Why Good Companies Go "Bad" - By Trying to Be Somebody They're Not

Why Good Companies Go “Bad” – By Trying to Be Somebody They’re Not

A Comparison of Delta and Southwest Airlines

The Opportunity

We advise our children to find out what they like to do and what they’re good at, and we foster their growth in that direction. Taking a child’s innate gifts, likes and dislikes into account is more likely to foster a happy and successful career match.

Looking at two airlines in this admittedly simplified light, we can surmise that Southwest Airlines is thriving in an ideal “career,” while Delta Airlines has, at times, been pushed in directions that are less suitable for its core competencies.

We don’t brand Delta as a “bad” company. We fly Delta frequently out of Salt Lake City, Utah, we know lots of great people that work for Delta. We hope for the best future for the company. But we would argue that some of their tactics have led them to be less than successful in today’s marketplace. We feel this is because Delta’s repeated attempts to be somebody they’re not has detracted from their core competencies.

What follows is a bit of Delta’s history and a description of its foray into the low-cost market, as compared to Southwest Airlines, a competitor that was built from the ground up as a low-cost carrier. As in any real-world examples, any comparison is bound to be simplistic, but we’d like to explore some of the key differences.

The Solution

Measures of Success

Both airlines have historic roots and have had astonishing successes, but Delta is currently in bankruptcy while Southwest enjoys a reasonably stable stock price and at this writing, is listed as a “strong buy” rating by at least three respected analysts. While Delta has repeatedly laid off employees over the past few years, has several pending court actions brought by employees and received quite a bit of negative publicity for firing a flight attendant who was a well-known blogger, Southwest has gained positive publicity for themselves, their opponent and a local charity by turning a threatened legal battle into an arm-wrestling match. Southwest employee morale continues to be high, as demonstrated by regular contributions to the positive blog “Nuts about Southwest” and have participated in a community theater stage musical entitled “Show Your Spirit” (played only in towns served by Southwest.)

We’ll start with Delta, and then discuss Southwest.

Delta’s Strengths

Delta Airlines started as Huff Daland Dusters in Macon, Georgia. Renamed “Delta” after the Mississippi river delta, it has grown and evolved to international status and is now the second largest airline in the world. They invented the hub and spoke model, used by many airlines today. They had legendary employee loyalty at one time – in 1982, when Delta was suffering from financial troubles, its employees took a voluntary pay cut. The company used the proceeds to purchase the company’s first 767 (it’s largest airplane at that time) which it dubbed the “Spirit of Delta.” (This is a dramatic contrast to its later layoffs and lawsuits involving employee groups.) The airline was profitable again for several years. They expanded routes to Latin America, the Caribbean, Asia, and Europe. Delta carried the Olympic Torch from Athens, Greece to the United States for the traditional relay to the Summer Games in Atlanta, Georgia in 1996. It also pioneered the codesharing alliance between airlines that vastly expanded cooperation between airlines and the routes available to its passengers.

They developed state-of-the art internal software and introduced ticket kiosks. They are one of the founding partners of the online travel agency Orbitz, which was later purchased by Cendant Corp.

Delta is also a pioneer in customer comforts. They offer upgraded snacks, in-flight entertainment, iPod plug-ins, and recently announced the revolutionary airline seats that actually lie flat.

Delta’s core competencies include international travel, technology, long-distance flights, a variety of popular destinations, cooperation with other airlines, and luxurious amenities for passengers.

Delta’s Weaknesses

Delta’s core competencies have been overshadowed by two major weaknesses: First, Delta has had a high propensity to have “people issues.” Second, its attempts to develop a low-cost subsidiary has distracted from its core competencies. These two factors make Delta’s future uncertain in spite of its storied history and stellar accomplishments.

“People Issues”

Delta’s “people issues” are best exemplified by a specific person, Leo Mullin, named CEO in 1997. A highly-publicized executive compensation scandal marred the trust between management and the rank and file. Delta filed for bankruptcy less than 18 months after he abruptly retired.

Certain actions by Delta have not endeared the company to its employees. Massive layoffs in 2004 continued through 2005 and 2006 and have led to messy court actions. Employees and pilots have picketed airports. Recently the bankruptcy court terminated their pilot defined benefit plan. Delta also had a highly-publicized conflict with an employee develop into a court action when they fired flight attendant Ellen Simonetti (aka Queen of the Sky) who had become a well-known blogger.

