One-On-One With Delta COO Jim Whitehurst: Delta Pushes For More Corporate Contracting

Delta COO Jim Whitehurst recently spoke with BTN editor-in-chief David Meyer about the state of the market, emerging from bankruptcy, SimpliFares, global distribution system deals and domestic airline consolidation. Whitehurst and CFO Edward Bastian both have been named as possible successors to CEO Gerald Grinstein, 74, who earlier this month said he intended to resign "a little while after" Delta emerges from Chapter 11 protection, as it plans to do next year.

BTN: Will the number of Delta's corporate negotiated discounts increase?

Jim Whitehurst: From Delta's perspective, as we are absolutely focused or refocused on the corporate market, we will be more aggressive in the marketplace. We went through a 20 percent reduction in our overhead, which translated into a 23 percent reduction in our non-frontline employees. The only area of the company that grew in size was the number of people in our salesforce.

We are investing literally hundreds of millions of dollars to put in what we believe is the best product in the sky and a ton of money in our expansion domestically and internationally to points our business travelers want to fly. We are spending a lot of our time and energy refocusing our times of day for when business travelers want to fly and we absolutely, positively need to be in the market selling that. We will be more aggressive as we move forward in the corporate arena than we've been in the past.

BTN: Would you describe the negotiating climate for U.S. point of sale as a seller's market?

Whitehurst: I wouldn't say that. As we have gotten into the fall, a lot of carriers have talked about demand weakness. It certainly is not quite as robust as it was a few months ago. It's really hard to say. We feel very good about our advanced bookings and demand that we're seeing. Obviously, we saw some relatively weak numbers from some of our competitors, be that single-digit revenue per available seat mile increases from Continental and US Airways in September or load factors in the 50s for AirTran. All those things tell one that demand must be softening. While we haven't seen it ourselves, certainly some other carriers are beginning to see that, so we'll have to watch that carefully.

We have some reason for pause but our load factors are up solidly year over year for the coming months, so we feel good about where we are. I honestly can't tell you how much of that is that we really underperformed last year after we filed for bankruptcy, versus we're really that strong this year, but we feel very good about our performance as we start October and get into the fall. That said, a lot of others have disclosed concerns about revenue weakness.

BTN: If I asked you to look into your crystal ball for 2008, you'd say it's too cloudy.

Whitehurst: Much too cloudy. I will say this: We will not have the major near-double-digit RASM increases in 2007 that the industry enjoyed in 2006. What we don't know is whether it will be flat or be up a couple percent. I don't think that as an industry we can expect it to be up much more than that. It really depends on how the soft patch in the economy will translate. Given the relative discipline in capacity, it would be 1 or 2 percent. A real recession would be down 1 or 2 percent. I think that's the kind of range we'll be looking at next year when we get into RASM. I believe we'll be in a soft patch so you'll see RASM in the industry up a couple percent.

Delta will beat that because we have so much spool built into our system this year. This summer, 12 percent of our available seat miles were in domestic and international markets we were not flying one year ago. As those spool up we should have a natural RASM increase just associated with that.

BTN: Please tell us the prognosis for coming out of bankruptcy next year.

Whitehurst: We continue to march forward and we're very pleased with the retiree benefits deal that we recently reached. We still have some work today with the Pension Benefit Guarantee Corp. in taking over the terminated pilot pension plan. We still have various and sundry vendor deals that we're finalizing. The obvious big one is raising the exit financing, but we're still, I believe, clearly on track to emerge in the first half of next year. I don't see anything there that would slow it up, beyond what I just mentioned, the biggest being the PBGC.

BTN: Many airlines are talking about profitability ahead. Are you as bullish or more cautious?

Whitehurst: Ahead meaning into next year, I am reasonably bullish from the standpoint of there is limited capacity growth. We have not seen as much weakness as some others have following the August London terrorist event. Now, we're not as heavily oriented toward the United Kingdom as some of our other competitors. We're still seeing strength in demand and not a lot of capacity coming online, so we're reasonably bullish, depending on fuel prices or a major recession, but right now we feel pretty good about next year.

