The biggest surprise in the airline industry may be taking off in Atlanta.
Conventional wisdom has it that
Delta Air Lines
is trapped in a downward spiral, fueled by a flawed strategy to boost revenue by throwing capacity at any international destination with an airport.
A top Delta executive disagrees, saying the airline industry will abandon that view in just a few months.
"The second quarter will drop some people's jaws," says Executive Vice President Glen Hauenstein in an interview. "It will change they way people think
about how this airline is digging out from a $2 billion loss last year."
Hauenstein, who oversaw the international expansion behind the turnaround of
, has mapped out a similar strategy for Delta.
"We have international expansion as far as the eye can see," he says, adding that the airline's goal is to do 50% of its business overseas within three years. That exceeds the carrier's previously announced intent to have international flying account for 35% of systemwide revenue by the end of this year, up from about 20% in June 2005.
Delta had a good day on Wednesday. The company's pilots voted to approve a three-year contract agreement that is expected to save Delta $280 million annually, and the bankruptcy court approved the deal.
Meanwhile, the airline reported improved financial results for April. It lost $27 million, compared with a $163 million loss in the same month a year earlier. Costs per available seat mile were 7.26 cents, a 3.8% decline. Passenger revenue per available seat mile was 10.97 cents, representing a 17.1% improvement.
"While our progress is encouraging, we're still at the bottom of the industry in terms of financial performance," says Chief Financial Officer Ed Bastian. "We have a plan for long-term viability, and it's working, but we still have a lot of work to accomplish before declaring victory."
Delta sought bankruptcy court protection in September, and it expects to emerge in the first half of 2007 after completing a restructuring that involves $3 billion in annual cost costs and revenue improvements. International expansion is expected to account for much of the new revenue.
Since last summer, Delta has added more than 50 international routes. Many have quickly shown profits, Hauenstein says. For instance, routes from Atlanta to Punta Cana, Puerto Vallarta and Managua "have been profitable right out of the box." Atlanta to Tel Aviv, added in March, has exceeded expectations and is already making money. Other profitable new routes began in March include Atlanta to Copenhagen and Dusseldorf.
"We haven't started them all yet, and some do make me nervous," Hauenstein says. "But the great thing about airlines is that our
planes are mobile. We'll move them if routes don't work."
Hauenstein joined Delta in August after two years at Alitalia, where he served as chief operating officer and presided over a route restructuring. He previously spent 16 years at Continental. In his view, although U.S. airlines are expanding internationally, they're moving too slowly because they've failed to grasp the rapid pace of globalization.
has 15,000 employees in Budapest, many of whom travel regularly to GE installations in Louisville, Milwaukee and other cities. Three weeks ago, Delta inaugurated New York-Budapest service, the only nonstop flight by a domestic carrier between that city and the U.S.
Lack of Understanding
Hauenstein says the world is awash not just in international business travel but also in aging baby boomers who are ready to travel and who are weary of going to Florida year after year.
U.S. carriers also don't accept that the major European carriers, not the other domestic airlines, are their principal competitors, Hauenstein says. Additionally, even if the U.S. airlines did fully understand what is happening, they don't have sufficient long-range aircraft to match the demand for service, Hauenstein says.
For most carriers, wide-body jets will be in short supply until the new generation of Boeing 787s and Airbus A350s begins to arrive several years from now. Delta has talked with Airbus about the A350, Hauenstein says, but Airbus doesn't even know yet what the plane will look like.
"They are thinking about a redesign, which would push them off until about 2013," he says. Delta has also talked with Boeing.
Unlike its competitors, Hauenstein says, Delta is a company stocked with both wide-body aircraft and hubs that don't fully exploit their international potential. This year, 13 wide-body aircraft that had been flying domestically have been redeployed to international operations. Still in the domestic fleet, available to fly internationally, are 16 of its 767-400s, the last 767 models built and the most fuel-efficient.
Ten years ago, the Atlanta hub, the biggest in the world, with about 1,000 daily departures, had just 14 international departures. This summer it will have 67. Delta is also building a hub at New York's Kennedy International, this country's busiest international airport.
"We have a 30-gate facility in the world's largest airline market, and it is underutilized," Hauenstein says. "We have just gotten to four complexes and 165 departures a day, which is my threshold for what you can call a hub."
For that matter, Hauenstein says, Delta has a potential international hub at Los Angeles International that it barely uses today, making vastly increased flying between Los Angeles and Asia a long-term goal.
Of course Delta has heard the widespread criticism of its approach. Two weeks ago, Continental President Jeff Smisek told an industry conference that Delta's strategy for rapid international expansion is flawed.
Aviation consultant Daryl Jenkins summarizes the industry's view of Delta this way: "They have shown no brilliance in the last three years," he says. "No matter what they do, it will be met with skepticism."
Jenkins says that Delta's biggest mistakes have included a focus on competing with low-fare carriers
. Now, he says, the focus has shifted to international, but again Delta is overdoing it.
"I can understand their desire to diversify their portfolio, but I'm not sure that flying Atlanta-Kiev is the way to do that" he says. "I just don't think you can take Continental's plan and have it work elsewhere."
Another industry consultant, Robert Mann, says trans-Atlantic expansion is a good idea in moderation, "but when all fools rush in, how much sense does it make?" He says that filling trans-Atlantic flights poses little challenge in the summer, but there's no way to keep them full once vacation travel subsides.
Hauenstein recalls that when Continental began its international expansion in the mid-1990s, Bob Crandall, then CEO of
, asserted that the strategy would fail and would cost the industry hundreds of millions of dollars because of excess international capacity -- which is exactly what Continental now says about Delta's strategy.
However, Delta is starting from a stronger position than Continental, Hauenstein says. When Continental began growing internationally in the mid-1990s, it had just three trans-Atlantic routes. Delta, by contrast, became a major trans-Atlantic airline when it acquired Pan American's Kennedy-based Atlantic division in 1991.
Since then, Delta has been the top trans-Atlantic carrier among U.S. airlines, and this week it will pass
to lead all carriers in the market as it adds flights to Edinburgh, Venice and Kiev. But "British Airways may take the crown back this winter," says Hauenstein, who assured that Delta will adjust winter capacity by moving planes to warm-weather markets or taking them in for maintenance.
Delta does have a few converts, including
CEO Doug Parker.
"My understanding is that Delta is doing pretty well in terms of revenue generation through Atlanta, which isn't surprising," he said in a recent interview. "It's a big hub, and the industry is doing well, and they're getting out of some capacity, which certainly helps them."
So far, the Delta story is little known because the airline hasn't spoken much publicly, preferring to focus first on issues including the pilot contract. As a result, attacks on its strategy have gone unanswered.
"We've been kind of quiet," Hauenstein says. "Nobody
outside really knows what's going on here. But we have a lot of restructuring to do, and unlike some competitors who went through bankruptcy and missed an opportunity, we aren't going to miss any opportunities."