Distractions from Core Competencies

Delta has spent a lot of valuable time and resources in answer to low-cost fare competitors in the U.S. such as JetBlue and Southwest. Like a large 18-wheel truck trying to follow a motorcycle around town, this has been an awkward waste of energy.

Delta Express was started in 1996. Delta Express was not successful for two reasons. First, the fares were not as low as JetBlue or Southwest, and secondly, there was a perception problem since this was a deviation from Delta’s image.

Delta President Fred Reid “We really found out that customers want to see something distinctive. We still found that people had this edge of skepticism about it that (Delta Express) was just part of Delta. . . . This is truly different.”
Song followed in 2003. The business model was that it was cheaper to use larger planes if they were full. 757s are cheaper to operate than small planes if all the seats are filled.

They upgraded the seats to leather and encouraged the staff to be “friendlier.” Passengers had a better experience on Song (the low-cost carrier) than on Delta’s main operation.
Delta Shuttle was started in 1991 with the purchase of used Pan Am aircraft and continues today. The Delta Shuttles fly only between limited east-coast city pairs.
Delta Connections is a current subsidiary. Flights are flown by SkyWest, based out of St. George, Utah using Delta Connections branded Canada Regional Jets. Their website shows only airplanes in Delta Connections livery. These planes don’t allow full-sized carry-on luggage; anything bigger than a laptop computer needs to be checked through the regular baggage claim or checked planeside.

None of these attempts at a low-fare subsidiary have been entirely successful, and have detracted from rather than contributed to Delta’s overall success as an airline. Presenting these multiple faces is confusing to the flying public.

These repeated attempts to enter the low-fare market detract a significant amount of focus and resources from what Delta does best. In “This Bird Won’t Fly,” The Travel Insider blog (in 2002 and updated in May 2006) calls this a “Futile Act of Self-Cannibalism,” indicating that the low-cost options have actually been competing against the main Delta service; and may have made its shortcomings more apparent.

Bankruptcy

Delta made a voluntary filing with the U.S. Bankruptcy Court for Chapter 11 bankruptcy. Chapter 11 allows the airline to continue to conduct its normal operations while it undergoes corporate restructuring. Delta’s transformation plan is focused on “developing and implementing a plan to make Delta a simpler, more efficient and cost-effective airline.”

We hope that as they do so, they focus on the markets that they are best in, and not complicate their plans with additional subsidiary companies and multiple business models.

Now, let’s look at an airline with a more singular focus.

Southwest Defined the Low-Cost Market

In the United States low-cost airline market, Southwest Airlines has been a shining example. Economists have come up with a new term called the “Southwest Effect” - when an efficient, low fare carrier (or any aggressive and innovative company) enters a market; the market itself changes and usually grows dramatically.

If imitators are a measure of success, Southwest has its share of those as well. Europe’s EasyJet, Canada’s WestJet, New Zealand’s Freedom Air, Malaysia’s Air Asia and Thailand’s Nok Air are all based on the Southwest system.

Playing on Strengths

Comparing Southwest’s strengths with the weaknesses of Delta, we’ll look at their relationships with people and their single-minded focus on their key market.

Relationships with People

In contrast with Delta’s executive pay scandals, the officers of Southwest have remained consistent, promoted from within, and have maintained a reputation for being honest, plain-dealing, down-home folks.

Current President of Southwest is former secretary Colleen Barrett, who has been with the company since day one. She makes no bones about her humble roots and presides over the folksy blog “Nuts About Southwest.”

One example of building positive relationships is Southwest CEO Herb Kelleher’s reaction when he was faced with a lawsuit. Kurt Herwald of Stevens Aviation had copyrighted the motto “Plane Smart” and threatened legal action since he felt that Southwest’s “Just Plane Smart” was too similar. Kelleher, wisely determining that publicity was the issue at hand, challenged Herwald to an arm wrestling match.

In a three-round match, the loser of each found was to pay $5,000 to a charity of their choice, and the winner gained use of the trademarked phrase. A promotional video of both CEOs training for the bout showed Kelleher being helped up during a sit-up where a cigarette and a glass of scotch was waiting. Kelleher lost the match, Herwald gained the use of “Plane Smart, and in a gesture of good sportsmanship, granted the use of “Just Plane Smart” to Southwest.

