If Delta's Going To Make A Move, `It's Now Or Never'Chuck Hawkins
Thomas K. Stewart, Delta Air Lines' point man in Berlin, wasn't worried when Delta's inaugural flight 67 took off from Berlin's Tegel Airport on May 3 headed for Atlanta, via Hamburg. After all, it was the culmination of years of meticulous planning.
Delta had carefully nurtured the Hamburg market before adding the Berlin spur. It had crunched numbers, pampered German tour operators, and generally proved to itself that it could turn a profit long before flight 67 ever rolled onto the runway. The new 218-seat Boeing 767 widebody had only 52 passengers aboard when it lifted off from Berlin. But after boarding travelers at Hamburg, it headed west over the Atlantic virtually full. "Not bad for our first week here in Berlin," says a pleased Stewart. Not bad at all.
Call it the tortoise approach. A full 13 years after its first international flight, Delta Air Lines Inc. will for the first time crack the $1 billion mark in overseas revenue this year. Slowly, painstakingly, Delta has built up service to 17 European and Asian destinations. And unlike the yo-yo experience of many U. S. carriers overseas, Delta's international routes have been consistent money-makers.
OPEN EARS. But these days, mere profits may not be enough. After months of shakeout in the airline industry, the race is on among the survivors to expand overseas by snapping up failing carriers' assets. Because of aggressive route purchases, overseas revenues of both United Airlines Inc. and American Airlines Inc. already dwarf Delta's (chart). And unless the Atlanta carrier comes out of its shell soon, it could get left in the dust. Says Standard & Poor's Corp. analyst Philip Baggaley: "It's now or never."
Delta Chairman Ronald W. Allen appears to be listening. On May 16, he led a Delta entourage to Taiwan to schmooze with government officials and kick off an uncharacteristically bold strategy in the Pacific: building a hub operation in Taipei as early as next year. In the Atlantic, Delta is pondering much more dramatic action. By midsummer, the 49-year-old Allen is likely to bid for major pieces of what's left of bankrupt Pan Am Corp. He's also talking to Carl Icahn about pieces of the financier's troubled Trans World Airlines Inc.
Talk about cultural upheavals. Change comes slowly at tradition-rich Delta, which so far has done nothing more radical in the international arena than to cut marketing agreements with Swissair and Singapore Airlines Ltd.--pacts bolstered by mutual 5% equity stakes. More than a decade after deregulation, Delta executives--most of them homegrown--still cling to the notion that market share comes second to operational efficiency and people skills.
By hewing to a disciplined regimen of buying new planes during good times and bad, Delta maintains one of the youngest, most fuel-efficient fleets in the industry. By selling its used planes at premium prices, it earned nearly $500 million in capital gains over the past decade, which helped pay for expansion. Add to that a loyal business-customer base lured by its steady service, and Delta has historically forged solid profits. But now, the deliberate-growth program is beginning to show its limitations.
Indeed, as Delta officials launch or add service in Berlin, Copenhagen, and Frankfurt this spring, a United 727 is often already at the gate. With its acquisition last fall of Pan Am's London Heathrow routes, United was able to extend service to the Continent practically overnight. American, already an aggressive European player, is also expanding at Heathrow now that the Transportation Dept. has cleared its purchase of TWA's London routes.
SLIM PICKINGS. Both moves were risky but necessary. Although U. S. domestic traffic has stalled in recent years and isn't expected to improve soon, overseas routes are projected to continue growing by 9% or more a year. Moreover, the window of opportunity may soon slam shut. Routes for sale are limited, and most European governments permit increased competition only grudgingly for their state-owned carriers. Delta's future growth may depend on providing its domestic passengers with the overseas connections United and American offer. It can't afford to lag too far behind.
Even narrowing the gap will take guts. Delta now serves Taipei with a single daily flight, from Portland, Ore., which first stops in Seoul and, from Taiwan, continues on to Bangkok. The carrier hopes to connect flights from several U. S. cities through Taipei and on to a dozen or more Asian cities. First, however, it must gain landing rights from a host of often uncooperative governments.
