One-On-One With CEO Richard Anderson: Delta Adds Corp. Sales Resources

Delta CEO Richard Anderson this month spoke with BTN editor-in-chief David Meyer and senior editor Jay Boehmer to discuss Delta's integration with Northwest Airlines, the merged carrier's approach to the corporate market and plans to further develop a joint venture with Air France-KLM.

BTN: Does the current environment change your approach to the corporate market?

Richard Anderson: We have the network, we have the commitment to customer service and we have a financially strong airline. Those three things really are evidence of the commitment we have to our corporate customers and the importance that they serve in our business. We've put a really strong sales organization in place with Jim Cron and Steve Sear, and we've actually been adding a lot of resources to our corporate sales organization, and we'll continue to make those investments.

BTN: What are those resources?

Anderson: Jim and Steve are in the process of adding 30 people to the combined sales force, so we're actually adding staffing to our corporate sales organization.

BTN: To what extent is the sales force empowered to act as a single entity at this point?

Anderson: We really are acting as a single entity. On the sales and distribution side of the business, there are no Federal Aviation Administration operating constraints, Department of Transportation constraints or labor union constraints, so that's an organization that you integrate very promptly.

BTN: Our understanding is you likely won't gain a single operating certificate from the Federal Aviation Administration until year-end. Does that limit the ability to act as a single organization?

Anderson: We act as a single organization from the standpoint of all decision-making, labor relations, customer operations. This really has more to do with the manuals, training, cross-fleeting and the like in the airline operations. From the standpoint of the customer, we are already operating as a single airline because we're dual-coded across both the systems, except for just a few markets. We have linked our reservations together and our Web sites together. We have a single pricing department and a single yield-management department. We're already well down the road to being singular. There are only about 16 airports in the United States where we aren't located next to each other and we have joint ticket counter occupancy.

BTN: Last year, you said that IT issues and the reservations system were among the biggest challenges. What needs to be done to move those efforts forward?

Anderson: That work is underway. We're going to migrate our international reservations to Deltamatic. We're working closely with Travelport right now to compete that migration by year-end. It involves a fairly significant amount of technical work to move the Northwest inventory and reservations all onto the Deltamatic platform. Both Deltamatic and PARS are very similar systems, housed on the same mainframe and both operated by Travelport. I believe we have a plan to have that done by the end of the year.

BTN: If the merger wasn't enough, you're simultaneously working on integration for your joint venture with Air France and KLM.

Anderson: Correct. That continues to be a really important part of our merger strategy. We have a joint venture with Air France, which is much newer, not as fully developed as the Northwest-KLM joint venture. We have work underway to merge the joint ventures into a new joint venture. We will start on the sales side with Delta-Air France corporate contracting on April 1. We expect to then be going from two two-way joint ventures to having a single joint venture between Delta-Northwest-Air France-KLM completed by the end of the year.

BTN: How active would your sales force be in selling Delta-Air France contracts when the four-way will be competed shortly after?

Anderson: The sales piece, the front end of the joint venture and entering into contracts with corporations we can already do. Remember, we have antitrust immunity with Air France-KLM now, so we can do the single contract across the whole network. The joint venture just deals with the interrelations of the financial and operating pieces and the split on the commercial side, but it doesn't stop us from going forward and entering into global sales agreements that include the networks of Delta-Northwest and Air France-KLM.

BTN: Joint venture arrangements by Star and Oneworld are right behind you.

Anderson: The Department of Transportation has issued notices on those. The dockets are incomplete. In the middle of all this, we've had some carriers talking about mergers with other carriers, so the DOT has rightly stepped back to examine that. Our principal issue is that we just want access to airports, so proceedings like the American Airlines-British Airways proceeding become a little problematic if we don't get access to Heathrow. The difference with our ATI is that there was free and unfettered access to all of our hub airports. It's not like Heathrow, where it's very slot-constrained. In fact, in the past year a pair of good slots at Heathrow sold for $100 million. That's hardly access. Our principal issue there is making sure we have real and broad access. The issue you have with a Star Alliance proceeding: Are you really going to have that many carriers with antitrust immunity? It remains to be seen whether those end up getting done.

