The LSE Summer School 2004

The LSE Summer School 2004

Management Programme

MG106 - Organisation and Strategic Management

Seminar 11 – The US Airline Industy Today

Readings on Delta Airlines

Financial Times (London)

July 18, 2003, Friday Europe Edition 1

Top US airlines climb back into profit

By CAROLINE DANIEL

(…) Leo Mullin, chairman and chief executive at Delta, said: "While encouraged by our progress, it is clear that Delta must remain diligent in our efforts to establish a viable revenue-to-cost relationship. Delta still faces many challenges as we cautiously emerge from the worst business cycle in our company's history."

Delta said it swung from a loss a year ago to net income for the quarter of Dollars 184m. That compared with Dollars 227m in net income for Northwest and Dollars 79m for Continental. However, excluding special items, all three would have made losses.

(…) Delta remains one of the best-positioned airlines, with Dollars 3bn of cash at the end of the quarter, against Dollars 2.8bn for Northwest and Dollars 1.6bn for Continental.

(…) In April Delta created Song, its low-cost carrier, in an attempt to compete more directly with discount rivals such as JetBlue. It expects to have 36 aircraft operating as Song by November. (…)

Financial Times (London)

July 2, 2003, Wednesday London Edition 2

Airlines raise Dollars 1bn in sale of Worldspan

By CAROLINE DANIEL

Three of the largest US airlines yesterday shored up their balance sheets by completing the sale of equity stakes in Worldspan, a computerised reservations system, raising about Dollars 1bn in cash and credits.

Worldspan, which is used by travel agents, has been sold to TravelTransaction Processing Corporation (…).

Delta Air Lines, the largest shareholder, said it received an immediate cash payment of Dollars 285m. It would also get credits worth Dollars 125m in Worldspan services and a Dollars 45m promissory note. (…)

Airlines also face underfunded pension liabilities of more than Dollars 22bn - Delta's plan alone is underfunded by Dollars 4.9bn. (…)

Financial Times (London)

June 5, 2003, Thursday London Edition 2

Delta Air Lines sets out restructuring plan

By CAROLINE DANIEL

Delta Air Lines yesterday set out further details of its restructuring - aimed at reducing its unit costs by 15 per cent and generating Dollars 2.5bn of profit improvements by 2005.

The most significant savings of Dollars 1.2bn are expected to come from operational and product initiatives - such as updating its fleet - improving maintenance processes and from its code-sharing agreement, recently concluded with Continental and Northwest.

A further Dollars 500m of savings is forecast from workforce initiatives. Michele Burns, finance director, said the figure did not include any cuts that could emerge from wage negotiations with its pilots union but included reforms such as employee cost-sharing for healthcare plans and changing its defined benefit pension scheme.

Although Delta has moved to create Song, its low-cost carrier, it is expected to generate only Dollars 80m of profit improvement by 2005. Ms Burns denied this was small. "It is not too insignificant given that it (will account for) 8-10 per cent of our currently available seat miles by the end of this year."

Delta also said it expected cost increases of about Dollars 1bn, from increased pension expenses and high insurance costs, to offset some of its improvements.

The airline is in talks with its pilots to match the wage cuts achieved by United and American. However, it could be hard to achieve similar concessions as it has remained financially more robust and has continued to access the capital markets.

(…) Delta closed the first quarter with more than Dollars 2.5bn of cash and has also re-worked a Dollars 1.2bn credit line from GE Capital Aviation Services.

Financial Times (London)

April 2, 2003, Wednesday London Edition 2

Alliance could restructure airline industry

By KEVIN DONE

Three of the top five US carriers - Delta Air Lines, Northwest Airlines and Continental Airlines - have been cleared by the US aviation industry's main competition regulator to press ahead with their ambitious 10-year marketing alliance after the airlines agreed to make concessions.

Three months ago the airlines launched themselves on a collision course with the US Department of Transportation when they rejected the terms it set for approving the alliance and effectively challenged the government to sue them.

(…)

Flight International

February 25, 2003

Delta AirElite fills business jet gap

Programme aimed at niche between ad hoc charter and fractional ownership, as well as exploiting airline link

Kate Sarsfield / London

Delta AirElite Business Jets has launched a block charter programme designed to plug the gap between ad hoc charter and fractional ownership. The move is also aimed at attracting a new category of customer and to maximise the company's position as a Delta Air Lines subsidiary.

Delta AirElite president and chief executive Mike Green says: "There is a big hole in the market which is not served by charter or fractional. People are looking for a reliable programme which offers a high standard of service without the expense of fractional ownership or the inconsistent standards often associated with ad hoc charter."

The Fleet Membership programme will mainly be targeted at corporate flight departments looking for regular supplemental lift, those scaling down their operations, and companies with a requirement for a business aircraft but a reluctance to have the asset on their balance sheets. Customers could include individuals seeking two-way travel rather than a single sector.

