- Dec 5, 2003
- 21,709
- 10,721
Bashing Delta or wishing for its demise has been one of the more popular pastimes of this board. It’s time to lay out a sound case for why DL will not only thrive but survive. For those of you who work for or are passengers of Delta, you have lots of reasons to have hope. For those of you who work for competitors, you have a formidable challenge on your hands. And for those of you who like to see Cinderella stories, one is being written before your very eyes.
First, DL has a pre-deregulation legacy of being one of best run airlines in the world. To be sure, DL hasn’t had the industry leadership since the US domestic airline industry was deregulated in 1978 that it did before but it still has done very well since deregulation. First, Delta has been given nothing in its 75 year history – quite a contrast to that of many of its legacy competitors. Delta never was given the choice industry routes and never had the access to the big cities in the US or overseas that seemed to provide unlimited opportunities for competitors like American, United, and Northwest. Delta has always fought very hard for what it has and in the process, outlived airlines like Eastern, Pan Am, and TWA that had been given much more to work with.
Delta’s profitable strategy was exactly what has now created so much difficulty for it: DL built a route system designed to blanket the US, particularly the eastern US, with access to more cities than any other airline. Because its home in the southeast US was full of many small cities, DL had to carry traffic through hubs. And DL’s home in Georgia was right next to Florida, one of the world’s top vacation destinations, providing a seemingly endless supply of passengers to fill its jets.
Make no mistake. Delta’s strategy of high frequency connecting service in the SE was very profitable. Until 2001. 9/11 in itself wasn’t the issue but rather the pulldown that was necessary by the legacy carriers to survive the terrorist attacks. And as the legacy carriers pulled down capacity, the low fare carriers took advantage of the opportunity to grow. And they did. Although low fare carriers had long existed, the tipping point was reached. Customers knew that low fares were available between most regions of the country, even if it meant traveling to an alternate airport. As such, the legacy carriers could no longer charge $2000 for roundtrip flights by business people. And Delta’s seemingly personal wealth stash began to vanish. DL’s strategy was very valid… but for a different era.
The regional jet played a role, too. Delta saw the opportunity to grow its network and deployed more regional jets through its partners than any other airline – and strengthened its already formidable domestic route network. But as other carriers began acquiring regional jets, no market was inaccessible to other carriers. Not only did LFCs put pressure on nonstop flights and in connecting markets subject to an LFC presence but regional jets meant that the few remaining premium connecting markets were “fair†game for all of the legacy carriers, including those in the SE where DL had long been able to command a significant revenue premium.
As with most companies that must rework its strategies in order to survive, Delta only got part of the formula right in its first attempts. Delta slowly began to pull down connecting capacity, starting with DFW where it never gained a significant share of the local market against American. Even though SLC and CVG are small cities, they have fared better in DL’s efforts to cut back capacity. CVG does have a strong business base even though it is small while SLC generates much more traffic than a city of its size normally does due to Utah’s attraction as a leisure and religious center. But the missing piece in DL’s turnaround plan – as is true in most companies – is that DL did not find new sources of revenue or deploy assets effectively into new markets.
That has changed. In a big way. DL’s strategy of providing lots of domestic capacity meant that it had an unusually high percentage of widebody aircraft in its fleet. When the L1011s were retired, DL made the decision to replace 300 seat domestic L1011s with 287 seat 767-400s, an aircraft that has substantial capabilities despite it being one of Boeing’s least popular models. The light bulbs finally went off in some Delta people’s heads that those 767-400s plus some of DLs 767-300ERs that were flying domestic routes could and should be redeployed to international routes. Because DL has nearly 30 767-300s and 400s that can be redeployed, the international growth prospects are enormous. Even after retiring the 15 767-200s, DL still has the world's largest fleet of 767s, a very capable and cost-efficient aircraft. So far, DL has announced plans to use only about 1/3 of the “newly discovered†international capabilities of its 767 fleet. And DL’s international growth capacity is even larger if it decides to start flying 757s on overseas routes, potentially providing the opportunity to develop secondary markets in the UK and far western Europe as well as from Boston deeper into Europe or from the US deeper into S. America. More significantly, by pulling substantial capacity out of its domestic network, Delta is not only improving its domestic revenue performance but will help many of its competitors that carry connecting passengers as well. However, DL’s huge fleet of regional jets will ensure that markets without nonstop service but could have an RJ flight will probably get one from one of DL’s partners and that DL will have abundant capacity to feed its international network.