Both companies got what they wanted – use of their chosen motto, which was now more firmly established in the minds of the public. $15,000 went to charity; and both companies garnered goodwill publicity for their amicable handling of the situation.

This makes a striking contrast to the litigious handling of disputes (and resulting negative publicity) that continues to plague Delta.

In the 1999 Ravenwerks article “Hiring People –Getting the Best,” we included this passage about Southwest’s hiring practices:

Southwest Airlines determined that friendly, personable people are their best prospects to contribute to their success as a business. In order to evaluate whether candidates have those skills, they interview people in groups and observe their interactions, not only with the interviewer(s), but with one another. They ask each candidate to introduce him or herself to the group and relate a little bit about themselves. During this time, they are observing not only the candidate and how he presents himself, but the other candidates. Are they listening to the presentation, nodding, smiling, laughing at jokes and perhaps asking questions? Or are they busy preparing their own presentations?

Focus on What They Do Best - Celebrating Smallness

Started in 1971 as a regional airline serving three cities in Texas from Love Field in Dallas; Southwest thrives on its differences from the major carriers and has never tried to emulate them. Rather than competing with other airlines, Southwest’s ambition was to compete with the cost of driving from one place to another.

While other airlines were unveiling bigger airplanes and varying their fleets, Southwest flies only Boeing 737s. While other airlines struggle for gate space at large, famous airports, Southwest has withdrawn from large airports (San Francisco, George Bush International, and Stapleton) in favor of smaller, more efficient airports in nearby communities. Southwest has maintained its ticker symbol “LUV” as a tribute to its founding airport, Love Field, when its competitors were based out of the larger Fort Worth airports. It has also become a symbol for its corporate culture.

The smaller communities appreciate their relationships with Southwest.

While other airlines are upgrading passenger amenities with leather seats, on-board entertainment, and upgraded drinks and snacks, Southwest offers a very limited selection of inexpensive refreshments, and the only onboard entertainment is the notoriously colorful boarding announcements from flight crews who are encouraged to have fun and enjoy their jobs.

Southwest reflects this fun attitude, and relationship with the destinations they fly to, using “themed” aircraft. These aircraft are painted nose-to-tail to resemble a killer whale or a flag of a state, or commemorate an event or charity. Current “themed” aircraft include:
• Orca One, Two and Three (Killer-whale aircraft that fly to SeaWorld destinations)
• State themed aircraft (Arizona One, for example, has the state flag of Arizona painted on it nose-to-tail.)
• Silver One and Spirit One, (Commemorating Southwest’s 25th and 30th anniversary)
• Triple Crown One (Commemorating winning three prestigious airline industry awards)
• Spirit of Hope (Overhead bins decorated with children’s artwork from a Ronald McDonald House)
• Slam Dunk One (Commemorating Southwest’s partnership with the National Basketball League.)

Mitigating Adversity

While every airline has been negatively affected by the terrorist attacks of September 11, 2001 and subsequent impacts on passenger numbers and security costs, as well as rising fuel prices, Southwest has handled these intelligently.

Since Southwest is not an international carrier and its airplanes are smaller, it may be seen as less of a target than the larger, international airline flights. Also, its focus on people and the friendliness of staff may contribute to passenger’s feeling of safety.

Southwest’s smaller planes use less fuel, and the company has a long-standing program of purchasing fuel options to mitigate spikes in fuel costs. Their current options program allows them to pay lower than the market price for fuel through 2009.

These efforts to mitigate adversity have been successful – Southwest has maintained its profitability and share price through circumstances that have killed larger and older airlines.

Weaknesses

Southwest does have its share of weaknesses, including the practice of unassigned seats. Passengers are assigned to a “boarding group” in order of check in and left to find their own seat on the airplane. This leads to wasted time as passengers who have special seat needs or strong preferences need to get to the airport early to check in, and does cause some grumbling and jostling among passengers. Southwest is actually considering revising this in 2008. Southwest tickets are available only through its own website, ticket counters, or calling the airline, and not available through Travelocity, Orbitz, or travel agents. This can be inconvenient to web-savvy travelers.

Conclusion

While both companies have their strengths and weaknesses, and all airlines have been subject to some brutal environmental factors, including worldwide terrorism events, airport security and turmoil, and radical fuel price fluctuations, Southwest has survived and even thrived. Delta has suffered near extinction. Although there are many factors involved, two key differences between them are their focus (or lack of focus) on their core competencies and their attitude toward and relationships with people.