Cincinnati, Ohio-based Delta AirElite was formed following the acquisition three years ago of Comair Jet Express by Delta Air Lines. The subsidiary is, says Delta AirElite, the only business jet charter and management company owned by a major airline -- a position it is keen to exploit.

Green says: "Delta wants to retain its high-end customers and keep them flying within its family. Business aircraft users do have occasion to travel on airlines, but there is no facility for them to earn any status on the airlines."

In response, Delta AirElite has launched a loyalty scheme to reward Fleet Membership customers. "By signing up to the programme, customers are awarded points which can be offset against Delta Air Lines' SkyMiles Medallion programme. The cost savings could benefit a number of companies as travel is a key factor driving corporate spending," Green says. Ad hoc charter customers also earn qualifying miles on Delta Air Lines based on the total business aircraft expenditure.

The programme is divided into three tiers based on the number of hours required: Silver 25h; Gold 50h and Platinum 100h.

Members select an aircraft category -- light, midsize and large business jet -- although it is possible to downsize or upgrade, Green says. Membership fees start at $99,500 for 25 hours on a light jet and, based on the category of aircraft, an occupied hourly rate is also levied.

"We offer a guaranteed response time of 12h maximum and will reward customers who use the aircraft for two way travel, with extra hours [on top of their allocation]," Green adds.

Green says around 300 corporations have expressed interest in the Membership programme, which will have a dedicated fleet of nine business jets, consisting of Bombardier Learjet 60s and Challengers, operated by Delta AirElite.

The 20 aircraft in the company's managed fleet as well as the 250 aircraft in the affiliate fleet will also be available. Green says new aircraft will be added to the Delta fleet as demand dictates.

Financial Times (London)

January 17, 2003, Friday London Edition 1

Delta reports narrower loss

By VANESSA VALKIN

Delta Air Lines, the third-largest US carrier, reported a narrower loss for the fourth quarter and said 2003 first-quarter losses would be at least as large as 2002.

"Delta, like all airlines, continued to feel the serious financial blows from the post-9/11 industry turmoil and the slumping economy," said Leo Mullin, chief executive.

The airline also recorded a larger-than-expected non-cash charge of Dollars 1.6bn related to pension plan costs for the quarter, above its estimate of Dollars 700m-Dollars 800m.

It blamed lower interest rates and the reduced value of its pension plan assets.

Mr Mullin pointed to two dangers to results going forward: rising fuel prices and the threat of war with Iraq.

Executives said they see continued lower demand for air travel until at least mid-2004.

(…)

Delta announced during the quarter that it would cut up to 8,000 jobs by May of this year. (…)

Financial Times (London)

December 3, 2002, Tuesday London Edition 1

Delta links for Latin America

By ROGER BRAY

Delta Air Lines is expanding its network of routes between the US and Latin America through a code-sharing agreement with Alianza Summa, Colombia's largest airline group, set to start next April, writes James Wilson.

The alliance will put Delta's flight code on existing Summa flights from Colombia to New York and Miami, as well as on flights between Bogota, Colombia's capital, and six regional Colombian cities.

Summa will be allowed to put its flight code on Delta flights out of Atlanta and Fort Lauderdale to nine US cities. Passengers on the jointly coded flights can earn air miles as part of the SkyTeam alliance, which also includes Air France, Alitalia and Korean Air.

Financial Times (London)

November 21, 2002, Thursday London Edition 2

Low-fare move by Delta

By VANESSA VALKIN

Delta Air Lines, the third-largest US carrier, is to launch a new low-fare airline on its East Coast routes next year in an attempt to fight off increasing competition from low-cost rivals.

The operation, as yet unnamed, will gradually replace Delta's existing low-cost carrier, Delta Express.

Low-cost carriers are viewed as the one area in the aviation industry that promises robust growth in the tough economic environment, as shown by the success of airlines such as Southwest and JetBlue in the US, and Ryanair and EasyJet in the UK.

Delta plans to use 36 Boeing 757 jets with only economy seats in a denser 199-seat per aircraft configuration. The unit cost - the cost per available seat mile - will be 20 per cent lower than on its mainline aircraft, executives said yesterday.

Delta is hoping to keep down costs by selling 70 per cent of the tickets online or through voice-activated reservation centres. Aircraft turnround times will be cut in an attempt to achieve a 23 per cent increase in the time an aircraft is used, to 13.2 hours a day.

Some analysts had doubts about the plans, citing the failure of other carriers' "airline within an airline" concepts, such as United Airlines' United Shuttle.

Jamie Baker, airline analyst at JP Morgan, said low-fare European carriers were doing well because their operating costs were lower than those of their full-fare competitors. But that was not true for Delta and other US carriers.

Financial Times (London)

October 23, 2002, Wednesday London Edition 1

Delta's Atlantic challenge for Ezzell

THE NEW BROOM

By RUTH SULLIVAN

Little did Carolyn Ezzell know the scale of the challenge ahead when she took up the role of vice-president of Delta Air Lines for the Atlantic region shortly before September 11 last year.