Oddly enough, only hours before Allen's Pacific strategy was announced, Chairman Robert L. Crandall told shareholders at the annual meeting of AMR Corp., American's parent, that he was convinced there was no profit to be made in building hubs in Taiwan or Korea. The most lucrative hub in Asia is Tokyo, where fares are higher, but United and Northwest Airlines Inc. have that all locked up. "Delta decided, I guess, to go out there and lose money for a while," says Donald J. Carty, executive vice-president for finance and planning at AMR. "Maybe they're more optimistic than we are." Delta insists that it can make money over time with a Taipei hub, largely because the modern McDonnell Douglas MD-11 planes it would use on the routes are just the right size for the traffic.
In Europe, Allen was caught flat-footed by United and American. United already offers passengers service between Europe and United's gateways in New York, Washington, Los Angeles, San Francisco, and Seattle. Delta, in contrast, serves Europe with nonstops primarily from Atlanta, along with limited service from Cincinnati, Dallas-Fort Worth, and Orlando.
In Germany, that works to Delta's advantage. Just across the tarmac at Frankfurt-Main International Airport is the U. S. military's sprawling Rhein-Main air base. Delta's hub in Atlanta, of course, is in the heart of a heavy concentration of military installations. So it gets a steady flow of service people and dependents from Germany.It's a nice niche. But for millions of other travelers, Atlanta is not a logical destination. That's where Pan Am comes in. By picking up Pan Am's international rights from New York, Delta would acquire its first overseas gateway in the Northeast, where its domestic feeder network is already strong. It could also add flights to cities in Eastern Europe by using Pan Am's grandfathered rights at its Frankfurt hub. In South America, Pan Am's routes would put Delta head-to-head with American, which bought Eastern Air Lines Inc.'s Latin America system last year. As for TWA, it offers routes between New York and Southern Europe. And Delta covets TWA's London-Baltimore route, which could be switched to Orlando, funneling sun-seekers to Disney World.
COMPANY MAN. Allen declines to discuss acquisition plans, and he disputes the notion that Delta is under the gun. "Our plans are unfolding as we choose to unfold them," he says. "We're not striving to be the biggest in the world, just the most profitable." Nonetheless, W. Whitley Hawkins, whom Allen recently promoted to president from executive vice-president for marketing, asks the question out loud: "Are we going to belly up to the bar? All Pan Am assets for sale have some appeal to us."
Now in his fourth year as chairman, Allen has spent his entire career at Delta, starting out in the personnel department after graduating from hometown Georgia Institute of Technology with an engineering degree. He has been extremely frugal with Delta's cash. Last fall, he had a chance to snap up Continental Airlines Inc.'s lucrative routes to the South Pacific but eventually balked at the price. This time, though, Delta will probably bid. For all his caution, Allen has shown he's willing to shake up the status quo when he thinks he must. He was a subtle but persuasive behind-the-scenes orchestrator of Delta's 1986 timely acquisition of Western Air Lines Inc. Delta's then-chairman, David C. Garrett Jr., initially opposed the idea.
Another acquisition would obviously increase Delta's leverage, which is already a hefty 74% of total capital when off-balance-sheet airplane leases are included. And, says Allen, over the next several years, he'll spend at least $2 billion a year on terminals and new planes. On the other hand, Delta gained considerable elbow room by netting $476 million in an April common-stock offering. That helps cushion the blow from a record $343.6 million net loss during the first nine months of its current fiscal year, on revenues of $6.6 billion.
Integrating either Pan Am or TWA workers into Delta's mostly nonunion culture could prove trickier. Delta would rather take no workers, but to make a deal, it may have to. Any glitches resulting from taking on people or planes would be exquisitely ill-timed, since Delta is planning its biggest-ever ad blitz this fall, playing up its service.
As at home, Delta's steady-as-you-go policy has won kudos from travel professionals in Europe. They appreciate the U. S. carrier's consistency and friendly service. Unlike American, Delta has not pulled out of a single European market after commencing service. And that's no small matter. At the 1990 press conference in Amsterdam announcing that Delta would be flying from there to Atlanta, the first question raised from a reporter was: "When are you going to leave?"
The answer is that Delta is in the international arena to stay. Nevertheless, Allen will have to quicken his pace. Delta has earned the loyalty of its passengers, and Allen is wise to protect that franchise. But moving like a tortoise works only if you go where the passengers are going.