VikeDog,
thanks for asking. I've had and have a very busy spring so may not get to spend as much time on this board as I'd like but will try to stop in when I can.
I am listening to the JP Morgan airline conference webcast right now.
http://www.mapdigital.com/jpmorgan/airline05/welcome.html
I missed part of DL’s presentation but heard enough to validate my position is that DL has a solid plan and is executing against it. While it has been fashionable to bash DL for not having a plan but in fact DL really didn’t roll out their plan until late last year and didn’t start executing it until this year. Let’s talk about some of the initiatives.
Simplifares – DL knew what needed to be done to turn around the biggest reason the legacy airlines have continued to shrink. While CO calls Simplifares “simply stupidâ€, AA is joining DL in saying that this is exactly what was needed and the results for AA are tracking similarly to what DL has forecast and is happening. The advantage DL and to a lesser extent AA have is that they planned for this kind of event and do not see it as revenue dilutive as much as an investment in the future.
ATL restructure – DL’s restructuring is resulting in performance above expectations which certainly serves to get costs out.
Financial restructuring – DL says it is on target and I tend to agree they are probably right. Saying a statement like that obviously has legal obligations so I tend to think they actually are getting the costs out they said they would. It is very notable that DL says its costs will be within 10% of the LCCs by the end of 2006. That is very significant if they keep revenue on track which is fairly likely since DL is now controlling pricing among the legacy carriers.
Pensions – It is good to see that DL is joined by AA, CO, and NW in saying they do not intend to terminate their pension plans. UA and US will stick out even more as financial failures when it becomes apparent that other carriers can develop business plans that include maintaining their commitments to their employees. Further, DL says that it is doubtful that costs actually come out as much as expected when pensions are terminated. Employees should not bear the brunt of restructuring and the four solvent airlines will gain a significant premium in their ability to execute a restructuring that is balanced across all areas – not just employees.
Competitive growth – Like AA, DL has aggressively gone after competitors. Given the capacity that is coming into the industry from LCCs and the fact that DL’s network is pretty well LCC saturated, it is doubtful that the LCCs will significantly grow in DL markets – which makes it a lot easier to develop and execute a restructuring plan. Unlike AA and UA, DL has growing revenue premiums against LCCs as do CO, NW, and US.
International expansion – with the largest 767 fleet in the world, half of which are flying domestically, DL has a large ability to shift capacity out of the domestic market and to international markets (more domestic/international fleet flexibility than other carriers). Moscow has long been one of DL’s most profitable cities and they will undoubtedly do well from ATL. Virtually nothing internationally fails from ATL unless there are overall market problems that are bigger than DL or ATL. DL has much more expansion possibilities in Latin America.
Domestic expansion – DL is aggressively going after the SE and NYC. While US will be fighting to defend its local hub markets, DL is well on its way to so dominating the SE and the east coast connect markets that DL is really the only likely long-term survivor to serve the huge amount of markets in the east that will always require a connection. Even if other carriers move into US hubs (if they fail), no one is likely to be able to mount a true hub operation that will touch DL’s hubs in ATL and to a lesser extent CVG. In NYC, DL is aggressively building its network – both to “mark out†its territory before B6 starts receiving its new aircraft this fall and to become a true nationwide carrier from NYC – something DL has not ever done well. DL is certainly stepping on some of AA’s toes but I think that in time DL and AA will have fairly similar route systems. UA’s ability to compete transcontinentally from NYC will only get more difficult as DL grows and uses Song – a premium coach product that is well suited to the transcon market; it is not possible for UA to survive in the transcon markets based on flying large aircraft in a premium product configuration with half to two-thirds of the seats while other competitors are selling premium coach seats like on Song for less than $200 round trip.
Product – While none of the airlines are willing to invest much in new products, DL is making small incremental steps to improving the product. While I don’t expect that DL will be a top tier product carrier, I expect they will be very competitive. The introduction of the E170 will give DL the ability to offer a high quality smaller, domestic long haul product and to add a higher quality product in some of the most competitive markets that are served by current regional jets. Unlike UA and US that have to use their 170s to fill holes in their network and to replace mainline flying, DL is much more likely to use their 170s to further grow the quality and size of the network. DL employees should not fear the growth of 170s in the fleet since many more are likely to be added to the fleet if Comair employees agree to freeze their pay; further, having the 170s in the fleet makes it that much easier for DL to pick up UA and US E170s – current and future – should the need arise. Finally, some of DL’s early RJs are nearing the end of their life cycle and could be retired in the next few years which would help to upgrade the product if some of the early CRJs are replaced with aircraft like the 170.
Consolidation – since consolidation has been raised by every airline (or by the analysts) at the JP Morgan conference, I will address it too. I still think AA and DL are best positioned to lead industry consolidation because of the equity they have tied up in their regional carriers – and DL has about twice as large of a regional jet operation that AA/AMR. I don’t expect they will tap that equity any earlier than they need to because those regional operations do contribute a significant amount to those carriers right now; it doesn’t make sense to sell off the money makers until the mainline operation is turned around and there is a need to access that cash. When it is tapped, AA and to a greater extent DL will have tremendous ability to lead consolidation by virtue of having cash that doesn’t exist anywhere else in the legacy segment of the airline industry.
I still believe DL will tap that cash to buy significant portions of United while AA will use it to acquire a larger east coast and Pacific presence. While UA and DL fit together nicely from a network perspective, there is not a single clear carrier that will solve all of AA’s network needs although US probably comes the closest. I believe AA has a pretty good chance of building a decent Asian route system on its own even though it continues to indicate it wants to buy an Asian route system. If you listen to the conference call, Mike Palumbo indicated that DL still has anywhere from 100-200 aircraft (737 classics, 767-200s, and possibly some or all MD-80s/90s) that could leave the fleet relatively easily over the next couple years; that fleet flexibility will prove very valuable if DL should choose to participate in consolidation and rationalize some of its hubs.
Ultimately, the ability to eliminate excess capacity through consolidation will happen if the legacy airlines are willing to assume significant amounts of the obligations currently carried by the airlines that will be eliminated. None of the legacy airlines will be in an ideal position for acquisitions but the carriers that have the financial flexibility to take on other carriers’ obligations will win. I believe DL will have the ability to take on enough obligations to effect acquisitions because of the aircraft that can leave the fleet in the next couple years.
Obviously, the next six months are very crucial for DL to get its execution well under way. I think the results so far are very favorable for DL and a year from now DL will look decidedly and positively different from the rest of the industry.
I’ll try to check in at least once or twice a week, esp. when major aviation news breaks.
