Delta pools phonebuy--with a twist
To lower telecom costs at Delta, buyers Terri Glaze, David Paule, and Amy Minnick manage Delatel, a wholly owned subsidiary of the airline.
By Staff -- Purchasing, 7/16/1998 6:00:00 AM
Presented with the challenge of reducing costs of purchasing telecommunications services at Delta Air Lines in Atlanta, buyers pooled the company's requirements to negotiate volume discounts from suppliers. Not satisfied with results of this effort, the buyers decided to take another approach to lowering the airline's annual purchasing tab for telecom services.
In April, 1995, they formed a company, a wholly owned subsidiary of Delta Air Lines, to purchase and resell telecom services to its parent company, the airline's connection partners, employees, and business travelers. Since its founding, DeltaTel not only has reduced the airline's costs of purchasing telecom services, it's also turned a profit for its parent company.
Turning a profit, however, is not the objective of DeltaTel, says David M. Paule, vice president of operations. "Cost savings either directly or indirectly for telecom services is first and foremost. We are never going to be a major player in the telecommunications industry unless we want to invest billions of dollars and run fiber around the world." Another of the buyers' objectives is to improve service to Delta Air Lines customers.
Reducing costs of purchasing the airline's passenger phone and cockpit communications system by 25% is one result of the buyers having formed DeltaTel. They've helped Delta save 45% on calling-card rates as well. "With the number of people we have on the road at any given time, this is a fairly significant figure," says Paule.
DeltaTel is able to generate these cost savings because of its status as a telecom services carrier. The telecom industry is tightly regulated and services carriers may charge customers only those rates which have been previously published. They may, however, sell services to other carriers such as DeltaTel at rates that are negotiable.
Telecom services DeltaTel purchases for its parent company include long-distance calling cards, courtesy calling debit ("distressed passenger") cards, satellite communications, pagers, and cellular phone rentals. It also plans to introduce a voice-mail system as well as an Internet service package.
Registered as a telecom services carrier in 24 states, DeltaTel is a "virtual company." It does not own any facilities or equipment. Because of their skill at negotiating agreements and managing suppliers, DeltaTel is run by buyers whose primary job responsibilities are for purchasing at Delta Air Lines.
While VP of operations for DeltaTel, Paule also has responsibilities as general manager, corporate travel services, at Delta Air Lines. Terri Glaze, manager of corporate contract services, Delta Air Lines, is vice president & controller, DeltaTel. Amy Minnick is marketing manager, DeltaTel. Each spends roughly 70% of his or her time working for Delta Air Lines, with the remainder devoted to running DeltaTel, which means not only negotiating agreements and managing suppliers, but keeping up with all of the regulatory changes that occur in this industry as well. When needed, the subsidiary also enlists services of Delta employees working in other areas such as the accounting or legal departments.
"Delta gave us tremendous authority over the creation and running of this company," says Paule. "Most people don't realize how important telecom services are to an airline. Look at what an airline does in terms of moving people, cargo, and equipment. Every action the company takes is directly dependent on its communications network."
DeltaTel also has its own board of directors made up of vice presidents or senior officers of Delta divisions that benefit from efforts of the subsidiary, such as finance and marketing. "We did this to ensure that senior management was on board with us," says Paule. "By having on the board people who directly benefit from the company's existence, we ensure that we are responsive to these people."
Impossible task
As Paule recalls, "DeltaTel grew out of an impossible mission. Back in the early 90s when all of the airlines were losing money, my predecessor was given the task of cutting telecom costs back to what was virtually impossible."
His idea to create a phone company as a wholly owned subsidiary allowed Delta to pool its volume and take advantage of discounts that are not available to the airline, explains Paule. Delta uses this strategy in several other areas "where we have a mission-critical purchasing dependency" as well. For instance, Delta has formed subsidiaries to purchase fuel and temporary-staffing services.
As a subsidiary, DeltaTel uses the resources of its parent company to market telecom services it provides the airline's customers--by placing cards in the aircraft's seatback pockets or through Delta's onboard magazine. DeltaTel also provides telecom services to Delta employees. To reach them, it uses the airline's News Digest.
