WorldTraveler
Corn Field
- Joined
- Dec 5, 2003
- Messages
- 21,709
- Reaction score
- 10,662
As part of my ongoing assessment of the industry, particularly Delta’s role in it, I offer the following analysis. Those of you who think I’m perpetually biased may be surprised at the candor of what I say.
As some expected, the new China awards went to CO for PEK (Beijing) service from EWR and AA for PVG (Shanghai) service from ORD. I totally agree w/ the DOT that CO’s case for EWR service was strong and compelling given the strength of the local market; further, EWR is a hub in a very large market which makes just about any market work from EWR when the local and flow traffic is considered.
I’m less pleased that the DOT felt it was necessary to award service to AA primarily because it had the best opportunity to provide competition to incumbent carriers NW and UA. Awarding a valuable international route to an airline on the basis of its ability to provide competition says more about the monopolistic nature of limited access international aviation than it does about AA’s inherent need to provide the service. In my mind, increasing competition through a route award should be much further down the list of reasons to award service, behind providing service to an established and needy market (the basis of CO’s award) and development of new markets (the primary basis of DL’s route case – but one which the DOT finds hard to substantiate). Given that market access around the world is growing very quickly, there are probably not likely to be many more pivotal route cases like this down the road for US air carriers.
Specific to Delta, they really shouldn’t have been too surprised that they didn’t win a China award. After all, you have to fly over just about every other hub on the way from ATL to Asia. And while the SE may be growing in its Asian population and economic ties, it is still very far behind many other areas of the country. I do think the DOT missed the responsibility it has in awarding air service to develop new parts of the US through air service but maybe that job comes in a couple years when every carrier should be able to serve China and when the 787 will allow even the smallest international markets to be developed.
The DOT noted that DL has not developed Asia at all, a consideration in not awarding DL new China service. I have few harsh words for Delta but what I do have revolves around their western US and Asian strategy - or lack thereof. I believe I am correct that DL begin service to Asia via PDX before AA and had served far more Asian points than AA at one time. Granted, airlines can throw planes at routes and not make money but it is necessary to recognize what it takes to be a global carrier and develop strategies to grow into those needed markets. Granted, there is no US airline that can truly be said to be international but AA and UA used the 90s to become far more international than DL – which grew very comfortable becoming a very large domestic airline. Despite all of the wealth that the big three came upon in the 90s, DL expanded its worldwide network only by beginning service to S. America – a market that was itself overdue and which has proven to profitable and which will provide significant future opportunities for DL given its east coast strength which is geographically well-suited for Latin America service. DL spent much of the 90s trying to fine tune the Pan Am continental Europe acquisition which works but which only provides service to some of Europe’s smaller markets; after more than a decade, it is still not well connected to the DL domestic network through JFK (in contrast to CO’s well connected EWR transatlantic gateway) although DL’s JFK presence is now growing.
I believe the core problem is that DL has been far too comfortable staying close to its southeast roots. The Pan Am acquisition helped make DL a global player although without the crown jewels; if it was done a year earlier, DL would have had the LHR routes now held by UA and which would do wonders at improving DL’s European fortunes. The Western acquisition helped DL grow in the west but DL quickly dismantled much of the north-south routes on the west coast because of the highly competitive environment out west. Domestically, DL grew its hubs so that they are very competitive despite their small market size (outside of ATL) and can carry lots of connecting traffic but we now know that carrying the volume of connecting domestic traffic DL carries is largely unprofitable even for LCCs at the fares that exist in the US today.
DL is at a crossroads in the development of its network. It wants to be more international but probably can only fine tune and incrementally add to its Latin and European networks since LHR is the only major market in either region that DL doesn’t serve or couldn’t serve if it wants to. Asian economies are the fastest growing region in the world and they will continue to grow over the next few years. Yet, in order to serve them, DL must have a strong western US position or access to the top Asian markets - which none of DL's hubs are. DL’s western US strength now is just as weak as it was before the Western acquisition. I flew DL a couple times to Asia and was amazed at how few connecting flights DL provided at either PDX or LAX to feed the transpac flights there. DL could argue that PDX esp. was too small to justify much more longhaul domestic service yet DL had very few RJs that could have provided increased service within the west and DL has never had a shortage of RJs. Further, DL never flew PDX-Florida, one of the top markets at least in terms of volume from Asia. Finally, although DL pulled the plug on Asia after 9/11, to my knowledge it never considered using 767s across the Pacific even though PDX to Japan and Korea are well within the range of a 767 (and shorter than some of DL’s transatlantic flights even considering the different routes required).
