Dl's China Loss Points Out Network Deficiencies

WorldTraveler

Corn Field
Dec 5, 2003
21,709
10,721
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.
 
Excellent post.

If only this website attracted more posts like yours.

On owning the regional feed, I think the jury is still out on the outsourced FPD arrangements. In profitable times, outsourcing the feed and keeping all the upside is very attractive. But in losing times, when cash generation (and cash conservation) is of paramount importance, owning the feed looks like the better choice to me.

And in my view, DL and AA have benefitted tremendously over the past three plus years because of their wholly-owned regionals. Especially if the feed the regionals deliver to the mainline (at a guaranteed profit) is unprofitable feed for the mainline, which might be the case today. If that is the case, at least that unprofitable feed is delivered at cost, and not cost plus a guaranteed profit.

And this doesn't even address any possible synergy/efficiencies by which the mainline and the wholly owned can share expenses that would be duplicated if the regionals were not wholly owned.

Mesa and Republic keep reporting profits while many of their mainline partners are suffering. Over on the US forum, there is an active discussion of the huge cash payments to the outsourced regionals, and US owns some of its feed. I've read similar discussions about UA, which owns none of its regional feed.

On China, I figured that DL and CO would be handicapped due to their extensive marketing partnership with NW.

I agree that consolidation/network capacity reductions are necessary. Competition can be preserved with fewer than six legacy network options, especially since many consumers have LCC options in WN, B6 and FL, plus other smaller airlines. There are simply too many hubs. Until recently, DL maintained hubs at ATL, CVG, DFW and SLC. In my view, that's 2 or 3 too many. Same with NW and CO. Even after the downsizing of STL, AA may still have too much hub capacity.

I fully agree with DL on the pension issue. UA and US had to terminate (or begin the termination process) their plans because neither has sufficient cash to make this year's (or last year's) contributions. DL and AA have managed to weather the pension plan storm and as rates rise and equity markets improve, the annual contributions will keep falling, making them even more affordable. As I have posted numerous times, WN spends a much larger proportion of its revenue (and a lager % of its total comp) on its retirement plans than does AA in recent years.

The termination of those plans has devastated the morale of the affected employees and will be a contributing factor in the inevitable shutdown of those airlines, in my opinion.

Of course, that's the cue for DL and AA to work like hell to attract the higher-yield passengers of UAL and USAir; if both are smart, they WON'T expand significantly. Leave the low-fare leisure crowd to the upstart LCCs. Let B6 continue to reduce the prices of its tickets lower and lower.

The secret to survival for the full-service legacy airlines is to get smaller as the pool of passengers shrinks; let go of the bottom 10% to 25% of the passengers - they can go fly WN or B6 or FL or they can take the bus. Full service hotels still attract significant numbers of guests, and airlines with full-service can still attract significant numbers of pax.

And CO? I concur that it will probably get a lot closer to NW and may be acquired by NW; the DOT may have just awarded NW an additional seven frequencies to China.
 
FWAAA said:
Excellent post.

If only this website attracted more posts like yours.

[post="250483"][/post]​

No kidding! Both posts are great!! With all the silly union fighting over on the AA board this is refreshing! :up:
 
WorldTraveler said:
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.
[post="250411"][/post]​
Great thread! World, I totally agree with your observations. As far as spinning off the regionals, I have always thought that was DAL's so called "Ace in the hole" . The questions are who would buy them, how much could they get for them and how much debt relief would DAL realize? I have heard that we(DAL) have 8-9 billion in RJ debt. Any thoughts??
 
Thank you each for the affirmation. The key to making this industry work is creative, critical thinking. There are some of us that are capable of doing it and it is fun to “talk†with like-minded people.

The jury is out on the benefit that can be gained from spinning off the owned regionals. AA, CO, and DL have all benefited from their large regional jet operations by moving capacity back and forth between mainline and the regionals during the worst times of the past few years when it was hard to fill mainline aircraft but when it was absolutely necessary to preserve the network. Because of its huge RJ fleet, DL has done the most with developmental flying using RJs and that benefit cannot be underestimated. Neither of those benefits need to be lost if regional carriers are spun off since where and how the aircraft are deployed is not dependent on the ownership of them.

