case study 831

The central components of your analysis should include issue identification, issue analysis, solutions, and potential limitations to your solutions. The case analyses serve to:

a) Provide an opportunity to apply the class concepts in the solution of practical problems.

b) Provide you with a common task through which you can learn to be more effective thinkers and problem-solves in your organizations.

The written case analysis will be evaluated based on your effectiveness in identifying and analyzing issues in the case, the adequacy of and support for the recommendations made, and the identification of potential downsides to your solutions. In addition, written case analyses will be judged based on the clarity and technical quality of the writing and report presentation. The case analysis should be approximately 500 words (double-spaced).

Strategy and HRM at Delta Airlines

In 1994 top executives at Delta Air Lines faced a crucial strategic decision. Delta, which had established an unrivaled reputation within the industry for having highly committed employees who delivered the highest quality customer service, had lost more than $10 per share for two straight years. A large portion of its financial trouble was due to the $491 million acquisition of Pan Am in 1991, which was followed by the Gulf War (driving up fuel costs) and the early 1990s recession (causing people to fly less). Its cost per available seat mile (the cost to fly one passenger one mile) was 9.26 cents, among the highest in the industry. In addition, it was threatened by new discount competitors with significantly lower costs—in particular, Valu-jet, which flew out of Delta’s Atlanta hub. How could Delta survive and thrive in such an environment? Determining the strategy for doing so was the top executives’ challenge.

Chairman and chief executive officer Ron Allen embarked upon the “Leadership 7.5” strategy, whose goal was to reduce the cost per available seat mile to 7.5 cents, comparable with Southwest Airlines. Implementing this strategy required a significant downsizing over the following three years, trimming 11,458 people from its 69,555-employee workforce (the latter number representing an 8% reduction from two years earlier). Many experienced customer service representatives were laid off and replaced with lower paid, inexperienced, part-time workers. Cleaning service of planes as well as baggage handling were outsourced, resulting in layoffs of Page 96long-term Delta employees. The numbers of maintenance workers and flight attendants were reduced substantially.

The results of the strategy were mixed as financial performance improved but operational performance plummeted. Since it began its cost cutting, its stock price more than doubled in just over two years and its debt was upgraded. On the other hand, customer complaints about dirty airplanes rose from 219 in 1993 to 358 in 1994 and 634 in 1995. On-time performance was so bad that passengers joked that Delta stands for “Doesn’t Ever Leave The Airport.” Delta slipped from fourth to seventh among the top 10 carriers in baggage handling. Employee morale hit an all-time low, and unions were beginning to make headway toward organizing some of Delta’s employee groups. In 1996 CEO Allen was quoted as saying, “This has tested our people. There have been some morale problems. But so be it. You go back to the question of survival, and it makes the decision very easy.”

Shortly after, employees began donning cynical “so be it” buttons. Delta’s board saw union organizers stirring blue-collar discontent, employee morale destroyed, the customer service reputation in near shambles, and senior managers exiting the company in droves. Less than one year later, Allen was fired despite Delta’s financial turnaround. His firing was “not because the company was going broke, but because its spirit was broken.”

Delta’s Leadership 7.5 strategy destroyed the firm’s core competence of a highly experienced, highly skilled, and highly committed workforce that delivered the highest quality customer service in the industry. HRM might have affected the strategy by pointing out the negative impact that this strategy would have on the firm. Given the strategy and competitive environment, Delta might have sought to implement the cost cutting differently to reduce the cost structure but preserve its source of differentiation.

The present state of Delta provides further support to these conclusions. With the family atmosphere dissolved and the bond between management and rank-and-file employees broken, employees have begun to seek other ways to gain voice and security. By fall 2001 Delta had two union organizing drives under way with both the flight attendants and the mechanics. In addition, labor costs have been driven up as a result of the union activity. The pilots signed a lucrative five-year contract that will place them at the highest pay in the industry. In an effort to head off the organizing drive, the mechanics were recently given raises to similarly put them at the industry top. Now the flight attendants are seeking industry-leading pay regardless of, but certainly encouraged by, the union drive.76

The Delta Air Lines story provides a perfect example of the perils that can await firms that fail to adequately address human resource issues in the formulation and implementation of strategy.

SOURCES: M. Brannigan and E. De Lisser, “Cost Cutting at Delta Raises the Stock Price but Lowers the Service,” The Wall Street Journal, June 20, 1996, pp. A1, A8; M. Brannigan and J. White, “So Be It: Why Delta Air Lines Decided It Was Time for CEO to Take Off,” The Wall Street Journal, May 30, 1997, p. A1.