I don’t believe DL is capable of solving its network problems through internal growth. DL has used its massive domestic network to distribute Latin and European traffic throughout the US and to enter new markets that its local markets wouldn't otherwise allow but that really doesn’t solve the basic problem DL has on both its domestic and international network – it needs access to much larger local markets than it has now. ATL is the only large local market on DL’s network in which it has a commanding position but ATL is not big enough to support the 550 a/c in DL’s fleet, one-fourth of which are widebodies and ATL is not a large international market - exactly where all of the airlines recognize they need to grow. NYC is obviously a huge international market but it is highly competitive and, once again, the top markets have limited access which is held by other carriers. DL doesn't even come close to having parity with partner Air France in JFK-CDG, the biggest JFK market DL serves. DL’s domestic growth in NYC clearly reflects its recognition of the need to become a dominant player in some of the top local markets and none is any bigger than NYC. However, CO is well entrenched in the entire market, AA has a pretty good chunk including the limited access markets, and B6 is hell bent on growing into many markets DL would like to serve – all of which combine to make DL’s internal growth proposition very costly.
Revenue generation, then, is the real challenge for Delta. Of course it is for every airline but DL has perhaps fewer opportunities to grow its revenue than any other airline except US. All of DL’s revenue growth right now will have to come through increased volume; as we know, increasing capacity only reduces yields unless you happen to find some very choice and rare markets which don’t have local service but which could justify it - and in DL's case can be flown w/ RJs which can open new routes in a very cost effective manner.
DL’s forte for years has been cost control, something the Mullin crew lost focus of during an era when the industry reshaping should have been confronted. DL is now working feverishly to regain its cost competitiveness with other legacies and I believe will succeed. Unfortunately, DL, like the other legacies, has accumulated a mountain of debt while figuring out it now that it needs to dramatically reduce costs. More significantly, DL now has to contend with the LCCs who have lowered the cost bar even further. Despite the challenges, I am more optimistic about DL’s ability to manage costs than I am about their ability to generate new revenue.
All of this brings me to the conclusion that DL has no real long-term option but to acquire another airline in order to be a long-term survivor. I think DL recognized the need to access new local revenue all the way back to Mullin’s early days but his team bungled attempts at acquiring CO – which now has a very good chance and probably will stand on its own. DL is now in the position that it is not likely to be acquired given its large debt load and limited access to unique markets relative to its size. (DL is too large relative to the few good markets it does have). There are potential combinations with Delta that could work but none provide Delta with what it needs more than United, something even Mullin recognized early on at Delta when he tried to develop a codeshare relationship with United – but had to drop because of DALPA.
UA’s Tilton acknowledges that UA probably can’t survive long-term on its own – an incredible admission but one which acknowledges how difficult it is for an airline to emerge from bankruptcy and thrive – not just survive. Ultimately, investors loan money to and invest in companies based on their ability to make money – not just pay the bills and then lose money. UA has no more of a chance of making money than any of the legacy airlines. Strangely, lenders to the airline industry today seem interested only in getting paid today even though long-term prospects for the industry show no signs of improving. It is highly possible, then, that lenders might be willing to support consolidation in the industry if the airlines’ obligations are met but irrespective of whether the airlines will become viable entities in the long run. Using that yardstick, the idea that airlines have to return to fairly significantly financial health in order to merge is no longer valid.
Merged airlines need to have stronger revenue bases than the two have independently and they also must have lower costs. If as I expect, DL will demonstrate a new standard for legacy costs which will make it harder for legacy airlines to survive and attract financing if they can’t get the costs down. Despite all of the bravado from the UA camp, UA’s unit costs have not come down a whole lot despite 26 months in bankruptcy. UA has acknowledged by shrinking its domestic system that its costs cannot support a domestic operation. I believe DL will get the costs down and will provide a very credible case if it chooses to acquire other legacy airlines. Even with a shrunken domestic network, UA will still have access to the top markets and will not likely lose much of the local revenue. UA’s revenue - much of it in top industry markets - fits nicely with DL’s ability to reduce costs and maintain a strong connecting network – much of which can be moved to UA’s hubs which are stronger than DL’s other than ATL.