Delta also struggled for much of its existence about whether it was a first tier or second tier airline. I consider American and United as 1st tier airlines because their route systems are built around the US and world’s largest cities. Delta and Northwest, on the other hand, historically have built their route systems around smaller cities and both US and global regions. But DL and NW have owned the regions from which they fly…until everyone showed up with regional jets. Delta particularly has had a large presence in key business centers such as New York and Los Angeles but has regionalized its presence from those cities, serving primarily Florida from New York and east coast cities (its hubs and Florida) from LA.
You will see Delta becoming much more of a 1st tier carrier than it has been in the past.
Delta’s strategy shift is one of the most significant at any airline and even among other industries. Delta still has one of the most expansive domestic route networks of any airline and can make money carrying domestic connecting passengers – but they will pay much higher fares. And that huge domestic route network is well-suited to carrying passengers to the far corners of the world. Most of Delta’s current and expansionary international routes are to/from places where there is limited service by other US carriers (such as to smaller cities in continental Europe or Africa) or in O&Ds where other carriers cannot connect the hundreds of small markets that are part of every international destination. Eastern Europe is growing at rates as fast as economies in Asia and yet no other US airline serves Eastern Europe nor does any Eastern European country have a particularly strong local airline; the Eastern European market is for Delta to take away from the big three European carriers that carry most Eastern European passengers to and from the US via their western European hubs. To be sure, however, DL is also asserting itself in key local international markets such as from New York to Latin America. And Latin America represents a considerable growth opportunity for Delta. Although it has operated Latin American flights almost exclusively from ATL, Delta has become the 2nd largest airline to deep S. America and will likely surpass CO this year as being the largest airline to all of S. America. ATL is very well positioned geographically to develop new Latin markets which are already served from Miami and Houston. And DL’s growth prospects are very significant when they begin to develop JFK as a Latin American gateway. LAX and Florida also hold the potential for significant Latin growth prospects.
After years of struggling to find its role in the deregulated environment, DL now knows what they should be and do...not just what they should not do. That is key in recognizing that DL's turnaround plan is sound and geared for success.
It is not surprising that the template for Delta’s network turnaround has come in no small measure from Continental, an airline that spent decades and two bankruptcies trying to find itself after deregulation. Today, CO acts much more like a 1st tier airline than DL or NW although it has very little market share outside of its hubs. CO has used its assets extraordinarily well, possible both by having a major hub on one of the coasts but also because of NYC’s location relative to western Europe and Latin America which dovetails nicely with CO’s narrowbody capabilities. EWR became CO’s primary new source of revenue in the same way that DL is growing revenue through its international expansion. Further, two of CO’s former top network leaders are now doing the same job at Delta. It seems particularly ironic that the people who jeer Delta today are the same ones who rightfully laud Continental as running an extraordinarily good airline. And they do. DL will best CO at its game in just one trip through bankruptcy.
However, Delta has an even greater chance of success than CO because it has a much larger fleet of international capable aircraft, has a nationwide route system, and has multiple hubs which are capable of supporting international traffic (ie. despite the domestic cutbacks, CVG has more int’l air service than any similar sized city in population or wealth and it’s all provided by Delta and continues to do well despite the domestic cutbacks). Delta has many opportunities ahead of it but for the 1st time in perhaps 25 years, Delta has a vision of what it can be and the resources to make it happen. And while Delta has almost limitless growth potential over the next few years, its domestic competitors have very little growth capacity available to them. Because it still has a very large fleet of regional jets of all types, Delta is in very good shape to become an extraordinarily strong international airline while giving up very little of its domestic network through aircraft downsizing. Just as CO did in the 90s, Delta will possess a strong ability to grow relative to its domestic and international competitors given the cost advantage that Delta will have.
