Question

1. What would be the effect of a sharp decline on passengers for a firm with a microeconomic structure such as the one Delta had in place during 2001? Is Delta’s operating leverage high or low?

2. Analyze the proposal to launch Song as a response to the situation the firm is facing. Do you agree with this solution? Why? What would be some possible alternatives or alternative?

Answer 1

1. A major part of revenues in any industry depends on the customer turnaround. The case here is the airline industry. First, the airline industry involves putting in high fixed costs for the port, infrastructure and aviation fuel. If an industry incurs high fixed costs, then the time taken to recover is also more. A sharp decline of the passengers footfall can affect the revenues in a drastic way. With higher labour costs and a large number of staffs, revenues always were wafer-thin. Operating leverage is the measurement of the operating cash flows of the firm. Higher operating leverage implies that the company has a higher fixed costs. Thus, the operating leverage of Delta is high.

2. Delta Airlines was proposing to launch the low-cost air carrier after 2001 9/11 attack. The timing may be wrong, but it was important for the company to set the tone right. Any new entrant in the market needs to emphasize on the safety and the cost parameter more. Song could be launched as an airline carrier which offers safety at inexpensive rate. Coming to the cost structure, Delta Airlines need to reduce the unwanted fixed components and cut down on its labour to some extent. Furloughing employees at this juncture is always a risky proposition.