DL’s CFO commented just last week that part of the reason why DL stayed out of bankruptcy is because if consolidation occurs, DL wouldn’t possibly be a part of it other than potentially being acquired if it were in bankruptcy and the same principle holds for other airlines as well. Further, he said that DL believes that terminating defined pensions doesn’t really eliminate many costs but has a devastating impact on employees – who are after all in the service business. Further, DL’s CEO has said more than once that the case for owning its regional carriers – the largest owned and managed fleet in the world – is not what it once was. As DL stabilizes its mainline operation, I fully expect that you will see those owned regional carriers monetized – not only to shore up DL’s balance sheet but also to facilitate consolidation in the industry. Finally, DL has identified approximately 100 a/c (mostly 737 classics) that can be retired fairly cost- effectively over the next 2-3 years; UA has at least that many in its 737 classic fleet as well. Those DL and UA aircraft provide the flexibility DL could use to remove capacity from a merged airline.
DL has grown its network more through acquisition than has either AA or UA; DL also has a pretty good track record at making acquisitions work in an industry that does M&A activity very poorly. Delta knows that it was never dealt the prime hands that AA, UA, or even NW were dealt in the formative stages of the airline industry - let alone what now defunct airlines like EA, PA, and TW had. The industry is more about making the best of what you have than having a silver spoon but it is clearly apparent that the international market is virtually impossible to break into and become a market leader if you haven't either been given or acquired the necessary rights. The majority of CO’s current network came through acquisition – which says that the right acquisition can provide a powerful framework for building a new company.
Every one of the airline executives who spoke at the recent JP Morgan airline conference acknowledged that consolidation is likely to come. Some like CO don’t want it and will probably do well without it; despite CO’s strong operational finances, it has little balance sheet strength so probably has no choice but to continue to compete on its own. The caveat for CO is that its much better capitalized partner NW could decide that should consolidation occur, it will not be left alone. Nonetheless, consolidation will likely begin in the legacy industry if only because industry finances are becoming more predictable even if they are not necessarily conducive to merger activity. It is those companies that can navigate the current environment and plan for the future that will survive. I happen to believe that DL has the greatest need for an extreme network makeover and also one of the best chances of being able to pull it off and make it work.
As some expected, the new China awards went to CO for PEK (Beijing) service from EWR and AA for PVG (Shanghai) service from ORD. I totally agree w/ the DOT that CO’s case for EWR service was strong and compelling given the strength of the local market; further, EWR is a hub in a very large market which makes just about any market work from EWR when the local and flow traffic is considered.
I’m less pleased that the DOT felt it was necessary to award service to AA primarily because it had the best opportunity to provide competition to incumbent carriers NW and UA. Awarding a valuable international route to an airline on the basis of its ability to provide competition says more about the monopolistic nature of limited access international aviation than it does about AA’s inherent need to provide the service. In my mind, increasing competition through a route award should be much further down the list of reasons to award service, behind providing service to an established and needy market (the basis of CO’s award) and development of new markets (the primary basis of DL’s route case – but one which the DOT finds hard to substantiate). Given that market access around the world is growing very quickly, there are probably not likely to be many more pivotal route cases like this down the road for US air carriers.
Specific to Delta, they really shouldn’t have been too surprised that they didn’t win a China award. After all, you have to fly over just about every other hub on the way from ATL to Asia. And while the SE may be growing in its Asian population and economic ties, it is still very far behind many other areas of the country. I do think the DOT missed the responsibility it has in awarding air service to develop new parts of the US through air service but maybe that job comes in a couple years when every carrier should be able to serve China and when the 787 will allow even the smallest international markets to be developed.
The DOT noted that DL has not developed Asia at all, a consideration in not awarding DL new China service. I have few harsh words for Delta but what I do have revolves around their western US and Asian strategy - or lack thereof. I believe I am correct that DL begin service to Asia via PDX before AA and had served far more Asian points than AA at one time. Granted, airlines can throw planes at routes and not make money but it is necessary to recognize what it takes to be a global carrier and develop strategies to grow into those needed markets. Granted, there is no US airline that can truly be said to be international but AA and UA used the 90s to become far more international than DL – which grew very comfortable becoming a very large domestic airline. Despite all of the wealth that the big three came upon in the 90s, DL expanded its worldwide network only by beginning service to S. America – a market that was itself overdue and which has proven to profitable and which will provide significant future opportunities for DL given its east coast strength which is geographically well-suited for Latin America service. DL spent much of the 90s trying to fine tune the Pan Am continental Europe acquisition which works but which only provides service to some of Europe’s smaller markets; after more than a decade, it is still not well connected to the DL domestic network through JFK (in contrast to CO’s well connected EWR transatlantic gateway) although DL’s JFK presence is now growing.