No US airline has developed and maintained the dense worldwide route systems that characterize British Airways, Air France, and Lufthansa. Based on the route announcements and rumors we have seen and heard over the past few months, Delta could very well have the most expansive international route network of any US airline. There will still clearly still be holes in their network but Delta should be able to fill those holes from a position of strength in the not too distant future.
However, a strong network isn’t the only ingredient necessary for a successful airline. Airlines end up in bankruptcy because of damaged finances. To their credit, American Airlines is the only legacy airline that has managed to avoid bankruptcy throughout its history and they have done that by responding to the threats that challenged their business and their balance sheet. However, bankruptcy is not all bad and CO again stands an example of a company that successfully used bankruptcy not only as an opportunity to develop a new strategy but also to clean up the damage from years of losses that resulted from those flawed strategies. To be sure, CO is still a highly leveraged airline and extraordinarily leveraged when compared with other industries but it is generating the revenues necessary to service its debt.
Again, Delta will have an advantage in its financial restructuring when compared with other airlines. Delta entered bankruptcy with the highest amount of unsecured debt of any US airline: $4 billion; its previously strong finances allowed it to offer unsecured debt that others could not. Ironically, Delta tried to renegotiate much of its unsecured debt in the 18 months prior to its bankruptcy filing, but without success. Most of those debt holders will end up with pennies on the dollar but with a stake in the reorganized Delta Air Lines. Put in another perspective, those unsecured debt holders in a sense supported Delta through several years of losses post 9/11.
By being near the back of the pack of airlines that have filed for bankruptcy in this business cycle, Delta has learned a lot. It has learned that it will not accept debt-only exit bankruptcy financing as one airline has done; replacing the debt that one came into bankruptcy with new debt doesn’t do much to provide a platform for success. Delta has also learned that a business needs capital to grow – necessary to keep costs down as the LFCs are good at doing but as they develop new business opportunities. DL’s route development over the next several years will be worthless if it cannot obtain the ultra long haul aircraft necessary to convert many of these new far flung markets into nonstop routes which will be necessary to build premium revenue. Further, DL still needs a cost efficient 100 seat airplane and it is very doubtful that Boeing, as Delta’s exclusive airframe supplier, will cede not only Delta’s business in that segment but also that of the entire industry to a Brazilian company. Boeing has no choice but to build a plane that meets Delta’s needs. Boeing will build it and Delta will fly it. Delta will have the finances necessary to build its business. Even in bankruptcy, Delta is upgrading its cabin interiors and airport facilities. Failing to invest in the business for any period of time is tantamount to deciding that you will not be a class leading competitor in your industry. Most importantly, DL is laying the framework to be a profitable airline which will ensure that it has the financial resources to remain a viable company. Having the lowest costs among the legacy carriers will serve as a huge advantage for Delta, just as it has in the past when Delta was one of the most efficient and lowest cost producers. It is not lost on DL’s leaders today that DL’s losses began to mount when it lost its cost advantage. Bankruptcy has been a powerful wakeup call for Delta. It has reenergized Delta as it has not been energized in decades and required it to develop the strategies and plans necessary to survive and thrive in the current airline environment.
People make up the final wing on which the retooled Delta will fly. Long recognized before deregulation as being one of the best companies in the world to work for, Delta has allowed its relationship with its employees to be badly damaged and has done little to improve it. Even though Delta employees have historically been well paid when compared with their peers, Delta employees were not happy. Delta has cut pay over multiple occasions rather than doing it once in a large enough measure to ensure success. While many people would like to think otherwise, high pay is not in and of itself a key to happiness at work. Continental employees have considered their airline one of the best to work for and yet they haven’t made industry leading salaries in a very long time. They do, however, share in their company’s success and are given considerable credit for their efforts at running their airline. You will see Delta moving from a patriarchal institution to one which is much more entrepreneurial in nature and in which employees are encouraged to see Delta’s goals as their own – exactly as it was for decades before deregulation. Delta succeeded because its employees understood what it took for the company to survive and made Delta succeed, to their mutual benefit. A confrontational work environment epitomized by salary cuts is never successful and that is the environment Delta has had for the better part of the past 15 years. As Delta people become competitively compensated, the confrontation and takebacks will come to an end and Delta people can share in their company’s hope in the future.