What AA and DL particularly have done is rely on regional jet profits to keep the larger carrier afloat. It was a lot easier to not address the larger structural issues in the mainline operation when other subsidiaries such as the American Eagle and Delta Connection contributed significant profits to the corporation. Thankfully, AMR and DAL both recognize that the overall company must be fixed and both companies are dead set on doing so; the legacy airlines have to learn how to be profitable all the time and not be wed to the boom and bust cycles as the industry has long done.

As for the specific value of the regional operations, the best guess is from DL who put a value of $2B on its owned regional jet operation as part of the Amex agreement. Given that there was no public valuation, the number is probably conservative and might be higher. Given that American’s jet fleet at AE (vs American Connection contract flying) is about two-thirds the size of ASA plus Comair which are owned (in contrast to contract flying by Skywest, Chautauqua, and the in-limbo FRJs from ACA), AE’s value may not be a whole lot less although DLC is now almost entirely jet aircraft which have higher revenue generating potential in contrast to AE’s 80 or so turboprop fleet. There are investors that will plunk down cash for regional airlines since they are much more consistently profitable than the legacies. I doubt if either AMR or DAL will completely spin off AE or DLC initially and will incorporate lots of clauses that prevent those two from wondering too far from their “parentsâ€. As for the debt carried by DL for DLC aircraft, I’m guessing it’s between $2-4B (and I’d err on the low side with the information I have) given the owned/leased proportion of the fleet and the age of the RJ fleet. It is proportionately lower for AMR given the smaller but newer RJ fleet and the larger number of turboprop aircraft. Total value for DAL is probably about $4-6B and $3-4B for AMR. Either way that could translate into a significant balance sheet overhaul. Of course, operating costs will go up after a divestiture since some balance sheet items will be converted to operating cash items.

You are right about not growing capacity in existing markets to try and force yields up; all of the legacies are shifting capacity from domestic markets which will help but could be offset by LCC growth and incursion. Don’t underestimate the importance of simplified fares in trying to minimize LCC growth in a legacy carrier markets. However, legacy airlines don’t shrink to profitability – precisely why I believe UA’s turnaround plan will not work. If you redeploy as much or more capacity to new markets (international) as you pull out of old markets (domestic), you can reduce costs. It is virtually impossible, even in bankruptcy, to get unit costs down while shrinking capacity. Even US is not trying to shrink the size of its mainline operation.

There are still too many hubs in the industry but the only way some will be eliminated is if the surviving carriers are able to control the strongest hubs and get rid of the weakest. DL’s CEO once commented that ATL, DTW, ORD, DFW, and DEN are among the hubs with long-term survival potential. It’s notable that CVG and SLC aren’t on the list and that DEN and ORD are. It’s also notable that ORD is probably the only city that will continue to support two airline hubs because of the artificial capacity limitations that prevent market forces from eliminating a weaker carrier as AA did to DL in DFW because of AA’s ability to grow so much longer. I heard Crandall say years ago that AA would be as close to UA in schedule parity as possible in ORD – a strategy that has enabled AA to stay in the game despite its former “underdog†status.

One other point about finances. Mike Palumbo (DL’s CFO) commented that another reason why DL did not want to file bankruptcy is because DL has about $3B of tax benefits (NOLs). A reorganization under bankruptcy almost always results in a change of ownership which wipes out those benefits. The $3B benefit for DAL and $790M for AMR (as of 9/2004) is enough to pay several years worth of pension benefits. DL at least is saying they would rather pay their pension bill and not taxes – a position I’m sure their employees would support.
 
It's an interesting analysis. Here are my thoughts.

WorldTraveler said:
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.
It does, but the US government doesn't get to control China's government. Something about how they have a lot of people, a good sized army, and a handful of nukes, I'd imagine. <_<

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).
I'd agree with your prioritization, but it's also worth pointing out that you explained later in your post exactly why it is that DL wasn't offering to develop much of a new market:
After all, you have to fly over just about every other hub on the way from ATL to Asia.
What other choice would you have had them make, once CO got theirs?