Despite a bleak outlook for the US airline industry following a decreased demand for air travel, recent third-quarter losses of Dollars 326m (Pounds 211m) and another round of job cuts, Ezzell, 48, remains upbeat. "We're going to do what it takes to get out of this," she says.

(…)

The airline is also deferring deliveries of aircraft in 2003 and 2004 and grounding all 15 of its MD-11 aircraft.

(…)

Ezzell is looking at possible future cost-cutting measures such as virtual offices in countries where call centre employees could work from home; and at sharing sales offices with Air France and Alitalia in Europe.

"Not knowing what is round the corner means practising business hold-back", she says. Ruth Sullivan

Financial Times (London)

October 18, 2002, Friday London Edition 2

Delta to axe up to 8,000 more positions

By CAROLINE DANIEL

Delta Air Lines wielded the axe again against its workforce, cutting a further 7,000 to 8,000 positions, after warning that revenues had plunged to their lowest level since 1995.

The latest cuts come on top of the 11,000 positions Delta cut last year in the aftermath of the September 11 attacks. American Airlines, the biggest US carrier, has also cut about 27,000 jobs, as conditions have worsened. (…)

Flight International

October 01, 2002

Making the Connection

Despite industry decline, Delta Connection has held on to its pole position in the regional jet race and this looks set to continue with the company's commitment to take 76 more aircraft in 2003

Brendan Sobie / Atlanta

The US airline industry has been turned upside down over the past 13 months, with a seemingly never-ending string of aircraft delivery deferrals, capacity cuts and layoffs. Despite the upheaval, several regionals have been expanding, taking on jets, adding capacity and hiring new staff at record rates. Delta Air Lines, a pioneer in deploying regional jets, has also become the poster child of regional jet strategy since the 11 September terrorist attacks, using six types as the centrepiece of a major schedule revamp.

In these days of pinching pennies, major carriers are trying to spare their regional affiliates because they can play a critical role in preserving network footprints and market share. Delta has slashed its 2003 capital expenditure budget to $1.7 billion and has nearly zeroed the line item for new Boeing deliveries, but has left intact its $800 million investment in regional jets. Two years ago, new mainline aircraft accounted for over 80% of Delta's capital expenditure budget.

"The regional jets and the routes we are putting them on are cash positive from day one," says Delta Connection chief executive Fred Buttrell. "You can't spend money to lose money in this environment. If you add mainline aircraft, it would be very cash negative."

Buttrell has overseen the deployment of about 60 additional aircraft since taking over as Delta's regional jet mastermind last November. He will be managing 296 regional jets by the end of 2002, spread across five operators and six types. Delta is the industry leader in all these categories and plans to remain so with its commitment to take 73 more regional jets in 2003. Buttrell plans to commit to another batch of regional jets for 2004 delivery in the next few months.

Paying dividends

American Airlines and Continental Airlines have roughly half the number of regional jets that Delta has, with United Airlines, Northwest Airlines and US Airways even further behind. No other US major has more than three regional jet operators or more than four regional jet types. The clear lead held by US operators in regional jet deployment, compared to the European flag carriers, is illustrated in the table on P49.

At a time of dwindling demand, Delta's large lead in the regional jet race is paying dividends. Regional jets are suddenly the right size for many traditional mainline markets and their operators have lower cost structures. "There are still a lot of routes where we can add more and be cash positive from day one," Buttrell says.

In response to the rapidly changing route economics, Delta has asked its regional partners to rejig their route networks overnight several times over the past year. Atlantic Southeast Airlines (ASA) overhauled its schedule at 28 cities in one swoop last autumn. The Delta subsidiary then took delivery of seven Bombardier CRJs last January alone, including its first 70-seater, leading to another batch of schedule changes. The carrier has added nearly 1,000 employees over the past year.

"We turn on a dime; we're not a battleship," says ASA senior vice-president Bryan LaBrecque. "We've built this company to move on opportunities faster than our competitors." (…)

Comair president Randy Rademacher predicts "things are going to continue to change. The focus is on flexibility, staying loose and taking advantage of opportunities that come along."

Diversification

The schedule and gauge changes, made possible by Buttrell's diverse portfolio of regional jets, helps Delta better align capacity with demand in a difficult environment. They are also pegs in Delta Connection's hub diversification strategy. Over the last 15 months, Delta has gone out of its way to make sure its hubs are fed by more than one regional. The strategy was created during the three-month pilot strike last year at Comair, which crippled Delta's CRJ-dominated Cincinnati hub. But Rademacher says flowing regional jets through multiple hubs instead of limiting flying to out-and-back routes also improves aircraft utilisation.

"We've drawn lines in the sand at all the hubs over the years and it will require some adaptation," he says. "But if we succeed, the odds of growth for all of us are good."

By November, Cincinnati-based Comair will operate only 75% of the regional jet flights at the Cincinnati hub, with ACA's share growing to 25%. Delta has also diversified the hub by moving in ASA and three of its ATR 72s.