Delta has not forgotten how to run a profitable airline. It has taken longer than many of us would have liked for them to find a new way but they have obviously found it and are executing to make it win. Just you watch and see.
First, DL has a pre-deregulation legacy of being one of best run airlines in the world. To be sure, DL hasn’t had the industry leadership since the US domestic airline industry was deregulated in 1978 that it did before but it still has done very well since deregulation. First, Delta has been given nothing in its 75 year history – quite a contrast to that of many of its legacy competitors. Delta never was given the choice industry routes and never had the access to the big cities in the US or overseas that seemed to provide unlimited opportunities for competitors like American, United, and Northwest. Delta has always fought very hard for what it has and in the process, outlived airlines like Eastern, Pan Am, and TWA that had been given much more to work with.
Delta’s profitable strategy was exactly what has now created so much difficulty for it: DL built a route system designed to blanket the US, particularly the eastern US, with access to more cities than any other airline. Because its home in the southeast US was full of many small cities, DL had to carry traffic through hubs. And DL’s home in Georgia was right next to Florida, one of the world’s top vacation destinations, providing a seemingly endless supply of passengers to fill its jets.
Make no mistake. Delta’s strategy of high frequency connecting service in the SE was very profitable. Until 2001. 9/11 in itself wasn’t the issue but rather the pulldown that was necessary by the legacy carriers to survive the terrorist attacks. And as the legacy carriers pulled down capacity, the low fare carriers took advantage of the opportunity to grow. And they did. Although low fare carriers had long existed, the tipping point was reached. Customers knew that low fares were available between most regions of the country, even if it meant traveling to an alternate airport. As such, the legacy carriers could no longer charge $2000 for roundtrip flights by business people. And Delta’s seemingly personal wealth stash began to vanish. DL’s strategy was very valid… but for a different era.
The regional jet played a role, too. Delta saw the opportunity to grow its network and deployed more regional jets through its partners than any other airline – and strengthened its already formidable domestic route network. But as other carriers began acquiring regional jets, no market was inaccessible to other carriers. Not only did LFCs put pressure on nonstop flights and in connecting markets subject to an LFC presence but regional jets meant that the few remaining premium connecting markets were “fair†game for all of the legacy carriers, including those in the SE where DL had long been able to command a significant revenue premium.
As with most companies that must rework its strategies in order to survive, Delta only got part of the formula right in its first attempts. Delta slowly began to pull down connecting capacity, starting with DFW where it never gained a significant share of the local market against American. Even though SLC and CVG are small cities, they have fared better in DL’s efforts to cut back capacity. CVG does have a strong business base even though it is small while SLC generates much more traffic than a city of its size normally does due to Utah’s attraction as a leisure and religious center. But the missing piece in DL’s turnaround plan – as is true in most companies – is that DL did not find new sources of revenue or deploy assets effectively into new markets.
That has changed. In a big way. DL’s strategy of providing lots of domestic capacity meant that it had an unusually high percentage of widebody aircraft in its fleet. When the L1011s were retired, DL made the decision to replace 300 seat domestic L1011s with 287 seat 767-400s, an aircraft that has substantial capabilities despite it being one of Boeing’s least popular models. The light bulbs finally went off in some Delta people’s heads that those 767-400s plus some of DLs 767-300ERs that were flying domestic routes could and should be redeployed to international routes. Because DL has nearly 30 767-300s and 400s that can be redeployed, the international growth prospects are enormous. Even after retiring the 15 767-200s, DL still has the world's largest fleet of 767s, a very capable and cost-efficient aircraft. So far, DL has announced plans to use only about 1/3 of the “newly discovered†international capabilities of its 767 fleet. And DL’s international growth capacity is even larger if it decides to start flying 757s on overseas routes, potentially providing the opportunity to develop secondary markets in the UK and far western Europe as well as from Boston deeper into Europe or from the US deeper into S. America. More significantly, by pulling substantial capacity out of its domestic network, Delta is not only improving its domestic revenue performance but will help many of its competitors that carry connecting passengers as well. However, DL’s huge fleet of regional jets will ensure that markets without nonstop service but could have an RJ flight will probably get one from one of DL’s partners and that DL will have abundant capacity to feed its international network.
