Avaition

Delta's Operation Clockwork

Transforming the fundamentals of an airline

Lucio Petroccione Jr. - Principal

Transportation & Logistics Practice

Decision Strategies, Inc.

Lpetroccione@decisionstrategies.com

404.918.7937

May 07, 2007

About the author

Lucio Petroccione Jr. is a seasoned airline executive with over twenty years of industry experience. His career includes executive positions with Pan Am World Airways and Delta Air Lines. Lucio has had extensive experience in the critical areas of Strategic Planning, Business Development, Marketing, Network & Schedule Development, Airport Customer Service, Operations Management and Technology Development.

In 2005, Lucio was the architect and led the corporate implementation of the largest major redesign of Delta's Airline Network in its history - Operation Clockwork. It was also the largest Network and Operational redesign in aviation history.

Lucio is currently the Principal for Decision Strategies' Transportation and Logistics group responsible for leading a wide range of major consulting assignments in a variety of industries.

This paper is printed with the approval of Delta Air Lines.

Executive Summary

Delta implemented the largest airline network restructuring in the history of aviation called Operation Clockwork. The majority of the airline's revenue generating capacity was moved around in one night. Gerald Grinstein, Delta's CEO, shared his perspective at the annual shareholders meeting in Atlanta on May 19, 2005. "If you have to put your finger on one thing that could fundamentally change the direction of this airline, it is Operation Clockwork." This transformation set the stage for a new business model to achieve the highest possible efficiency and lowest possible cost for the airline. It started a major transformation from a legacy carrier with its high cost structure to a business model that can compete and win in today's battlefield.

Background

A decade-long commoditization trend has firmly established the operating cost structure as the real battlefield for competitive advantage. In the end, everyone will be striving for the same objective, that is, to create the lowest cost business model that will achieve the highest efficiency while growing revenues. This is significant because it equalizes all the carriers, LCCs and Legacy carriers from a cost perspective. It removes the most powerful competitive advantage (the ability to set prices) away from any single carrier or group of carriers. Achieving the lowest cost model is also crucial to long term success given the permanent introduction of higher fuel prices and the uncertainty and risk it brings into the airlines cost equation.

To address this in a strategic manner, rather than arbitrarily slashing expense line items by negotiating large labor concessions or re-negotiating capital lease payments, companies need to re-design fundamental changes into their operation for a sustainable business model. Such transformation can create new growth opportunities by enhancing throughput, enhancing the productivity of assets and relieving real capacity constraints. In many cases, their entire business model should be transformed to achieve the target efficiency and cost structure required to win in today's competitive environment.

Historically, companies have chased short-term cost cutting solutions that ultimately proved to be unsustainable and inflexible in the marketplace. However, those that aim to drive sustainable market presence, competitive advantage and strong shareholder value approach the problem from a long-term strategic perspective. They transform their business to continuously adjust to ever changing economic and market conditions. Confidence in design and perseverance in its execution are key factors. Transformation must be viewed as a journey, not an end state. Only over a period of years - not months - will it become evident how well the new business model will perform.

Airline Business Model and Constraints

This paper is the story of one airline's transformation efforts. The commercial aviation industry is unique as a production "factory", with the perishable nature of its primary product flowing out of each airport as its factories. The product, available seats to a number of locations at a particular time of day, is the perishable commodity. There is no way to recapture that product and value once the plane departs if a seat is empty. The seat cannot go on a shelf waiting to be purchased the next day.

The airport-factory is dependent on receiving the inventory of seats, i.e. the arriving aircraft, which produces available seats to leave the airport. The steady, reliable delivery of inventory is highly dependent upon an independent vendor and upon meteorological factors. Both variables may appear to be beyond the airline's control. For instance, the Federal Aviation Air Traffic Control System (ATC) is responsible for the delivery channels and capacity of aircraft to the airport factories on schedule. Airlines can sometimes influence ATC outcomes, but they cannot directly control them. Weather, a constant and unpredictable component, further contributes to the complexity of delivering inventory where and when needed. The airline's themselves have limited control on the impact and timely delivery of inventory in conformance to their production schedule (the flight schedule). An area where airlines have some influence on this capacity is through their network design and schedule. All of these elements are directly linked, subjecting the process to a high degree of variation, which in industrial terms creates a defect rate impacting the timely availability of capacity compared to the planned schedule.

Once the inventory, the airplane, is on the ground, the factory strives for optimum throughput