Why Delta Thinks It's Better Than a Mere Airline

From an investment standpoint, Delta Air Lines no longer wants to be a passenger carrier.

The airline is instead targeting the kind of consistent financial returns Wall Street has come to expect from railroads and truckers, from UPS and other “high-quality industrial transportation companies,” as Delta executives explained repeatedly during the airline’s annual investor conference in New York today. “We no longer benchmark ourselves to the airline set,” Delta President Ed Bastian told analysts.

Delta executives touted a robust financial performance for the year—profit is expected to be a record $2.6 billion—and said they’re on track to pare the company’s debt to $7 billion by the end of 2015, about $10 billion below where it stood in 2009. The upbeat news capped a year in which the airline was widely praised by Wall Street as the first U.S. legacy carrier to realize fully the benefits of industry consolidation and turn in a financial performance that soundly topped its domestic peers. Over the past 12 months, Delta’s $2.4 billion pretax income was more than twice that of its next profitable rival, Southwest. “It really has been a banner year for Delta,” says Glen Hauenstein, the chief revenue officer. “It’s been a great year.”

Source: Delta

As part of its goal to make money even during the economy’s downturns—cycles that have typically caused gushers of red ink in the capital-intensive airline industry—Delta has focused on squeezing more revenue from its customers with new ancillary products and services and a range of strategic investments with airlines in Brazil (Gol), Mexico (Aeroméxico) and the United Kingdom (Virgin Atlantic). Delta has also revamped its operations with new flights and renovated airport terminals in New York City and started building an international hub in Seattle. It is planning, as well, to turn a $100 million loss this year on the fuel refinery it bought in Pennsylvania into a profit in 2014, refining 70,000 barrels of crude oil each day, up from 17,000 this year.

While its fleet is older than those of most of its U.S. rivals, the airline touts a reliability rating that is tops in the domestic field. Delta executives say they achieve that apparent paradox through scrupulous attention to maintenance. Today the company bragged that it has had 70 days in 2013 with none of its flights cancelled worldwide and 110 days when no flights were canceled due to maintenance issues.

To be considered a true “quality” transport industrial, however, Delta will need consistently to shift much more of its fuel expenses and other costs onto consumers. To that end, Delta Chief Executive Richard Anderson made clear that the airline won’t shoulder any increase in the Sept. 11 security fee on air tickets included in the congressional deal on the federal budget. If the $2.50 fee is raised, “airfares are going up for consumers,” Anderson said. “So that tax increase will not be absorbed by Delta. It’s a tax increase—let’s not call it some sort of service fee or some fiction folks use around that. It’s a sales tax, and the sales tax will have to be paid by consumers.”

Delta is also targeting $500 million to $600 million in “new product sales” by 2017, mostly by merchandising services designed to sell a trip on Delta as an enjoyable “experience.” That may mean bundling extra legroom with a free checked bag, or movie and television selection with premium alcoholic drinks. “In the past the only thing you bought from an airline was the ticket, and it led to the terrible feeling that you paid $700 and the person who sat next to you paid $79, and you received the exact same flight experience,” Hauenstein said. Delta has already begun pitching a $199 package that offers a free checked bag, priority boarding, bonus frequent flier miles, access to preferred seats, and a discount on coach seats with extra legroom.

If Delta and its rivals can eventually bundle and sell enough of these types of “smart travel packs,” Wall Street may one day view the U.S. airline industry as not just commodified people haulers but flying, industrial cash machines.

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