Delta also struggled for much of its existence about whether it was a first tier or second tier airline. I consider American and United as 1st tier airlines because their route systems are built around the US and world’s largest cities. Delta and Northwest, on the other hand, historically have built their route systems around smaller cities and both US and global regions. But DL and NW have owned the regions from which they fly…until everyone showed up with regional jets. Delta particularly has had a large presence in key business centers such as New York and Los Angeles but has regionalized its presence from those cities, serving primarily Florida from New York and east coast cities (its hubs and Florida) from LA.
You will see Delta becoming much more of a 1st tier carrier than it has been in the past.
Delta’s strategy shift is one of the most significant at any airline and even among other industries. Delta still has one of the most expansive domestic route networks of any airline and can make money carrying domestic connecting passengers – but they will pay much higher fares. And that huge domestic route network is well-suited to carrying passengers to the far corners of the world. Most of Delta’s current and expansionary international routes are to/from places where there is limited service by other US carriers (such as to smaller cities in continental Europe or Africa) or in O&Ds where other carriers cannot connect the hundreds of small markets that are part of every international destination. Eastern Europe is growing at rates as fast as economies in Asia and yet no other US airline serves Eastern Europe nor does any Eastern European country have a particularly strong local airline; the Eastern European market is for Delta to take away from the big three European carriers that carry most Eastern European passengers to and from the US via their western European hubs. To be sure, however, DL is also asserting itself in key local international markets such as from New York to Latin America. And Latin America represents a considerable growth opportunity for Delta. Although it has operated Latin American flights almost exclusively from ATL, Delta has become the 2nd largest airline to deep S. America and will likely surpass CO this year as being the largest airline to all of S. America. ATL is very well positioned geographically to develop new Latin markets which are already served from Miami and Houston. And DL’s growth prospects are very significant when they begin to develop JFK as a Latin American gateway. LAX and Florida also hold the potential for significant Latin growth prospects.
After years of struggling to find its role in the deregulated environment, DL now knows what they should be and do...not just what they should not do. That is key in recognizing that DL's turnaround plan is sound and geared for success.
It is not surprising that the template for Delta’s network turnaround has come in no small measure from Continental, an airline that spent decades and two bankruptcies trying to find itself after deregulation. Today, CO acts much more like a 1st tier airline than DL or NW although it has very little market share outside of its hubs. CO has used its assets extraordinarily well, possible both by having a major hub on one of the coasts but also because of NYC’s location relative to western Europe and Latin America which dovetails nicely with CO’s narrowbody capabilities. EWR became CO’s primary new source of revenue in the same way that DL is growing revenue through its international expansion. Further, two of CO’s former top network leaders are now doing the same job at Delta. It seems particularly ironic that the people who jeer Delta today are the same ones who rightfully laud Continental as running an extraordinarily good airline. And they do. DL will best CO at its game in just one trip through bankruptcy.
However, Delta has an even greater chance of success than CO because it has a much larger fleet of international capable aircraft, has a nationwide route system, and has multiple hubs which are capable of supporting international traffic (ie. despite the domestic cutbacks, CVG has more int’l air service than any similar sized city in population or wealth and it’s all provided by Delta and continues to do well despite the domestic cutbacks). Delta has many opportunities ahead of it but for the 1st time in perhaps 25 years, Delta has a vision of what it can be and the resources to make it happen. And while Delta has almost limitless growth potential over the next few years, its domestic competitors have very little growth capacity available to them. Because it still has a very large fleet of regional jets of all types, Delta is in very good shape to become an extraordinarily strong international airline while giving up very little of its domestic network through aircraft downsizing. Just as CO did in the 90s, Delta will possess a strong ability to grow relative to its domestic and international competitors given the cost advantage that Delta will have.
No US airline has developed and maintained the dense worldwide route systems that characterize British Airways, Air France, and Lufthansa. Based on the route announcements and rumors we have seen and heard over the past few months, Delta could very well have the most expansive international route network of any US airline. There will still clearly still be holes in their network but Delta should be able to fill those holes from a position of strength in the not too distant future.
