Question one: Impact of reducing passenger numbers to airlines such as Delta.
Traditionally, the airlines' industry has high levels of fixed cost. The higher fixed costs translate to thin margins. Lowering passenger numbers result to lower revenues and reduced net incomes. Delta's microeconomic structure has no margin of safety due to the highly leveraged nature of its operations. Operating leverage analyses the proportion of fixed costs as a percentage of total costs. Essentially, it requires a company to determine how much more it has to pay to provide a service. For Delta, the impact of decreasing passenger numbers not only threaten profitability but the survival of the company as a viable business (Lowry, 2020) . The situation is compounded by the inability of the company to manage the high operating costs, which is inevitable for a business in such a positioned. The options available to reduce the high operating leverage include scheduling plane overhaul during the low seasons and making staff contracts flexible to adjust to such variations. In extreme cases, contract renegotiation and bankruptcy are the way out of high operating leverage situation.
Question 2: Response to Launch of Song .
I agree with Deltas' decision to launch Song as a response to counter JetBlue's dominance in the low-ticket segment of the market. Song provided Deltas with much needed extra revenues critical to its survival. To ensure sustained profitability in Song, Delta has to adopt a low operating structure through streamlining of the subsidiary's operations. The approach would enable it to rise to the level of competition provided by the profitable competitor in JetBlue. Ensuring reduced fixed cost is the most significant aspect to long time survival of Song.
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In terms of possible alternatives, Deltas should explore leasing. Leasing of aircraft, equipment and other key operating cost components that contribute to higher fixed costs would ensure a reduction in fixed costs. Reduced fixed costs would greatly improve the cash flows for the company. To reduce staff costs, the company should explore flexible contracts that allow for of season breaks while at the same time scheduling aircraft maintenance at such times ("Five Ways Airlines Can Reduce Operating Costs • Rusada | Aviation MRO Software", 2020) . Besides, Delta should adopt smart hedging techniques aimed at ta reducing its fuel costs.
References
Five Ways Airlines Can Reduce Operating Costs • Rusada | Aviation MRO Software . Rusada | Aviation MRO Software. (2020). Retrieved 13 June 2020, from https://www.rusada.com/five-ways-airlines-can-reduce-operating-costs/
Lowry, W. (2020). Why airline investors should focus on operating leverage .
Finance.yahoo.com. Retrieved 13 June 2020, from https://finance.yahoo.com/news/why-airline-investors-focus-operating-130003999.html .
