Published in August 2016 issue
One hundred and eighty five million passengers fly Delta jets every year. That’s equivalent to almost half a million people booking, boarding, flying, and reaching any of the 330 global destinations on Delta’s network on any given day. With a staggering flight completion rate of 99.9%, Delta guarantees that its more than 800 aircraft, operating more than 5,000 flights every day, are able to deliver the world’s safest, quickest, most reliable on-time air service, canceling only one flight out of every 1,000—all while earning money and keeping its customers satisfied. This is Delta: the on-time profit machine.
By Enrique Perrella
However, new pressures challenge the airline’s continued growth and financial health; an expected climb in fuel prices, a rise in airfares, new security constraints, and a move by the Gulf Carriers into American territory.
With the Atlanta-based carrier under the leadership of its new CEO Ed Bastian, it’s a great time to understand how an airline like Delta Air Lines (DL) has climbed to—and plans to remain at—the cusp of success in the most volatile industry of all.
THE NUMBERS OF SUCCESS
“This airline has never performed better in its history,” said a happy Ed Bastian during an interview with Airways two days before taking the reins from his predecessor, Richard Anderson. Bastian—who has been with Delta for nearly 17 years, has a strong financial background and had served as President since 2007— took the helm on May 2, 2016.
Delta’s stunning 99.9% mainline completion factor—its percentage of non-cancelled flights—leads the global industry. It reported a US$1.56 billion pre-tax profit for this year’s first quarter, almost US$966 million higher than in 2015, and an impressive on-time arrival rate of 90.3%.
The new CEO said that the airline’s success is closely tied to its core business, which is providing its customers with a premium product, keeping away from the commodity carriers, and reinvesting its earnings into product enhancement, maintenance, and forecasting.
At the end of March 2016, the CEO said that the company had reinvested $870 million back into the business, including US$764 million in fleet.
“We generated well over US$30 billion in operating cash flow last year,” said Bastian. “And, for every dollar of cash we generate, we take 50 cents on the dollar and put it back into the business.” The remaining 50 cents, said Bastian, is used to repay debt or is given back to Delta’s stakeholders. This seems to be the formula that ensures that the airline will never get back into the state of disrepair that forced it to file for bankruptcy in 2005.
With this approach, Delta has invested over US$15 billion into facilities and fleet, and brought down its debt from about US$20 billion to just US$5 billion.
“We have to deliver a premium service with a higher quality, better reliability, a better product than our competition, and get paid for it,” Bastian said.
To keep up the quality of its product, Delta makes sure that its domestic hubs are well equipped. New terminals have been opened in Atlanta (ATL) and New York (JFK), and another will follow in Seattle (SEA). DL has upgraded its facilities in Detroit (DTW) and Minneapolis (MSP), and is allocating US$6 billion to update and expand its main hub in ATL for future growth over the next 10 to 20 years.
The result: an optimal operation. “All of our domestic hubs improved margins in the quarter with the best performances in Salt Lake City, Atlanta and Minneapolis. Our investments in markets like New York and Seattle are continuing to pay off, as we drove margin expansion in excess of the domestic average in both of these cities,” said Glen Hauenstein, Delta’s President, during a conference call.
THE NEW CEO
With Ed Bastian taking control, former CEO Richard Anderson stepped down with a sparkling résumé. Airways analyst Vinay Bhaskara considers him one of the best CEOs in the history of the US airline industry.
Anderson not only helped increase Delta’s share price by 428% since it bottomed out in 2011, but also led the airline to the position of the world’s most profitable carrier and to achieve best operational performance in the United States during a period of high oil prices.
He’s also been one of the strongest advocates against the Gulf Carriers’ alleged subsidies, most noticeably against Qatar Airways (QR).
“I’ve been asked many times, as I take over as CEO, as to what my priorities will be as we look to the future,” Bastian said. “So, it was an interesting time for Richard to hand over the keys to me and say, ‘Don’t screw it up.’ And we are working very hard not to screw it up.”
Bastian and Anderson—who will remain as Chairman of the Board—will continue to invest in the initiatives that are producing a durable, sustainable, and industry leading foundation at Delta.
Asked about QR, Bastian said he agrees absolutely with Anderson. “We do believe that these subsidies are not just real, but that they are also distorting the picture,” he said.
Bastian pointed out that the UAE and Qatar have a combined population equal to that of the state of Rhode Island; yet, these countries have more international wide-bodies on order than all of the US and Chinese carriers combined. “How is that possible?” he asked. “It is not possible without some type of aid. I am equally frustrated and equally engaged in the debate.”
Bastian gives Anderson enormous credit for his accomplishments. “It is very hard for leaders to walk away and retire when there is so much enthusiasm going in the business, and, as we say, there is still a lot of gas in the tank.”
And, while fuel prices remain low, will Bastian’s Delta remain at the top?
Paul Jacobson, Delta’s CFO, said that low fuel prices may start to climb sooner, rather than later. “We know fuel won’t stay low permanently,” he said. “As a result, we remain focused on staying disciplined with our costs.”
