new motto: If you can't beat 'em, join 'em.
The third-largest carrier on Wednesday unveiled its plan to create a low-cost carrier within Delta's corporate structure, in an attempt to steal market share from competitors
But Wall Street remained unconvinced that such a legacy carrier can transition any part of its business to a low-cost model, and Delta shares were off 1.6% at $10.99 on the news, after shedding 6.5% earlier in the day.
"Although we believe this is a step in the right direction, Delta has to prove that it can compete on cost. Similar attempts have failed in the past," said Nicholas Owens, airline analyst with Morningstar. "But as the beleaguered airline industry picks up the pieces of its unprofitable hub-and-spoke system, Delta is the most likely of the major U.S. carriers to pull off such a move."
Indeed, with its nonunion workforce and lower labor costs, Delta is one of the few carriers that actually might be able to make the leap. But history isn't on the company's side.
shuttered its Continental Lite operation after it lost $300 million in 15 months, causing Chief Executive Gordon Bethune to later remark: "By chasing away the customers, we lost more money than we made."
closed its MetroJet operation and
unit United shuttered Shuttle by United after the Sept. 11 attacks, because they were too costly to operate.
These "airlines within an airline" largely were used to ward off low-cost attempts to gain market share, even if it meant losing money to do it. They never managed to reap the profits or popularity enjoyed by Southwest, and now low-cost carriers have 22% of the market, up from the single-digits a decade ago.
"We have previously noted that low-fare carriers represent a real threat to Delta -- substantially more than that from other hub-and-spoke competition," said Leo Mullin, Delta's CEO, in a statement. "Low-fare customers have been making significant inroads, particularly during this period of extreme financial duress."
Delta's new unnamed low-cost subsidiary marks the end of its low-cost DeltaExpress service launched in 1996, which was a shadow of its former self after being cut in half last year. Under the new unit, which will be launched in early 2003 and will have a different brand and look than its parent, Delta will crib from Southwest's super-efficient playbook.
For example, the bulk of the one-way fares will range between $79 and $299, predominantly between the Northeast and Florida. Fares will be available through a dedicated Web site and will be available in 14-day, seven-day, three-day and walk-up options. Self-service kiosks will be used to get passengers onto planes more quickly, and the company will use only one type of plane.
The key to turning a profit is efficiency, which is why Delta is launching its service with 36 Boeing 757 planes, which will hold 199 passengers. By sticking with one type of plane, Delta mechanics can specialize on one line of parts and service, which results in faster turnarounds and greater cost savings. Indeed, Delta hopes to reduce its turn time by 30 minutes and cut costs by 20% in comparison to its mainline 757 fleet.
"The less time a plane spends on the tarmac, the more time it can spend in the air, and that's more flights you'll have to make money," said Allan Miller, associate professor of travel and tourism marketing at Towson University. "MetroJet struggled because it went into Miami, which is a long airport, and planes were on the ground for two hours. It may not be more expensive to keep a plane on the ground, but you won't have any revenue coming in."
But this is precisely where Delta's plans could go awry. Southwest flies the smaller 737, which has between 122 and 137 seats, resulting in a turn time of 10 minutes. Southwest flies from smaller airports, like Islip on Long Island, so its planes don't get backed up on the runway.
And because Delta's planes are larger, it could take more time to get people on and off the planes, which will make its model less efficient than rivals like Southwest. But these larger planes have their upside as well. More seats mean more money, especially if the unit proves popular with customers.
Ultimately, Delta could succeed with a low-cost operation if it learns from other failed attempts, staying lean and efficient, and resisting the urge to add in loads of flights, as was the case with MetroJet.
"Just look at AirTran. It built its business slowly and kept to the concept," said Miller. "Have you noticed how Southwest doesn't expand more than one or two routes every three months or so? Attempts like MetroJet simply kept adding flights and ruined the model."