I believe the core problem is that DL has been far too comfortable staying close to its southeast roots. The Pan Am acquisition helped make DL a global player although without the crown jewels; if it was done a year earlier, DL would have had the LHR routes now held by UA and which would do wonders at improving DL’s European fortunes. The Western acquisition helped DL grow in the west but DL quickly dismantled much of the north-south routes on the west coast because of the highly competitive environment out west. Domestically, DL grew its hubs so that they are very competitive despite their small market size (outside of ATL) and can carry lots of connecting traffic but we now know that carrying the volume of connecting domestic traffic DL carries is largely unprofitable even for LCCs at the fares that exist in the US today.
DL is at a crossroads in the development of its network. It wants to be more international but probably can only fine tune and incrementally add to its Latin and European networks since LHR is the only major market in either region that DL doesn’t serve or couldn’t serve if it wants to. Asian economies are the fastest growing region in the world and they will continue to grow over the next few years. Yet, in order to serve them, DL must have a strong western US position or access to the top Asian markets - which none of DL's hubs are. DL’s western US strength now is just as weak as it was before the Western acquisition. I flew DL a couple times to Asia and was amazed at how few connecting flights DL provided at either PDX or LAX to feed the transpac flights there. DL could argue that PDX esp. was too small to justify much more longhaul domestic service yet DL had very few RJs that could have provided increased service within the west and DL has never had a shortage of RJs. Further, DL never flew PDX-Florida, one of the top markets at least in terms of volume from Asia. Finally, although DL pulled the plug on Asia after 9/11, to my knowledge it never considered using 767s across the Pacific even though PDX to Japan and Korea are well within the range of a 767 (and shorter than some of DL’s transatlantic flights even considering the different routes required).
I don’t believe DL is capable of solving its network problems through internal growth. DL has used its massive domestic network to distribute Latin and European traffic throughout the US and to enter new markets that its local markets wouldn't otherwise allow but that really doesn’t solve the basic problem DL has on both its domestic and international network – it needs access to much larger local markets than it has now. ATL is the only large local market on DL’s network in which it has a commanding position but ATL is not big enough to support the 550 a/c in DL’s fleet, one-fourth of which are widebodies and ATL is not a large international market - exactly where all of the airlines recognize they need to grow. NYC is obviously a huge international market but it is highly competitive and, once again, the top markets have limited access which is held by other carriers. DL doesn't even come close to having parity with partner Air France in JFK-CDG, the biggest JFK market DL serves. DL’s domestic growth in NYC clearly reflects its recognition of the need to become a dominant player in some of the top local markets and none is any bigger than NYC. However, CO is well entrenched in the entire market, AA has a pretty good chunk including the limited access markets, and B6 is hell bent on growing into many markets DL would like to serve – all of which combine to make DL’s internal growth proposition very costly.
Revenue generation, then, is the real challenge for Delta. Of course it is for every airline but DL has perhaps fewer opportunities to grow its revenue than any other airline except US. All of DL’s revenue growth right now will have to come through increased volume; as we know, increasing capacity only reduces yields unless you happen to find some very choice and rare markets which don’t have local service but which could justify it - and in DL's case can be flown w/ RJs which can open new routes in a very cost effective manner.
DL’s forte for years has been cost control, something the Mullin crew lost focus of during an era when the industry reshaping should have been confronted. DL is now working feverishly to regain its cost competitiveness with other legacies and I believe will succeed. Unfortunately, DL, like the other legacies, has accumulated a mountain of debt while figuring out it now that it needs to dramatically reduce costs. More significantly, DL now has to contend with the LCCs who have lowered the cost bar even further. Despite the challenges, I am more optimistic about DL’s ability to manage costs than I am about their ability to generate new revenue.