Delta and Northwest (NW) both filed for bankruptcy in 2005, when fuel prices bottomed at US$55 a barrel. Today, according to Bastian, “we achieved our highest profit ever and fuel prices were at US$54 a barrel.” The difference? A decade’s worth of planning, restructuring, and revamping the business.
Anticipating that oil prices will rise again, Delta plans to reduce its capacity growth in 2016.
GLOBALIZING THE WIDGET
Delta is using its current positive cash flow to purchase stakes in Virgin Atlantic (VS), Gol (G3), China Eastern (MU), and, soon, Aeromexico (AM).
Delta’s overseas reach aims to expand its mainline service worldwide, taking advantage of its SkyTeam partners and offering a seamless experience to those customers who travel beyond its network.
“Whether through initiatives like headquartering our transatlantic operations in Amsterdam or through our equity stakes in Virgin, China Eastern, Aeromexico, and Gol, we see the international marketplace as a source of long-term profitable growth opportunities,” said Bastian.
China remains one of Delta’s most valued markets, which was made evident by its hefty US$450 million investment in MU for a 3.5% stake. “When you think about China, it is clear that it is going to quickly overtake the UK as the largest international travel market to the US,” Bastian said. “In fact, it will probably happen in the next 12 to 24 months.”
The CEO views MU, and its hub in Shanghai (PVG), as the perfect combination to capitalize that growth opportunity. Shanghai “is the commercial capital of China, and 16% of all high value premium travel goes through PVG,” he said. “So it is a logical place for us to establish a hub.”
Then comes Virgin Atlantic. Delta bought Singapore Airlines’ 49% stake in VS for US$360 million in 2013, and, according to Glen Hauenstein, Delta’s President, it is bringing outstanding results. “We are pleased with our performance in London and we continue to benefit from our deeper integration with Virgin Atlantic and the network changes we made together in 2015,” he said. The deal gave Delta some much desired space at London- Heathrow, and increased access to Asian markets.
The British carrier will also move its reservation system under Delta’s, an unprecedented move that marks the first time in the industry’s history where the international operations of two different carriers operate under the same program.
The software integration will give VS access to a reservation system that is the product of a US$350 million investment. “Virgin Atlantic, on the other hand, spends roughly US$50 million a year in technology; so, if the experiment goes well, some of our partners may become more interested in it,” said the CEO.
Mexico and Brazil are the next two markets for which Delta has big ambitions, with AM and G3 as its two targets. “The reason why we are investing in Aeromexico is that Mexico is country with 120 million people and is one of our closest trading partners,” said Bastian. “And Brazil is a very important and strategic market us. We are confident that, once the political and economic storm is over in Brazil, GOL will be one of the airlines standing.”
The Aeromexico transaction should be closed by the end of the year. Currently, Delta owns about 17% and, before the year is out, its share should increase to 49%. And Delta’s current stake in Gol is about 9%.
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BIG REFLEETING EFFORTS
Delta is devoting great effort to replacing or refurbishing the oldest aircraft in its colossal 825-strong fleet. That has resulted in one of the industry’s biggest headline stories in years: Delta and Bombardier committing to 75 110-seat C Series CS100 aircraft, a breakthrough order that may save the Canadian manufacturer from a massive failure with its all-new twin-engine airliner.
“We have 75 firm orders coming from Bombardier, with options for an additional 50,” Bastian said. “It is an absolute wide-body feel in a narrow-body aircraft and is 20% more fuel efficient than our Boeing 717, which was a game changer for us four years ago.”
Bastian described the CS100 as the perfect aircraft for Delta. “Our customers don’t like flying on a 50-seat, regional airplane,” he said. “The CSeries is going to be the next evolution of an upgauge strategy as we continue to free Delta out of regional into the mainline space.” And Delta may elect to convert a number of these CS100s into CS300s.
At the same time, 82 brand-new Airbus A321ceo aircraft will join Delta’s fleet. Bastian said that they had great end-of-the-line pricing, as Airbus prepares to massively produce the neo variants and phase out the ceos. In addition, 50 more Boeing 737-900(ER)s will be joining the fleet over the next four years.
In the wide-body sector, Delta was the first airline to take delivery of the Airbus A330-300 MTOW, with its increased takeoff weight that allows for extended-range routes. Four additional Airbus A330-300s are yet to be delivered. The first of 25 Airbus A350-900s is expected to arrive in the second quarter of 2017. New A330-900neo aircraft should be delivered in 2019, replacing the current Boeing 767-300(ER) fleet.
Asked about the Boeing 787 Dreamliner orders inherited from DL’s merger with Northwest, Bastian said, “It is still on the books, and we’ll look to evaluate it,” though he didn’t look too enthusiastic.
As new airplanes join the fleet, others are destined to leave. Since 2009, DL has retired over 400 narrow-body and regional jets, while refreshing 300 more aircraft. Large numbers of Boeing 757s, 737-800s, and Airbus A319/320s are going away. This major refleeting effort will save US$350 million in 2016, the airline said.
Delta is also carefully planning the phase-out and eventual replacement of its aged MD-88s. “There will be several different aircraft brought in to help substitute the -88s,” said Bastian. “It is a large fleet for us to replace, with about 115 that we would like to retire by the end of the decade.”