BTN: The focal point of these joint ventures is transatlantic. Do you see the opportunity in the Pacific, perhaps with Korean Air or other SkyTeam partners?

Anderson: We do and we're exploring that. We're always exploring that. Obviously, Delta didn't have a very strong position in the Pacific, but now that we have the combined network with Northwest that will certainly be high on our priority list.

BTN: After Delta and Northwest announced the merger, everyone expected a flurry of merger and acquisition activity that never materialized. Do you anticipate any more domestic consolidation?

Anderson: Where we stand right now, I don't think so. Based on everything you see in the marketplace today and the challenges the industry faces and the credit markets, it's not likely.

BTN: Your timing was good.

Anderson: Yes. The timing was good. It's much better to be lucky than smart.

BTN: Delta's been aggressive in pulling back capacity and rationalizing the network with Northwest. Do you expect additional capacity to come out on top of cuts already announced?

Anderson: We don't. The whole industry was down across the domestic system pretty significantly in the fourth quarter and those will extend through the year. We've announced somewhere around 6 percent of total capacity reductions in 2009. We're pretty comfortable where we are, particularly given the fact that our prediction with respect to revenue is a 8 percent to 10 percent revenue reduction for the whole industry for the year as a result of the economy. Consistent with that, we feel comfortable with our decision on capacity.

BTN: What's the outlook this year for hub rationalization?

Anderson: If you look directly at the hubs, they have probably slightly increased, if anything, at least in Atlanta. The hubs haven't been affected as much as some of the international flying and the non-hub flying across the combined networks. A lot of the combined capacity you'll see us taking out this year is principally international and in most instances it's going from two frequencies in a market to one frequency. We're continuing the same broad network, but in some cases we're taking out the second flight or going from seven days a week to four. The point is that the convenience, integrity and utility of the combined network is not compromised.

BTN: Delta's in the midst of a fleetwide inflight Internet rollout. Will that extend to Northwest's fleet?

Anderson: Ultimately it will. We're starting out on the Delta fleet, but ultimately it will roll out across the entire fleet. That's something we can do quickly. It's not like inflight entertainment. Most business travelers carry a BlackBerry or a laptop and once you get access to the Internet via Wi-Fi on the airplane you have a fully functioning office. It's very attractive and something we can do quickly and efficiently.

BTN: What are the booking trends that you have been seeing so far this year?

Anderson: It's too quick to call, because we're getting into a heavy booking period right now, but based upon everything we see, we're still consistent in our view that it's an 8 percent to 12 percent total revenue decline in the total industry. That's based upon what we're seeing in forward bookings and what we're seeing in terms of the yield of those forward bookings.

BTN: A revenue drop of that magnitude is never good news, but the airlines seem about as prepared as they can be for that.

Anderson: The industry has a massive offset in terms of fuel price, so the amount of revenue offset is pretty significant. In the case of the combination of the new Delta it's somewhere around $4 billion to $5 billion in fuel savings, going to what the current forward curve is, compared with what we paid in 2008. You have a natural hedge against the economic softness.

BTN: Do you see the current demand environment as a short-term problem or a long-term problem?

Anderson: The economy always comes back. It's cyclical. If you look at the history of downturns and recessions in the airline industry it's cyclical and will rebound. Our expectation is that toward the latter half of the year, we'll begin to see improvement. You have some unprecedented things going on. On the one hand, you have unprecedented economic difficulties in the United States and around the world. On the other hand, we've never before had a government that intervened as deep or as determined as our government has. The same is true for governments around the world. The fact that they're all coordinating together to keep the economy strong tells us that with everything being pumped into the economy plus the fact that fuel prices and commodity prices are down significantly—in and of itself, those things are a stimulus—all the makings of an economic rebound are there. We've been in a recession for 14 months and if you look at a typical cycle, historically you come out in the year-and-a-half to two-year range. We expect some improvement in the latter half of 2009.

BTN: You have a positive profitability outlook for 2009, right?

Anderson: We've told the street that we expect to be profitable in 2009. There will be a rough quarter here or two, but ultimately we expect to have a profitable 2009.