Delta Invests Heavily in Virgin Atlantic

Airline industry experts have been predicting increased consolidation in the airline industry for years now, as unpredictable volatility in oil prices, high labor costs, and an overall softened global economy have left some carriers with few options other than to be gobbled up by carriers who are on stronger financial footing.

Delta Air Lines, America’s second largest airline recently announced their intent of purchasing 49 percent of Britain’s second largest carrier, Virgin Atlantic, to help strengthen the trans-atlantic market share held by Delta. The airline is purchasing the 49 percent share of ownership that is currently being held by Singapore Airlines, with founder Sir Richard Branson retaining the remaining 51 percent of ownership. Behind this transaction are coveted and extremely valuable London Heathrow landing slots. Heathrow, despite being one of the worlds busiest airport, is actually slot-controlled which means that there is a limit as to how many flights (or “slots”) available for airlines to fly in or out with. Because supply is effectively controlled by airport administrators, fares to Heathrow are typically higher and include a premium related to the high demand for seats that many corporate business travelers don’t mind paying to get access to London’s best geographically located airport.

The partnership will provide a stronger competitor to the American Airlines – British Airways alliance that currently controls 60% of the London to United States market (with this alliance expecting to control an estimated 25% of traffic). The two airlines are also hoping to achieve anti-trust immunity that American and British Airways both currently have, which will legally allow Delta and Virgin to share their schedules, prices, and strategize together on trans-Atlantic operations which provides a real competitive advantage as the resources of the two airlines will be effectively utilized as one large carrier. Delta and Virgin have signed an agreement where they will share both the revenue and costs from their London to the United States flights.

Another advantage for Delta in this deal is that like their U.S. competition, Delta is strategically interested in dominating the New York airline market, which is difficult to do if you don’t have a strong presence in New York’s second largest travelling destination in London. This partnership will allow Delta to strengthen their New York operations by being able to offer lucrative corporate travelers better access to London’s Heathrow. Not only that, some analysts are saying that the real value in this partnership is actually the ability for customers to connect in London to other destinations throughout Europe and Asia on Virgin, giving the airline an effective and valuable hub in London that it never had before.

Delta Air Lines has transformed themselves into an industry trendsetter, with recent investments in oil refineries to produce their fuel in house, in addition to bucking the industry trend and leasing older but extremely cheap and reliable aircraft to expand their fleet. Time will tell whether these strategic decisions will pay off or burden the airline with higher costs. One thing is for sure though; their new-found access to the London Heathrow market is now the envy of their competition.

JC Penny: Adding Mannequins, Reducing Clutter

JC Penny has a long history in the American retail storybooks, however recent management changes which have led to radical shifts in marketing strategy have left a company that seems to struggle with their identity. As a reactionary measure, JC Penny decided to do away with coupons and discounts that were reducing artificially inflated prices of items, and instead charge fair and reasonable prices that in theory, consumers would have paid anyway. No longer feeling the rewarding benefits of a discount or coupon, customers have reacted negatively to JC Penny’s new strategy as they feel like they are paying “full price,” even if it is what they would’ve paid with the coupon. According to Reuters, JC Penny’s sales dropped 26.6 percent last quarter, and their stock price has tumbled 50% so far this year, showing how dramatic this shift in strategy has impacted their financial performance.

However JC Penny leadership has remained dedicated to this new approach as part of a larger effort to rebrand the tired name, and they feel that they have made some inroads in achieving their ultimate goal. JC Penny’s Chief Creative Officer Michael Fisher, wants to introduce more mannequins displaying whole outfits, while at the same time removing the clutter and amount of merchandise that traditional department stores seem to have. The goal for Mr. Fisher and executives at the company is to ultimately transform JC Penny into “jcp” which represents a new, higher end, boutique driven retail model that will attract higher end brands and younger and hipper clientele.

The results of this new strategy are mixed however. Sales per square foot of the new boutiques have increased to $269 per square foot, which is about twice as large as the old JC Penny used to produce (this compares to $391 per square foot for Gap, and $6,060 per square foot for Apple). While foot traffic has declined slightly, JC Penny executives claim that it is going to take time for customers to get used to the new store, as well as take some time to get designers on board with the new strategy. In addition, initiatives such as the increase use of mannequins and the introduction of a house hold displays similar to that of IKEA are supposed to support the overall strategy and are intended to improve the shopping experience for the customer.

The jury is still out as to whether this strategy will work, and investors seem to be very bearish on the new strategy. Critics have argued that this brand revival is too little, too late, and that JC Penny is behind in the market in terms of being able to attract consumer retail dollars. This has not deterred company management as they are dedicated to this new strategy and believe consumers will come around with time. Only time will tell if JC Penny can whether this storm and become a new boutique destination retailer for consumers, or go the way of Borders, Circuit City, or Montgomery Ward and find this dramatic strategy shift has accelerated their path to their demise.