All of this brings me to the conclusion that DL has no real long-term option but to acquire another airline in order to be a long-term survivor. I think DL recognized the need to access new local revenue all the way back to Mullin’s early days but his team bungled attempts at acquiring CO – which now has a very good chance and probably will stand on its own. DL is now in the position that it is not likely to be acquired given its large debt load and limited access to unique markets relative to its size. (DL is too large relative to the few good markets it does have). There are potential combinations with Delta that could work but none provide Delta with what it needs more than United, something even Mullin recognized early on at Delta when he tried to develop a codeshare relationship with United – but had to drop because of DALPA.
UA’s Tilton acknowledges that UA probably can’t survive long-term on its own – an incredible admission but one which acknowledges how difficult it is for an airline to emerge from bankruptcy and thrive – not just survive. Ultimately, investors loan money to and invest in companies based on their ability to make money – not just pay the bills and then lose money. UA has no more of a chance of making money than any of the legacy airlines. Strangely, lenders to the airline industry today seem interested only in getting paid today even though long-term prospects for the industry show no signs of improving. It is highly possible, then, that lenders might be willing to support consolidation in the industry if the airlines’ obligations are met but irrespective of whether the airlines will become viable entities in the long run. Using that yardstick, the idea that airlines have to return to fairly significantly financial health in order to merge is no longer valid.
Merged airlines need to have stronger revenue bases than the two have independently and they also must have lower costs. If as I expect, DL will demonstrate a new standard for legacy costs which will make it harder for legacy airlines to survive and attract financing if they can’t get the costs down. Despite all of the bravado from the UA camp, UA’s unit costs have not come down a whole lot despite 26 months in bankruptcy. UA has acknowledged by shrinking its domestic system that its costs cannot support a domestic operation. I believe DL will get the costs down and will provide a very credible case if it chooses to acquire other legacy airlines. Even with a shrunken domestic network, UA will still have access to the top markets and will not likely lose much of the local revenue. UA’s revenue - much of it in top industry markets - fits nicely with DL’s ability to reduce costs and maintain a strong connecting network – much of which can be moved to UA’s hubs which are stronger than DL’s other than ATL.
DL’s CFO commented just last week that part of the reason why DL stayed out of bankruptcy is because if consolidation occurs, DL wouldn’t possibly be a part of it other than potentially being acquired if it were in bankruptcy and the same principle holds for other airlines as well. Further, he said that DL believes that terminating defined pensions doesn’t really eliminate many costs but has a devastating impact on employees – who are after all in the service business. Further, DL’s CEO has said more than once that the case for owning its regional carriers – the largest owned and managed fleet in the world – is not what it once was. As DL stabilizes its mainline operation, I fully expect that you will see those owned regional carriers monetized – not only to shore up DL’s balance sheet but also to facilitate consolidation in the industry. Finally, DL has identified approximately 100 a/c (mostly 737 classics) that can be retired fairly cost- effectively over the next 2-3 years; UA has at least that many in its 737 classic fleet as well. Those DL and UA aircraft provide the flexibility DL could use to remove capacity from a merged airline.
DL has grown its network more through acquisition than has either AA or UA; DL also has a pretty good track record at making acquisitions work in an industry that does M&A activity very poorly. Delta knows that it was never dealt the prime hands that AA, UA, or even NW were dealt in the formative stages of the airline industry - let alone what now defunct airlines like EA, PA, and TW had. The industry is more about making the best of what you have than having a silver spoon but it is clearly apparent that the international market is virtually impossible to break into and become a market leader if you haven't either been given or acquired the necessary rights. The majority of CO’s current network came through acquisition – which says that the right acquisition can provide a powerful framework for building a new company.
Every one of the airline executives who spoke at the recent JP Morgan airline conference acknowledged that consolidation is likely to come. Some like CO don’t want it and will probably do well without it; despite CO’s strong operational finances, it has little balance sheet strength so probably has no choice but to continue to compete on its own. The caveat for CO is that its much better capitalized partner NW could decide that should consolidation occur, it will not be left alone. Nonetheless, consolidation will likely begin in the legacy industry if only because industry finances are becoming more predictable even if they are not necessarily conducive to merger activity. It is those companies that can navigate the current environment and plan for the future that will survive. I happen to believe that DL has the greatest need for an extreme network makeover and also one of the best chances of being able to pull it off and make it work.
