Oct. 6 (Bloomberg) -- Delta Air Lines Inc. is taking on more maintenance work for other carriers in-house and working to expand its cargo business in a bid to boost revenue from those services to $2 billion within three years.
The world’s second-largest airline plans to reach $1 billion in revenue from aircraft repairs, almost doubling 2009’s total, and the same amount in cargo sales, a 27 percent increase, two executives said in interviews.
Delta is taking advantage of the broader network created by its 2008 purchase of Northwest Airlines Corp., which allowed it to charge more for cargo. The deal also gave Delta expertise in working on Airbus SAS jets, not just Boeing Co. planes, to help it expand in its maintenance business as U.S. rivals pull back.
“It’s free money, and a smart way for Delta to take advantage of its natural strengths after the merger,” said Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut, who recommends buying the shares.
Adding cargo and maintenance sales would help Chief Executive Officer Richard Anderson narrow the gap with United Continental Holdings Inc., the company that displaced Delta as the world’s largest carrier by traffic after the Oct. 1 merger of UAL Corp.’s United Airlines and Continental Airlines Inc.
Delta posted $28.06 billion in 2009 revenue, compared with $28.9 billion for Continental and UAL combined. Their cargo total together would have been $902 million. Atlanta-based Delta led North American carriers in maintenance revenue in 2009 and had the U.S. industry’s biggest freight business, at $788 million, based on data compiled by Bloomberg.
Freight revenue will be $850 million to $875 million this year, said Neel Shah, the vice president in charge of Delta Cargo, who outlined the $1 billion revenue target. Anderson and President Ed Bastian view cargo as a pillar of their efforts to end two straight annual losses, Shah said.
“Whether that profitability comes from cargo or passenger, they’re indifferent about that,” he said.
Shah said that even as Delta cut capacity by parking the last 10 of Northwest’s Boeing 747 freighters, which averaged about 30 years old, the airline was able to more than double its cargo profit margins to “well north of 50 percent” because a bigger network and improving economy helped pump up rates.
A Tokyo hub acquired through the Northwest purchase lets Delta ship auto parts and electronic components by Motorola Inc. and Intel Corp. between Asia and Latin America on routes neither airline had on its own, Shah said.
“I don’t only have to talk about trans-Atlantic, one lane in the Pacific and Latin America,” he said. “We talk the world, and that really gives you a tremendous amount of leverage.”
That hasn’t helped the shares this year. Delta has risen 4 percent in 2010, closing at $11.83 yesterday in New York Stock Exchange composite trading, to trail the 17 percent gain for the 11-carrier Bloomberg U.S. Airlines Index. The carrier also may face more competition for passengers from Southwest Airlines Co., which agreed on Sept. 27 to buy AirTran Holdings Inc. Atlanta is home to AirTran’s biggest operations.
Anderson’s strategy for expanding the maintenance, repair and overhaul business, known as MRO, diverges with steps by rivals including Continental, Southwest and US Airways Group Inc. to use contractors for much of that work.
U.S. airlines outsourced about 43 percent of maintenance expenses last year, up from 31 percent a decade earlier, government data show.
Delta took in $508 million in MRO revenue in 2009, up from about $200 million just a decade earlier, said Tony Charaf, president of Delta’s TechOps unit. The business has been profitable each year since 2005, with margins now in the “high single digits to low double digits,” Charaf said.
That compares with a profit margin last year of 8.3 percent for the largest airline-owned maintenance operation, Deutsche Lufthansa AG’s Technik, according to the carrier’s annual report. Technik posted 3.96 billion euros ($5.22 billion) in 2009 revenue.
The global MRO market was about $42 billion last year, according to industry publication AviTrader. Delta’s competitors include maintenance specialists such as AAR Corp. and Timco Aviation Services Inc.; planemakers Boeing and Airbus; and engine manufacturers such as General Electric Co.
Charaf said Delta has won business because of its expertise, parts inventory and quick turnarounds, with overhaul time on some engines cut to as few as 20 days, less than half as long as required several years ago. Delta also performs routine maintenance and projects done while jets are parked at airport gates, such as replacing burned-out lights.
Customers include Brazil’s Gol Linhas Aereas Inteligentes SA and Hawaiian Holdings Inc.’s Hawaiian Airlines, which put a $500 million value on a multiyear contract awarded to Delta in 2009 to service Boeing and Airbus jets.
“For Delta, taking that MRO work in lets them equalize their workloads instead of having peaks and valleys” around its own maintenance needs, said Marc Wilson, a former maintenance executive at AMR Corp.’s American Eagle unit.
Outsourcing maintenance and repairs typically costs about 15 percent more than doing the job in-house, said Wilson, who is director of safety, quality and asset management at consultant Morten Beyer & Agnew in Arlington, Virginia. The catch is that companies can only achieve the savings by investing in equipment and people, he said. Delta’s TechOps has 9,200 employees.
“It’s a wave of the future for a number of airlines that have already a substantial maintenance infrastructure,” said Hawaiian CEO Mark Dunkerley. “They are all looking for ways to better use the infrastructure that they have.”
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