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Aug 20, 2002
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Delta ready to go with low-fare unit
Operation may compete with JetBlue more than AirTran
By RUSSELL GRANTHAM
Atlanta Journal-Constitution Staff Writer
Delta Air Lines will soon announce a new low-fare unit designed to counter fast-growing discount airlines, a Wall Street analyst says.
Related:
• The Delta Insider




We expect that Delta will soon announce its new airline-within-an-airline, perhaps as early as next week, J.P. Morgan analyst Jamie Baker said in a report Thursday.
Rather than attacking the closest thorn in its side, discount carrier AirTran, which also has its flight hub in Atlanta, Baker said he expects Delta''s new operation to mostly take aim at a smaller, faster-growing threat: upstart discount airline JetBlue.
To the extent that Delta targets any one carrier, we expect it to be JetBlue, he said. Delta is already making some headway against AirTran since it matched the Orlando-based airline''s fares last year and has continued to add capacity on many competing routes, he said.
By concentrating on JetBlue, based at New York''s Kennedy International Airport, Delta would avoid repeating a serious mistake, he said. For a long time Delta barely recognized the existence of AirTran''s predecessor, ValuJet, until it had a firm foothold in Delta''s home market, said Baker.
Delta has acknowledged working on a new product to counter discounters. A spokesman for the airline declined to comment Thursday, other than to say the airline will dislose more details this month.
The topic is also likely to come up today, when Delta Chief Financial Officer M. Michele Burns will address industry analysts at an investor conference organized by Salomon Smith Barney. AirTran Chief Executive Officer Joe Leonard will also address the conference.
Burns is expected to detail Delta''s efforts to cut $2.5 billion in operating costs through 2005. Delta recently announced plans to cut up to 8,000 jobs and postpone deliveries of dozens of jets through 2004.
Delta has had a team working on a low-cost carrier strategy since August. It is headed by John Selvaggio, a veteran customer service and operations executive.
Delta already has moved to put bigger planes on some New York-Florida routes flown by its existing low-fare unit, Delta Express, suggesting that newer, bigger planes will be part of the plan.
Baker said he expects Delta to re-brand Delta Express to more effectively take on competitors AirTran, JetBlue and Southwest Airlines.
He said 44 percent of Delta''s domestic revenue base now faces competition from those three discounters, which can make money on lower fares because they have lower costs.
Baker said Delta needs a low-fare unit that would be a significant improvement over the existing Delta Express, which he said has been saddled with old planes and a cost structure that, while lower than the rest of Delta, is higher than the carriers it competes with.
Delta Express has never flown to Atlanta or Delta''s other main hubs, and it''s unclear if that will change with the new product.
Another analyst said he wonders why Delta would reinvent Delta Express, launched in 1996.
I''ve seen it happen so many times, only to see it fall by the wayside, said Ray Neidl, an analyst with Blaylock & Associates.
Delta started Delta Express at a time when several carriers experimented with low-fare units. But Continental, United and US Airways have all dropped the idea, and Delta has since cut Delta Express'' operations in half.
But if anybody can do it, it''s Delta, added Neidl, because it''s the least unionized big airline.
Baker said it''s about time big carriers tried again to take on discounters
Unless Delta fires a complete dud, the formation of a low-fare competitive unit signals a major shift in the competitive landscape, he said.
Delta already is competing hard with AirTran by matching that carrier''s fares from Atlanta and adding capacity on certain AirTran routes.
Baker said that strategy is proving effective, with AirTran''s proportion of revenue generated in Atlanta dropping from about 50 percent in 2001 to about 38 percent in the second quarter of this year.
Delta already has AirTran on the run, he said.
Neidl, however, said AirTran is strong and growing outside Atlanta. They can survive whatever Delta can throw at them, he said.
 

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