I don’t believe DL is capable of solving its network problems through internal growth. ... DL has no real long-term option but to acquire another airline in order to be a long-term survivor.
That may well be true, but I don't think that DL is in much of a position to acquire one of the bankrupt airlines. Their best bet is probably to hope for a fire sale, or to pull off some sort of AA/TWA-type acquisition, getting the assets without the liabilities.

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
That would have been a mistake anyway, since it still wouldn't have helped in the West and Asia.

Those DL and UA aircraft provide the flexibility DL could use to remove capacity from a merged airline.
While I agree that the route and hub structures of DL and UA mesh well, that's where "works well" ends. There's no union compatibility(!), and the fleets are fairly different (UA has A320s and 747s, DL has 737 NGs, MD-80s and -90s). True, they both have 757/767/777s, but the 777s have different engines. It's hardly a painless merger.
 
"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. "



NO, he didn't say that. But of course, it wasn't what YOU wanted to read, so you changed the words to concur with your agenda. (and you don't even work at an airline. Wow! You have this much time on your hands? Do you work? You are obviously intelligent, why the obsession?)


__________________________________________________________________

United CEO says airlines need to consolidate

By Dan Reed, USA TODAY

United Airlines CEO Glenn Tilton says the USA's No. 2 carrier could be a big player in a round of what he called an essential industry consolidation.
"The market has no space for six network, hub-based, legacy carriers," Tilton said at an investors conference in New York. Two big traditional airlines, United and US Airways, are operating in bankruptcy-court protection. American, Delta, Northwest and Continental are struggling to regain profitability.

Tilton strongly pushed the notion of consolidation, saying the big airlines should take cues from the telecommunications industry. SBC is buying AT&T, and MCI has accepted Verizon's bid as the industry adjusts to a new competitive landscape. Likewise, Tilton said, big airlines must consolidate to survive competition from fast-growing low-cost carriers.

Tilton repeated his belief that United will emerge from Chapter 11 in the fall. Its parent, UAL, entered Chapter 11 protection in December 2002 and continues to haggle with employees and creditors to reduce its costs.

Reacting to investors' sometimes pointed questioning, Tilton said it's not necessary that United be involved in a merger once it emerges from bankruptcy. But that, he said, is the path he thinks would be best.
 
I agree that in order for DL to really grow, they're probably going to have to purchase something. But before they do that, DL's management really needs to decide what they are truly committed to.

The JFK operation has been squandered for years. DL has added and dropped (domestic and international) flights so often that it's hard to tell what they are up to. Recently, it appears that they are trying to rebuild JFK (both international and domestic), but even now we get mixed messages. They add tons of Song flights to LAX, SFO and SEA while dumping PHX, SAN and DEN (the latter two were only relaunched last year!). This half-*ssed approach to JFK has made it very hard for DL to retain loyal customers.

DL's had a similar problem with BOS. They're building this brand new terminal, but honestly haven't shown much desire to fill it (in terms of adding new flights). Worst of all, DL's slowness in reacting has opened the door to JetBlue...which in a few years could surpass DL in terms of daily mainline flights.

Grinstein has said he wants to rebuild the west, but so far he's only added some flights at SLC (most of which were RJ's). Meanwhile, DL continues to dismantle what's left of the LAX operation by giving up the LAX-MEX route.

Now, as to expansion via acquisition. It would certainly be the fastest way to get into Asia and possibly some better domestic hubs. Unfortunately, there's two major stumbling blocks.

1) DL's finances are still very weak. Acquisitions are costly and usually end up costing far more than originally planned. Also, DL's overall liquidity is still quite poor and won't improve much for the next year or two. This is particularly true if fuel prices stay as high as they are. DL management has done a MISERABLE job in projecting future fuel prices.

2) Integrating another carrier into DL. M & A activity is a messy, messy business, particularly for airlines. In fact, most acquisitions prove to be BIG failures. If DL tries to pick-up UA, they could be in for more than they bargained for. Trying to merge UA's mostly union employees with DL's non-union employees would be a disaster. Not to mention that a merger would likely require thousands of layoffs (as part of the merger synergy). The already beleagured employees would fight this tooth and nail. I have a distinct feeling most UA employees would hate working for DL and would willingly do what is necessary to destroy DL (if they were acquired).

