Delta Open to New Ventures Amid ‘Final Stages’ of Consolidation

Delta Air Lines Inc. Chief Executive Officer Richard Anderson said the carrier’s joint venture with Air France-KLM and Alitalia has had the “economic effect of merging” and will serve as a template for future accords.

Delta executives declined to comment today during a webcast investor conference about a Sky News report that Delta was among carriers exploring a tie-up with Richard Branson’s Virgin Atlantic Airways Ltd., which has hired Deutsche Bank AG as an adviser.

Delta’s SkyTeam Alliance global marketing group has sought new partners including China Airlines so they can sell seats on each other’s flights and gain service within regulatory limitation. Delta, Air France-KLM and Alitalia have an even deeper arrangement that lets them coordinate fares and schedules for trans-Atlantic flights.

“The economic growth is going to be outside the U.S., and so I think we need to be certain that we’re flexible enough to participate, either through joint ventures or other sorts of arrangements,” Anderson said.

Delta can “use that model with Air France-KLM to get the same kinds of synergies on revenue and cost without trans-border mergers” with other carriers, Anderson said.

Delta today reiterated its plan to use free cash to pay down debt, with a goal of trimming it to $10 billion by 2012 from $15 billion now.

A stronger balance sheet will help Delta “be certain that we participate in what I sort of called the final stages of consolidation,” as the industry continues to be more deregulated, Anderson said.

More Mergers

The global industry has completed about three-fourths of the mergers that are necessary, Anderson said, without specifying how many more he thinks should happen.

Delta bought Minneapolis-based Northwest Airlines Corp. in 2008, a deal that made it the world’s biggest carrier until United Airlines and Continental Airlines combined in October to form the larger United Continental Holdings Inc. In September, Southwest Airlines Co. agreed to purchase AirTran Holdings Inc. in a cash and stock deal.

Joint ventures are critical because some countries, including the U.S., have laws limiting foreign ownership of airlines. Overseas companies can hold up to 49 percent of stock in U.S. carriers, or 25 percent of voting stock.

Virgin Atlantic is 49 percent-owned by Singapore Airlines Ltd., and analysts in the U.K. said any new deal involving Virgin may hinge on whether Singapore wants to sell its stake. Singapore Airlines declined to comment on its plans.

Delta is awaiting regulatory approval on a joint venture with Australia’s Virgin Blue Holdings Ltd., and the carrier will “hopefully have a positive announcement on that within the next 60 days or so,” said Glen Hauenstein, executive vice president of network and revenue management.

Seat Growth Capped

Delta said 2011 seating capacity will increase no more than 3 percent as it works on accumulating $2 billion in free cash to pay down debt.

Available seating will grow at roughly the same rate as the U.S. gross domestic product, with the biggest gains on routes to London’s Heathrow airport, Tokyo’s Haneda, Beijing and Shanghai, Delta said today in a regulatory filing.

Managing capacity helps airlines gain pricing power by matching the supply of seats with demand. Revenue in 2011 for each seat flown a mile, an industry benchmark, will meet the level last seen in 2008, before air travel slumped during the global recession, Atlanta-based Delta said.

This year will “end up being our best year in the past decade,” Anderson said during the investor meeting in New York.

Operating Margin

The airline reiterated its projection for a fourth-quarter operating profit margin of at least 6 percent and narrowed the upper end of the range to 7 percent from as much as 8 percent previously, citing higher costs.

The shares slid 40 cents, or 3.3 percent, to $12.64 at 4:03 p.m. in New York Stock Exchange composite trading. Delta has risen 11 percent this year.

Discussions with planemakers about a possible narrow-body order are planned for next year, Delta President Ed Bastian said.

The 542 jets in Delta’s domestic fleet have an average age of 16 years, according to Bastian. An Oct. 25 filing showed that Delta’s planes included about 40 narrow-body DC-9s that are 34 years old on average, more than 100 MD-88s that are 20 years old and 160 Boeing Co. 757-200s that are about 18 years old.

Delta has been retiring the oldest DC-9s and plans to cull some MD-88s in the coming years, Bastian said. Both those models were built by a Boeing predecessor.

“We do realize we need to assess our options over the long term,” Bastian said. “We will be opening up conversations with manufacturers in the first part of 2011.”

Airbus Option

Asked by an analyst whether Delta would consider the Airbus SAS A320 with new fuel-efficient engines, which the planemaker plans to introduce in 2016, Bastian said: “We’ll have more data when we talk to the manufacturers.”

Anderson said this month in a weekly message to employees that “we’ll look closer at the A320 to see if it might merit deeper consideration for our long-term fleet plans.” Boeing’s commercial airplanes chief, Jim Albaugh, said in October that the business case for putting new engines on its single-aisle 737 jets “is not as compelling as we’d like to see.”

When Delta does order new narrow-body planes, it will consider leasing and owning the aircraft outright, Bastian said.

The international wide-body fleet of 175 jets is about 11 years old on average, and “we’re very comfortable with where we sit” with those planes, Bastian said.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net.

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