DeltaTel began by first negotiating an agreement with one of its primary telecom carriers through which the airline pools the requirements of its partner airlines--Asa and Sky West--as well as those of its employee credit union. Because volumes of these airlines are relatively small, they were not able to purchase telecom services at the kinds of rates that Delta had been negotiating.
"It is a win/win situation," says Glaze. "We are helping our connection carriers get rates they couldn't get on their own. They are helping us by bringing their volumes in under our agreement."
Next, DeltaTel went out and negotiated a deal with a carrier for pagers. "We actually bid it as DeltaTel and let Delta bid it on its own," says Glaze. "The rates for DeltaTel were lower."
Another telecom service that DeltaTel purchases for its parent company is airline courtesy cards. In the past when flights were delayed or canceled, Glaze explains, passengers would approach gate agents and ask to use the telephone to call friends and family, which tied up the lines. The agents would hand out petty cash to let people use pay phones to keep their phone lines open.
"So through DeltaTel, we developed an airline courtesy card which provides passengers with 5-10 minutes of free calling time," says Glaze. "This is significantly cheaper than handing out petty cash and the administrative work of keeping up with such a fund at the gate. We produce well into the millions of these cards each year."
Not only has DeltaTel helped lower the airline's costs by producing the courtesy card, it also helped improve its capability to measure the savings. "With agents passing out petty cash for phone calls it's difficult to measure what's leaving the box," says Glaze. "Now, it's a measurable cost."
DeltaTel also benefits its parent company in other ways. In providing such amenities as the courtesy card "we help drive customer loyalty," says Glaze. "Anyone can fly an aircraft between cities, but not everyone can provide travelers with communication services and help make their stay in a city easier by giving them access to all these tools."
Another service purchased by DeltaTel that Delta Air Lines offers travelers is a long-distance calling card. Unlike the courtesy card, this card is not prepaid; it provides users with access to Delta's 800 telephone number, as well as direct connections to preferred hotels and rental car agencies. "The card saves passengers time and effort when they're traveling and can't easily get in touch with these services," says Glaze.
Since this card's launch in September, 1995, "it's been more successful that we expected," says Glaze. "Its travel services platform distinguishes it from AT&T's or MCI's calling card. It has a tremendous amount of functionality on it. It's a virtual traveling communications service although it's so much more."
In determining which telecom services to purchase and resell, Paule says, "initially we had an entrepreneur at the helm who wanted to offer everything. Now, we take the approach that since we're part of the purchasing department, we look at things that help improve our cost picture, or that try to address needs of our customers or employees that are not being met. (As a company, Delta conducts frequent customer satisfaction surveys.)
For instance, DeltaTel is ready to roll out a voice-mail message system that Delta intends to use not only to communicate with its work force (of which 30% is absentee), but also to offer as an employee benefit. The company plans to provide this service to employees at rates lower than they could get for themselves.
Ensuring that supplier performance is top-notch is another responsibility of Paule and his colleagues. "Suppliers get no reprieve because we are a subsidiary of Delta," he says. "We want any supplier we deal with to only have a positive operational impact. If calls aren't getting through, tickets are not being sold, and data isn't getting to where it's supposed to, that's bad. All Delta suppliers are measured in some format in this area and are held to highest standards."
DeltaTel's supplier-selection criteria include: integrity of the carrier's network, reputation, reporting capabilities ("It's important for us to have proper documentation so that we can make legitimate business decisions," says Paule), reliability, and capability to add value.
"We can create all of the cards, but then we can't concentrate on performing those aspects of our jobs that truly add value, whereas a printing supplier can perform the whole process from creating the cards to putting the ink on plastic to drop shipping the order to us," says Paule. "It is much more economical to work with a company that can distribute the cards worldwide than doing it internally, having our people manage the orders, giving them out, tracking how many each station receives. Turnkey solutions allow us to reduce our costs."
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