The Airbus A321 seems to be a great substitute. Seating 192 passengers in a wider, more comfortable cabin, it exceeds the 149-seat capacity of the MD-88.
However, one of Delta’s largest fleet components is the Boeing 757. The airline has begun upgrading both the -200 and -300 variants with new seats, inflight entertainment, overhead bins, and new inflight features. However, several of these airliners are a few decades old and will soon be retired.
Boeing has given up on producing a proper 757 replacement, and Airbus has capitalized from this by outselling its Airbus A321 to known 757 operators like American Airlines (AA). Delta’s CEO has expressed interest in this kind of airliner— dubbed Middle of the Market (MOM)—that is larger than the 737-900 and smaller than the 787-8, although the Seattle-based manufacturer has yet to come up with any proposals, leaving Airbus with an open field for MOM opportunities.
WELCOME, PREMIUM ECONOMY
Last year, Delta unveiled an enhancement in its Economy Class by offering Comfort+, an increased legroom option. Then, it created a new Basic Economy fare, tailored for price-sensitive travelers who often fly LCCs but would prefer Delta’s reliability and connectivity.
And now, with the help of partners Air France (AF) and VS— and to counter AA’s new Premium Economy—Delta announced a similar cabin, which will debut on the Airbus A350.
“We will bring a new international Premium Economy cabin with the A350,” said Bastian. “It will be its own cabin to itself, and it is going to be significantly improved.”
With the imminent retirement of the Boeing 747, the CEO said that offering a top-notch international product is paramount. “We believe that while we have made substantial enhancements to the front of the plane, it has created a greater divide between Business and Economy. So, we will add the Premium Economy with the A350 and expand it to the Boeing 777 fleet.”
THE HEATED SKYMILES PROGRAM
But even Delta can’t please everybody all the time. Frequent flyers who collect SkyMiles— one of the world’s most popular frequent flyer programs (FFP)— have had to adjust to drastic changes with a strong devaluation and the implementation of a revenue-based loyalty program.
Delta has a large community of frequent flyers who spend more than 300 days a year on Delta jets. Diamond Medallion (the FFP’s highest tier) Ron Hernandez is one of them.
“I fly around 250 segments a year and have totaled over 1.7 million miles with Delta,” said Hernandez. “I’ve been a Diamond Medallion since the FFP’s inception and it’s the first time I’ve found myself irritated at what used to be a most rewarding program.”
Delta has chosen to hide its SkyMiles award and upgrade charts from its website after many years of clearly indicating how many miles a passenger would need to fly from one region to another at various redemption levels and in different fare classes.
When asked how Delta planned to keep its Medallions happy, Bastian said, “Anytime you make changes, there are always a lot of people that are happy and others that are not happy, and that is part of the evolution in the business.”
However, when it comes to people who spend tens of thousands of dollars on Delta every year, these tactics could do more harm than good.
“Delta is a very special airline to me and, despite the changes to the SkyMiles program, I remain loyal,” Hernandez said. “But AA offered me a status match and I’ve begun to move some of my business to them.”
According to the CEO, the SkyMiles program had more redemptions in the first quarter of 2016 than at any time in Delta’s history; members redeemed miles for 2.2 million award trips in the first four months of the year.
“While there are some anecdotal frustrations, one of our goals was to expand the accessibility and availability of rewards across the broader spectrum, and it is happening,” Bastian reported.
Hernandez put his unhappiness with the program in perspective. “SkyMiles aside, I’m a satisfied Delta customer,” he said. “They get me where I need to go, are reliable, and their on-time performance is important to me. They’re much more on time than American Airlines.”
But the changes are clearly nettling Delta’s Elite travelers. “It seems that some of these SkyMiles changes are simply ignoring the highest-tier Elites to the point that some within are contemplating leaving the ranks or have left altogether,” Hernandez said. “If their most hardcore flyers are questioning their loyalty and eventually leaving, what hope is there for the casual traveler? Are we witnessing the beginning of the end of the frequent flier program as we know it?”
Bastian refused to comment on those questions.
KEEPING THE LEGACY ALIVE
While striving to renew its fleet and keep its product up-to-date, Delta also does its best to keep its legacy alive.
When, back in 2015, it announced the retirement of its Boeing 747-400 fleet, as capacity to Pacific routes began to decline, the airline did something unprecedented: it prepared the world’s first 747-400 airframe (N661NW • Ship 6301) to be placed on permanent display at Delta’s own museum, located right at ATL.
Hundreds of aviation enthusiasts, Delta employees, and news media witnessed a team of Delta Tech Ops move a 400,000lb, 232ft-long airplane from the outskirts of ATL, down two streets to the Delta Flight Museum—an endeavor that took almost three hours.
Now the Queen of the Skies rests next to a Delta Boeing 757-200, a DC-9-30, and a Boeing 767-200.
While Delta’s Museum immortalizes the airline’s history, it’s up to its new management, and its 80,000 employees, to keep ‘the Widget’ soaring high. With new challenges looming ahead, the game is on.