didn't change anything. Higher salaries and benefits are always on demand, and the unions always have the power to go on strike if they don't get what they want, or .supplementing new work rules High salary structure which could represent 40% of total earnings in a 15 years career (line 13, p.4) , together with10%-15% of total costs on fuel (line 16, p.4) , 15%-20% of total costs on services, including commissions to outside constructors (line 21-22, p.4) ' and a 15% of total costs on aircraft and facility rental (line 27, p.4) , created a .high cost structure With only 60%-70% load factor over the years 1978 to 2000, air carriers had a .(relatively low profits (see Exhibit 1 - Industry competitors Trying to differentiate themselves, major companies always try to improve service offering, offer a variety of flight times, and improving inflight meals and movies, .(causing high costs (line 12-13, p.2 Therefore, they had to charge twice as high as their intrastate counterparts (line 14, .(p.2 High rivalry among the major companies caused too high costs, and in the intrastate market, major air carriers needed to compete not only with each other, but also with .other intrastate small companies of flights of comparable lengths – Customers Passengers focused on safety, reliability, convenience, service quality, entertainment .(and food when choosing airlines (line 12-13, p.3 Therefore air carriers needed to differentiate themselves and give the best in every .aspect in order to attract customers, which led to high costs The development of the airline reservation system enables an online price .comparison, and customers become more aware of low price alternatives Online web sites gave customers more efficient access to travel information, and .(increased the pressure on airlines to offer the lowest price (line 44, p.3 – Substitute products In the intrastate field, the major airlines had to compete not only among themselves and with the small intrastate companies, but also with the bus companies and with the .train companies, which are usually cheaper .Q2 Air lines such as Southwest airlines and JetBlue earn enviable returns from some :reasons Reducing CASM CASM (Cost per Available Seat Mile) is the common measure of cost in the airline industry. An airline could lower its CASM by increasing the hours per day of its aircraft were in service (P.2 L.30). in order to do so it was very important to prepare the plane to takeoff as quickly as possible. Southwest airlines was the fastest with 27 minutes between Landing and takeoff. Also those airlines offered flights without .meals and an all coach cabin flights Employees Southwest and JetBlue enjoyed a good relationship and flexible work rules from their .employees Southwest gave to the employees bonuses (profit sharing plans by Southwest, P.5) .and worked closely with the unions JetBlue employed all nonunion workers which were proud to be workers and offered high flexibility in the employment package and gave them good working conditions ((JetBlue P.6 As a result the employees had a high motivation and performed better for example (contributed to quick turn time and high aircraft utilization (P.5 Route and Airports selection Southwest and JetBlue both provided services from secondary airports and by that lowered the costs and avoided forceful battles with major airlines (P.5 L.39) Innovation Southwest was the first to set its price very low, and by that expanded her market also to the auto travelers. By that they sometime increased the traffic on a certain route by .1000%/, which a lot from them were new customers JetBlue used technology in many aspects to be more efficient. 60% of the bookings were online. The pilots used laptops which helped them in the "paperwork" so they did it quicker and without any help. (P.6 L.31). also the reservation agents used the internet to help handle peaks of reservation calls. .Q3 General management mistakes: Many LCC attempted to expand to quickly, chose the wrong routes, and confronted harsh competition from other airlines when flying from same airport. (P.5 L37) Employees Unions such as the pilots union demanded the same salaries as in the legacy carriers for the low cost workers as well. There was a problem to differentiate between the salaries of the airline legacy carrier workers and its low cost carrier workers, a problem which largely increased the costs. Complicated Logistics LC companies which used their legacy companies (like CALite and Continental) in order to reduce costs, by mixing flights and using the same foundation (airplanes, employees) (P7 L8). Because of all the logistics formation became large and complicated this mixture confused and harmed the passengers. Complicated management Some low cost subsidiaries were managed by the same management as their legacy carrier founder and therefore saddled some of the bureaucracy and constraints, which increased the costs. Industry competitions – Brand: Several legacy airlines established their own low cost subsidiaries (P7 L 5). Subsidiaries of legacy airlines had to compete Southwest which was the first low cost airline and had a high reputation , achieved by their simple pricing structure , high frequency flights and enthusiastic work force . Passengers related the low cost subsidiaries to the legacy companies (sometimes the airlines themselves made the relation) which was not always perceived as low cost. (P7 L 28) Costs: In the bottom line as can see from all listed above the Low cost subsidiaries of legacy carriers could not compete with southwest's costs and sometimes their price was 70% more expansive (P7 L26 ,Metrojet). Because the costs were higher the price was higher and therefore less attractive for the passengers. Q4. The cross functional team was established to analyze and to process the data in order to recommend the board of directors about the best strategic options, regarding the low cost competition ("LCC"). Delta faces three strategic options: 1. Continue the status quo, in which Delta operates Delta Express, its low fair subsidiary, simultaneously with its mainline flights. Although Delta Express survived September 11th, by 2002 its profitability had deteriorated considerably, as a result of the pilot union fight (Page 9, Line 3) and the new high standards of JetBlue (Page 9, Line 5), the main competitor of Delta Express. Choosing this strategy will require re-branding of Delta Express, as well as setting new goals and business objectives, in order to achieve better performances. 2. Abandon the LCC market and compete it by creating new products and services under the strong and familiar Delta brand. By doing that, Delta will implement its size advantage, without need for neither new investments nor changing the organization structure. Previous attempts to establish LC subsidiaries had failed due to organizational failures in the company's headquarters (Page 7, Line 2-7), and high labor costs as a result of the union's fight, caused by the pay differential in the subsidiaries (Page 7, Line 8-11). In light of the above, it's possible that the conflict of interests is too strong to enable an operation of a profitable LC, using the same resources of the parent company. 3. Recognize the failure of Delta Express, and Launch a new brand to compete in the LC market. In light of the conclusions learned from the previous attempt of Delta Express, This is probably the most promising strategy. Nevertheless, the shareholders will be skeptic about the profitability of this strategy, due to the high up-front investment and the failure of other low cost subsidiaries. In order to make a recommendation to Delta's Board, the following steps should be taken: 1. First, the task force has to decide where Delta wants to be in the LC market, by defining Delta's vision, turn it into missions, and then set some new goals and targets for the future, regarding the LC market. 2. SWOT analysis for each one of the strategic options, in order to understand the current situation and the potential compared with the other competitors. The following considerations should be taken: organizational structure, reputation, and geographical distribution and market trends. 3. Internal analysis of Delta, in order to make the LC brand profitable without impairing the old brand. Delta's advantage is its large resources – labor, maintenance, headquarter, but misuse of those resources will damage Delta in the future. 4. External analysis of the market – How to create added value in the LC market for Delta's costumers? Does Delta have any advantage over its competitors in prices or quality? What is the forecast regarding the factors that affects the market? 5. A business plan for launching a new brand – costs, structural change, financing options, displaying few forecasts. It's possible that best solution is to buy one of the exist LC airlines. .