Given the messiness of a full scale merger, I think the only way DL could possibly get ahold of UA assets would be through piecemeal sale. I simply don't believe DL could digest all of UA...it's too much. However, acquiring certain pieces of the UA network might be feasible.

Of course, with all that said, I don't necessarily believe any part of the UA network will be for sale anytime soon.

Finally, I believe spinning off a regional will happen. Owning both Comair and ASA is unnecessary. Plus, DL will likely need the cash just to survive the next 18 months outside of bankruptcy. I'm not sure how much Comair/ASA are really worth. Both rely heavily on 50 seat RJ's whose economics have definitely gone south. If either ASA or Comair can begin obtaining E170's that would dramatically improve their value. Comair pilots and FA's are looking at a proposal that MIGHT bring E170's, but it's tough to tell what the outcome will be there.
 
Good thread.

DL's biggest network deficiency IMHO is that aside from ATL, their hubs are less than desirable. If JFK was the size of EWR, it would not be the case and they would be in pretty good shape, but with a mediocre JFK operation going up against AA and B6 there, it will be very difficult to build the hub into something as viable as EWR. BOS is a potential hub that could be turned into something like UA does at IAD, with the main connections flowing east-west to Europe. I don't know where DL stands at BOS these days vs. AA and US, but it seems like the best opportunity for growth. But again, it is subject to B6 destroying yields.

The lack of a anymore more than ATL is why I have always wondered why WorldTraveler has been so high on DL. Their balance sheet might be better than their competitors and they might have a better turn around plan, but at the end of the day it is selling tickets, and if there aren't enough customers in SLC and CVG to run flights with 70% of the passengers as O&D traffic, then their long term prospects are questionable.

I have a really old DL route map, from 1991 or something, that has (IIRC) the following hubs:
ATL
CVG
DFW
SLC
LAX
a 'regional' hub in BOS
a 'transatlantic' hub in JFK
a 'transpacific' hub in PDX
a 'European hub' in FRA
a 'developing Asian hub in TPE'
and I think even MCO was listed as some kind of hub

Regarding mergers in the future, right now I think with the industry in turmoil, the unhappiness of labor, the massive debt loads and the complexity of merging that we won't see a merger from the legacy carriers for at least 5 years. Codesharing accomplishes enough of the benefits of merging to make it the most cost effective way to expand an airline's reach that the costs of a merger would be too much at this point. As the LCCs continue to grow and take over a higher % of the domestic marketplace, I think we'll see a full-on merger, but until then any drastic changes will occur because someone went Ch. 7.

I also wonder whether or not DL would make a play for AS. Fleet should be compatible, fare structure/philosophy is similar and DL could build a pacific hub at SEA. With AS' route structure added to the SLC hub, DL/AS would be the dominant carrier on the west coast and have the feed to run a decent sized Asian operation from SEA. But like I said, I don't think we'll see this for at least 5 years, and that is also subject to AS being bought by AA first.

Should be interesting....
 
Fly said:
NO, he didn't say that.  But of course, it wasn't what YOU wanted to read, so you changed the words to concur with your agenda.  (and you don't even work at an airline.  Wow!  You have this much time on your hands?  Do you work?  You are obviously intelligent, why the obsession?)
[post="250617"][/post]​


I for one enjoy World's contributions to these discussions. He or she has obviously demonstrated an enchantment with the airline industry, and being employed by an airline is certainly not a prerequisite for posting on these boards. Perhaps you are the one with the agenda.
BTW... nice avatar.
 
thanks, luv.


