Delta Air Lines: Ringing up strategic gains
By Staff -- Purchasing, 1/14/1999 2:00:00 AM
At Delta Air Lines in Atlanta, transforming a strategic purchasing activity into a revenue-generating service is not a new idea. Indeed, way back in 1981 Delta Air Lines formed a wholly owned subsidiary called Epsilon to buy and sell jet fuel. "United Airlines was the first company to get a distributor's license; we just followed suit," says Tom Shell, general manager for fuel purchasing at Delta. "We sell $40 to $50 million of jet fuel, mostly in Cincinnati, where we operate that facility's fuel system. DHL is our largest customer.
"We don't pursue this activity to make a lot of revenue," says Shell. "We make comfortable returns, but Epsilon meets our strategic objectives more than it meets any profit objective." (Airlines garner some tax advantages by owning a fuel-trading arm.) As a result, Delta Air Lines and Epsilon share the same fuel-purchasing staff.
Meanwhile, another Delta Air Lines subsidiary was formed in April 1995. This one is called DeltaTel and meets an entirely different set of strategic objectives. Like Epsilon, DeltaTel generates revenue and is profitable, however, Delta's general manager of technical purchasing and the president of DeltaTel, Mike McHale, says the venture meets two other paramount objectives. One, becoming a certified telecommunications carrier allows Delta to lower its own costs. Two, McHale's staff has the opportunity to provide higher-quality services to Delta's airline passengers as well as his internal clients.
After negotiating telecom costs to the lowest possible price, "we felt we had gone as far as we could go using normal supply chain management fundamentals," says McHale. "So we brainstormed with a clean sheet of paper. The telecommunications industry was changing and lots of upstart companies were putting pressure on the big telecom companies. So we thought, 'why can't we do the same?'"
A huge buyer of telecom services from AT&T and MCI, as a reseller, DeltaTel can negotiate lower rates than Delta Air Lines. Then DeltaTel markets its long-distance, 800-number, calling-card, and pager services to its airline passengers in the Delta Air Lines magazine, to internal employees, and to its connection carriers like SkyWest. As an added bonus, Delta Air Lines also distributes telephone debit cards to distressed airline passengers.
Only three people in the procurement organization work with Delta Air Lines' telecom subsidiary, as marketing and order fulfillment functions are outsourced. Revenues from DeltaTel have grown 15% to 20% each year since 1995. "Most important, Deltatel helps illustrate that we have moved from being a tactical, reactionary procurement organization to being a strategic resource for the company," says McHale.
For more info, see DeltaTel's Web page at www.deltatel.com
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