395H
ave you ever been stuck at an airport
because your flight was late and you
missed your connection? You were frus-
trated by the long lines at customer ser-
vice counters and pay phones, and when
you called on your cell phone, you were
placed on hold for what seemed like for-
ever. Wouldn’t it be nice to use your
Internet-capable cell phone or personal digital assistant (PDA) to pull up flight information and
timetables and reschedule your flight? Since 2000, Delta Airlinespassengers have been able to
do just that.
The airline was one of the first to recognize that it could increase customer loyalty by giving
business travelers better flight information more quickly. Before Delta’s e-business unit added
this feature, however, the project had to be justified the project on the basis of its economic
value. Unlike making capital budgeting decisions about whether to buy new aircraft or build main-
tenance facilities, decisions that managers had been making for years, this project was moving
them into uncharted skies—literally.
Delta’s capital budgeting methodology for this Internet project used traditional net present
value (NPV) analysis to develop relevant cash flows, discount them at the company’s cost of capi-
tal, and subtract the project’s initial investment. Anticipated cost savings were a major factor in
developing projected cash flows. Wireless Web access enables customers to obtain information
and conduct transactions without calling Delta’s customer service representatives, so the airline
doesn’t have to add employees to handle a larger customer base. Another potential savings: lower
paper costs, because more tickets will be issued electronically, even when last-minute changes
are involved. The system is more cost-effective, thereby resulting in better resource utilization
and a higher ROI.
Improved productivity is another benefit to be derived from this wireless project. Delta
hopes to add self-service features so that passengers can choose seats, check in, and handle
other routine transactions online. This will free reservations agents to handle more calls placed
to purchase tickets, thus generating more revenue. Building on its initial success, Delta is ready
to expand its wireless applications. A joint project with American Airlines, United Airlines, and
Boeing Corporation will equip planes with broadband Internet connections so that the airlines
can sell in-flight wireless services. Delta’s innovative technology initiatives have made it one of
five finalists for Computerworld’s 21st Century Achievement Award.
Delta based its decision to accept the wireless-communication project on the project’s pos-
itive NPV, which indicated that the project would earn a return above its cost of capital. This
chapter focuses on the capital budgeting techniques, including NPV, that companies use to
accept or reject and to rank proposed projects.DELTA
DELTACUTS THEWIRES