wh,
I'm as troubled when I look at DL today compared with the route map of 1991 that I remember. DL has had a vision of being something significant in Asia and the west but has not had the fortitude to make it happen. The pitifully small operation they ran to Asia from PDX is plenty of example.
The reason I am positive on DL is because they continue to demonstrate an understanding of what it takes to survive in this business and to make it happen despite their financial woes. UA and US could have restructured their finances outside of bankruptcy but didn't think through the process long enough before going in. AA, DL, and now FlyI have all managed to do fairly significant out of court restructurings.
DL was supposedly very close to bidding on AS before 9/11 but obviously ditched it. AS could enable DL to develop a Pacific route system but I would bet the cost of building a route system along w/ an AS acquisition are much higher than simply buying an airline out of bankruptcy.
Codesharing does nothing to improve an airline's finances since in most codesharing relationships the operating carrier retains most if not all of the revenue for the segment they operate. The hope is that the bigger airline gets more revenue from bookings by the smaller carrier and thus their revenue is increased. Costs are unchanged if not increased. Duplicated resources (redundancies to Mr. Weiss) still exist.

Michael,
Fleet is not near as important in a merger when one is talking about fleet sizes that number in the hundreds for each fleet type. Engine commonality is fairly insignificant given that engines stay on the airframe for years in many cases and can easily be subcontracted out to someone that specializes in that engine.

Fly,
if you trace Mr. Tilton's statements over the past several years, you'll notice a significant increase in the lack of hope that UA will emerge. He simply will not come out and say that UA is not going to make it. The fact that he said that "UA can make on its own but a merger with another carrier is probably the best scenario" is a pretty clear indication that he doesn't think UA can or will make it on its own.
Listen to the JP Morgan conference if you want more clarity on what was said about consolidation by all the carriers.
 
DLFlyer31 said:
[lot's of good stuff clipped]

2) Integrating another carrier into DL. M & A activity is a messy, messy business, particularly for airlines. In fact, most acquisitions prove to be BIG failures. If DL tries to pick-up UA, they could be in for more than they bargained for. Trying to merge UA's mostly union employees with DL's non-union employees would be a disaster. Not to mention that a merger would likely require thousands of layoffs (as part of the merger synergy). The already beleagured employees would fight this tooth and nail. I have a distinct feeling most UA employees would hate working for DL and would willingly do what is necessary to destroy DL (if they were acquired).

Given the messiness of a full scale merger, I think the only way DL could possibly get ahold of UA assets would be through piecemeal sale. I simply don't believe DL could digest all of UA...it's too much. However, acquiring certain pieces of the UA network might be feasible.

[clip]
[post="250655"][/post]​

As Sam Buttrick very memorably put it (in the context of discussing UA-US in 2000/2001) "There have been 17 major airline mergers since deregulation and every single one has destroyed shareholder value ... apart from Delta's acquisition of Western, because they didn't take any of the employees." (From memory, but I think I have that close.) Between finances and seniority issues, I don't see consolidation happening through M&A -- only through asset sales once someone is forced by its creditors to start burning the furniture (a la Pan Am and TWA).

One other comment on one of many issues picked up by this thread. Network. ATL is a great domestic hub (great for funnelling people to/from Florida). It's location stinks for international (you ideally want a coastal /border gateway) or at least have stronger international O/D (e.g., ORD). JFK may be rescue-able (and BOS is an interesting option) for Atlantic. I don't see many options for DL over the Pacific except hand it over to Korean and Northwest. Hasn't Northwest added some service from PDX, DL's former gateway?
 
SVQLBA said:
apart from Delta's acquisition of Western, because they didn't take any of the employees." (From memory, but I think I have that close.)
[post="250689"][/post]​


There are former Western employees working at Delta.
 
WorldTraveler said:
Fly,
if you trace Mr. Tilton's statements over the past several years, you'll notice a significant increase in the lack of hope that UA will emerge. He simply will not come out and say that UA is not going to make it. The fact that he said that "UA can make on its own but a merger with another carrier is probably the best scenario" is a pretty clear indication that he doesn't think UA can or will make it on its own.
Listen to the JP Morgan conference if you want more clarity on what was said about consolidation by all the carriers.
[post="250687"][/post]​
That is (again) YOUR interpretation World. I'd like for you to share with us the "significant increase in the lack of hope that UA will emerge" as spoken by Mr. Tilton.
 

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