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.
ASA still dominates its hometown of Atlanta, but Comair began operating a handful of flights
there last November.
ASA has historically dominated Dallas/Fort Worth, but growth there is being split between
ASA, Comair and SkyWest. In Salt Lake City, SkyWest is still the only feeder, but Buttrell
hints: "You'll start seeing other carriers rotate through there."
SkyWest chief operating officer Ron Reber says: "We hear it and we expect it. I think a
majority of our Delta growth will go towards the Dallas hub."
Rademacher also expects to direct most of Comair's 2003 growth to Dallas and tentatively
plans to open a crew base there. Comair closed its Orlando base a month ago and will have
CRJs to redeploy as Chautauqua takes over its Florida routes over the next year. But
Rademacher stresses that nothing is set in stone considering the upheaval in the industry.
"You've got to remain flexible," he says. "I'm not going to put a stake in."
Flexibility is Delta Connection's hallmark. Buttrell can chose between the 32-seat Fairchild
Dornier 328JET, 37-seat Embraer ERJ-135, 40-seat CRJ400, 50-seat ERJ-145, 50-seat
CRJ100/200 and 70-seat CRJ700. The 328JET and ERJ-135 do not overlap because the
328JET performs better on shorter stage lengths. Buttrell also has separate missions for the
ERJs and CRJs, with the ERJ and low-cost Chautauqua focusing on the low-yield Florida
market. Chautauqua is taking intrastate routes that ASA or Comair CRJs cannot operate
profitably and longer-haul routes that are being downgauged from unprofitable Delta
Express 737-200s.
Buttrell also finds unique missions for the 40-seat CRJ, which ASA and Comair refer to as a
"-400". The 40-seater and 50-seater are identical from the outside and Bombardier calls
both the "-200". But the -400 costs less to operate thanks to an incentive package from
Bombardier aimed at making the aircraft competitive with the ERJ-135. Delta puts them on
long thin routes such as Atlanta-Monterrey and on business routes where the extra legroom
can be a marketing advantage.
ASA has 10 CRJ400s and no more on order, but LaBrecque says the carrier is looking at
converting some of its CRJ200 options to CRJ400 orders. Delta can add 10 seats to any of
its CRJ400s at any time, but has no ambitions to do so because it would have to suffer the
operating cost consequences.
Simple fleets
Comair's 115 CRJs include one 70-seater, 17 40-seaters and 97 50-seaters. Nearly all of its
deliveries over the past year have been of the 40-seat variety, giving it more flexibility. Next
year, Comair will take 30 aircraft, broken down evenly among the three types.
"The 50-seater will be the base player in the fleet for a long time," Rademacher says. "But
the good thing is there's hardly any difference in the three types. In this environment a
simple fleet makes a lot of sense."
The beauty of Delta's regional jet portfolio is that the diversity does not come at any extra
cost. Comair already has over 100 aircraft with a common type rating and ASA will take its
Buttrell (…) also sees the benefit of keeping niche fleets, like ACA's 30 328JETs and ASA's
19 ATR 72s. The ATR ploughs short-haul high-volume routes, mainly from Atlanta. Buttrell
also tries to save the 328JET for routes under 800km (430nm) because the CRJs are more
economical on longer sectors. "They like to have this armada of carriers and there is no
aircraft like the 328JET in their portfolio," says ACA's Moore. "The 328JET has economics
that cannot be matched by other aircraft."
Delta sees a continuing role for 30-seat turboprops. (…) Delta has actually been slower than
most US majors in phasing out turboprops and none of its four main hubs are all-jet.
Other US majors would love to match Delta's regional jet fleet, or at least close some of the
gap. Some are spinning off their regionals in an attempt to drum up cash to fund regional jet
expansion, a strategy Delta is not interested in duplicating at ASA or Comair. But the
spin-offs have had only mixed success and most majors' regional jet expansion ambitions
are hamstrung by restrictive pilot contract scope clauses.
Strength to strength
*Delta became the first carrier to introduce regional jets in in 1993, when then-independent
Comair began operating Bombardier CRJs.
*Delta Connection was created as a subsidiary in January 2000 following the acquisitions of
ASA and Comair.
*In July 2000, ASA and Comair placed the largest regional jet order ever, placing firm orders
for 110 CRJs.
*Delta Connection was moved from Cincinnati to Atlanta in November 2001 and Fred
Buttrell was named Delta Connection chief executive.
*Delta estimates that between 1995 and 2001 regional jets improved the profitability of the
mainline operation by $210 million, as additional regional jets allowed mainline aircraft to be
redeployed to more profitable routes.
*ASA and Comair today operate about 70% of Delta Connection's regional jets. ASA
operates 79 CRJs and Comair 116 CRJs. Atlantic Coast Airlines and SkyWest Airlines
operate 30 and 44 regional jets, respectively, for Delta. Chautauqua will become a Delta
Connection carrier next month and operate 22 regional jets for Delta by the end of next year.
*The average Delta Connection flight is 650km (350nm). This year 12 million passengers
will fly on Delta Connection. Cincinnati is by far Delta's most regional jet-dependent hub,
with over 350 daily departures compared with 160 mainline.
*Delta plans to have 372 regional jets in its network by the end-2003; a 27% share of the
world regional jet market.
A sixth partner in the wings
Aeromexico affiliate Aerolitoral could become the sixth regional jet operator in the Delta
Connection network as the carrier eyes regional jets and potentially broader SkyTeam ties.
Regional jets in major carrier networks - September 2002
North American carriers
1 Delta Air Lines
2 Continental Airlines
3 American Airlines
4 United Airlines
5 Northwest Airlines
6 US Airways
7 Air Canada
8 America West Airlines
European carriers
1 Lufthansa
2 Air France
3 British Airways
4 Swiss
5 KLM
268
163
146
124
78
70
45
43
97
93
60
44
44
Financial Times (London)
August 24, 2002, Saturday London Edition 2
US airlines in code-share deal
By IAN BICKERTON and CAROLINE DANIEL
Delta Air Lines, Continental Airlines and Northwest Airlines have announced plans to forge a
code-sharing agreement. This would allow their passengers to use frequent flyer miles on
each airlines' routes, and enable them to link schedules more closely.
The deal between the third, fourth and fifth-largest US carriers, representing about 35 per
cent of the US domestic market, could spark competition concerns.
The airlines said they hoped the Department of Transport review would be completed by
November 1, paving the way for the code share to kick off next spring.
The move comes in response to a rival code-share agreement, announced in July by United
Airlines and US Airways, and to harsh conditions in the sector. The DOT has extended its
review of US Airways and United's application by 30 days.
The tripartite plan could accelerate international alliances, with the code-share extending to
overseas routes. Continental has the option to join the SkyTeam alliance, headed by Delta,
which includes airlines such as Alitalia and Air France. (…)
Michael Linenberg, analyst at Merrill Lynch, said he expected the inclusion of Delta to
deliver benefits of about Dollars 200m for Delta, but warned that could fall "once US
Airways/United is up and running." (…)