"delta Dud"

[mweiss]

There's an article in Slate Magazine entitled Delta Dud. While there are a couple of rough edges (AirTran is once referred to as "AirTrain Airways"). Nonetheless, there are a couple of interesting financial analyses of the airline.

 

[WorldTraveler]

But what's his point? These kind of articles demonstrate the complete lack of understanding of the industry and the players on the part of the author. A couple months doesn't make a trend or dictate a company's future. Delta, like American, has been very successful for decades and has struggled for a relatively short time compared with other carriers. Indeed, United's future would not be near as cloudy if their management didn't severely miscalculate their cash flow needs, forcing them into bankruptcy. Delta and American have made no such mistakes.

He both bashes high pilot salaries and then says the traveling public doesn't want cheap labor in the cockpit? (How many people flying United or American even know how much less those pilots make than Delta or Northwest? answer... precious few and it certainly didn't affect the buying decisions of any one of them). Consumers buy service and they don't really care what the employees who serve them make. American has provided a nice restructuring template for Delta to follow and improve upon, and they will.

He bashes the legacy airlines as he has done before but fails to acknowledge that several airlines, most notably American, are making significant steps in restructuring their operations in order to compete against legacy carriers. Delta has taken a number of steps to reduce costs and improve productivity, particularly among non-pilot personnel. Many of the steps to improve Delta's cost competitiveness started under the Mullin regime but will be received far better coming from a management team that is focused on making Delta strong rather than doing what it can to line its pockets.

I continue to believe that American and Delta are the best positioned network carriers to survive and thrive. Looking forward five years in the industry, you'll see other legacy names gone while American and Delta will be bigger and stronger and will be the only network US airlines serving all of the US and a good chunk of the world.

 

[mweiss]

But what's his point?

I believe his point is that, as expensive as DL's pilots are, assuming that a 50% cut in their pay will make DL profitable is nuts. More than that is necessary to compete against FL, particularly since ATL is DL's bread and butter. The airline is essentially a two-hub airline, and CVG is not especially high on the O&D chart.

I continue to believe that American and Delta are the best positioned network carriers to survive and thrive.

I'm inclined to agree about AA, but I don't think DL is better positioned than NW or CO. Those three have clear strengths and weaknesses, and it's hard to say which is in the best position of the three; it will depend on forces we do not yet know.

 

[WorldTraveler]

The problem with Gross’ statement that the pilot pay cuts won’t be enough is that he assumes that management ever believed it would be. Although Grinstein has made far more statements to the effect that Delta’s overall cost structure has to come down, there has never been any doubt of that. Michelle Burns was a vocal advocate that Delta reduce its overall costs and she started the process of across the board cost reductions. The need for across the board cost reduction has not been lost on Delta management and is not a new concept because the pilots are asking for it; they simply haven’t seen the plans or numbers and want to make sure Delta has a plan to use the savings which the pilots are willing to provide (which there is) and to make sure the pilots are not singularly supporting the turnaround plan (which they are not).

The reason I am bullish on Delta and American has as much to do with their pedigree and their actions over decades, not just the past few months. Too many people get far too worked up about the challenges facing Delta today while forgetting that Delta has long been one of the most financially conservative airlines in the industry. Delta also has a long heritage of managing costs better than the industry because Delta is largely non-union and, in my opinion, Delta’s pilots are some of the most business-minded in the industry. Although it has a great revenue base and an excellent cost position, Continental is still very unstable due to their thin financial cushion which leaves them vulnerable to every industry shock – moreso than Delta or American. Northwest has key strengths as well but they simply don’t have access to the key industry markets that esp. American and even Continental has. NW has also not fully recovered from their financial difficulties in the early 90’s and is managing its balance sheet less for the long term than in order to get through the next crisis.

Also don’t forget that Delta was never one of the chosen few airlines and has basically built and acquired itself into a major world player – few other world airlines or similar size/stature can say the same thing. Delta and American both have keen senses of what it takes to succeed in the industry and have transformed with the industry better than other carriers. American has succeeded probably more in the marketing area; Delta has probably succeeded more on the ability to successfully compete on whatever is thrown its way. No other surviving US airline has had as large of an LCC operation at its largest hub and revenue base for as long as Delta has.

American and Delta are probably not in the final form that they will be but I continue to strongly believe that those two airlines will be industry leaders and will have the network breadth needed to succeed as legacy carriers. While Continental and Northwest are both competitive airlines today, they both are less positioned for the long haul than is Delta – based on overall network size and the ability to successfully compete against LCCs. Unlike Northwest and Continental, Delta and American both own at least the majority of their regional jet operations. Further, American and Delta are two of the few US airlines that are not dramatically downsizing and outsourcing aircraft maintenance and instead AA and DL are insourcing maintenance, a very wise step since Delta’s maintenance costs are the lowest in the network carrier industry and lower than many LCCs. The RJ operation and the maintenance capabilities create tremendous wealth for AA and DL which I fully expect will be exploited to help those two airlines reshape the future of the industry, whether it be in the form of product and marketing or by acquiring other carrier’s assets.

Everyone recognizes that the legacy industry needs to consolidate and restructure. I believe the only two carriers with the resources and industry vision necessary to lead that restructuring are American and Delta.