However, a strong network isn’t the only ingredient necessary for a successful airline. Airlines end up in bankruptcy because of damaged finances. To their credit, American Airlines is the only legacy airline that has managed to avoid bankruptcy throughout its history and they have done that by responding to the threats that challenged their business and their balance sheet. However, bankruptcy is not all bad and CO again stands an example of a company that successfully used bankruptcy not only as an opportunity to develop a new strategy but also to clean up the damage from years of losses that resulted from those flawed strategies. To be sure, CO is still a highly leveraged airline and extraordinarily leveraged when compared with other industries but it is generating the revenues necessary to service its debt.
Again, Delta will have an advantage in its financial restructuring when compared with other airlines. Delta entered bankruptcy with the highest amount of unsecured debt of any US airline: $4 billion; its previously strong finances allowed it to offer unsecured debt that others could not. Ironically, Delta tried to renegotiate much of its unsecured debt in the 18 months prior to its bankruptcy filing, but without success. Most of those debt holders will end up with pennies on the dollar but with a stake in the reorganized Delta Air Lines. Put in another perspective, those unsecured debt holders in a sense supported Delta through several years of losses post 9/11.
By being near the back of the pack of airlines that have filed for bankruptcy in this business cycle, Delta has learned a lot. It has learned that it will not accept debt-only exit bankruptcy financing as one airline has done; replacing the debt that one came into bankruptcy with new debt doesn’t do much to provide a platform for success. Delta has also learned that a business needs capital to grow – necessary to keep costs down as the LFCs are good at doing but as they develop new business opportunities. DL’s route development over the next several years will be worthless if it cannot obtain the ultra long haul aircraft necessary to convert many of these new far flung markets into nonstop routes which will be necessary to build premium revenue. Further, DL still needs a cost efficient 100 seat airplane and it is very doubtful that Boeing, as Delta’s exclusive airframe supplier, will cede not only Delta’s business in that segment but also that of the entire industry to a Brazilian company. Boeing has no choice but to build a plane that meets Delta’s needs. Boeing will build it and Delta will fly it. Delta will have the finances necessary to build its business. Even in bankruptcy, Delta is upgrading its cabin interiors and airport facilities. Failing to invest in the business for any period of time is tantamount to deciding that you will not be a class leading competitor in your industry. Most importantly, DL is laying the framework to be a profitable airline which will ensure that it has the financial resources to remain a viable company. Having the lowest costs among the legacy carriers will serve as a huge advantage for Delta, just as it has in the past when Delta was one of the most efficient and lowest cost producers. It is not lost on DL’s leaders today that DL’s losses began to mount when it lost its cost advantage. Bankruptcy has been a powerful wakeup call for Delta. It has reenergized Delta as it has not been energized in decades and required it to develop the strategies and plans necessary to survive and thrive in the current airline environment.
People make up the final wing on which the retooled Delta will fly. Long recognized before deregulation as being one of the best companies in the world to work for, Delta has allowed its relationship with its employees to be badly damaged and has done little to improve it. Even though Delta employees have historically been well paid when compared with their peers, Delta employees were not happy. Delta has cut pay over multiple occasions rather than doing it once in a large enough measure to ensure success. While many people would like to think otherwise, high pay is not in and of itself a key to happiness at work. Continental employees have considered their airline one of the best to work for and yet they haven’t made industry leading salaries in a very long time. They do, however, share in their company’s success and are given considerable credit for their efforts at running their airline. You will see Delta moving from a patriarchal institution to one which is much more entrepreneurial in nature and in which employees are encouraged to see Delta’s goals as their own – exactly as it was for decades before deregulation. Delta succeeded because its employees understood what it took for the company to survive and made Delta succeed, to their mutual benefit. A confrontational work environment epitomized by salary cuts is never successful and that is the environment Delta has had for the better part of the past 15 years. As Delta people become competitively compensated, the confrontation and takebacks will come to an end and Delta people can share in their company’s hope in the future.
Delta has not forgotten how to run a profitable airline. It has taken longer than many of us would have liked for them to find a new way but they have obviously found it and are executing to make it win. Just you watch and see.