BTN: I saw recently that Comair was instituting its own wage cuts as it attempts to emerge from its own bankruptcy. Are they making good progress?

Whitehurst: I think we are making progress. We're still working very collaboratively. There are two big issues there. We've reached a tentative flight attendants contract. We are working on the pilots deal as well. Those are very important to us in that they impact Comair and, as the owner of Comair, we certainly would like Comair to win additional flying from us and be able to grow.

That said, Comair has its own issues and needs to get its labor costs competitive with others who fly regional jets or it won't be able to grow. In fact, it might shrink. All that said, we are an owner of Comair, but Comair is a relatively small component of what we do, and it will not slow down our bankruptcy one way or another.

BTN: Does that mean that Comair's emergence probably will come after yours?

Whitehurst: It probably will happen contemporaneously with ours, but whether they're ready or not, we're coming out.

BTN: After all the fuel surcharges and other price hikes, is there any life left in SimpliFares? What was the impact on Delta from implementing SimpliFares?

Whitehurst: We continue to see huge benefits from SimpliFares. To be clear, SimpliFares was about simple fares, not about simply low fares. The base structure of six coach and two first class fares is still in place. That has had huge benefits for us in terms of taking headcount out of areas, simplified policies, fees and all the things that we did associated with that. The vast majority of that is still in place.

The thing that has obviously flipped is the price caps. As fuel prices have gone up, we've managed to raise fares. When we started off, there was a big bang because the fares were absolutely lower, but 90 percent of what we originally thought of as the benefits of SimpliFares—cost savings from our side and a friendlier fare structure from a customer perspective—are still in play. There are just some higher fares out there because fuel prices have gone up.

BTN: Delta signed seven-year full-content deals with global distribution systems, not five-year deals like other major carriers. How come?

Whitehurst: It's hard to get into details there, but we are very pleased with the deals that we cut and economics we got. We feel very comfortable where we are. Frankly, it won't be bad to not be the leader the next time around, and let somebody else take the heat next time.

BTN: You have everything resolved with every GDS but Amadeus, so do you have a timeframe in which you anticipate resolving that relationship? Is this just basically a financial discussion? Does their new opt-in program make it more likely that you will come to terms?

Whitehurst: Without a lawyer in the room, I have to be real careful about what I say, so I'll just give you a generic answer. We're working to try to get to a reasonable deal with Amadeus that meets our needs in terms of cost and functionality that we need to give to our customers. It's an ongoing negotiation, but I probably can't say more without getting killed by my lawyers.

BTN: Are direct connections—using agencies to bypass the GDS or even bypassing both of them and going directly to the customer—part of your future distribution strategy?

Whitehurst: Our distribution strategy is to be in locations our customers want to be, but at a cost that is commensurate with the fares that we're getting in those channels. Bringing people directly to Delta.com is a key thing that we need to do. Direct connect all comes down to the economics. With the right deals from the global distribution systems, direct connects make a lot less sense.

Frankly, it's great having those direct connects in the market because they help keep the GDSs honest. Over time, we want to do business at the lowest possible cost in the key channels. If GDSs want to charge us more, they are going to have to recover more from people using those channels. Conversely, if they can make those models work at a similar cost to a direct connect, have at it.

It really comes down to cost in the channel versus our price realization in the channel. We've been very pleased with the direct connect deals that we have had going. That said, they are still a very small share of the total and we've really tried to focus on the big part of the pie, which is getting global distribution system costs to a reasonable level.

BTN: There has been a lot of talk in the industry about the inevitably of domestic airline consolidation. Do you anticipate such consolidation in the next couple of years?

Whitehurst: Over the next couple of years? Over the next century, I'm certain that there will be more consolidation. It's really going to depend on what happens in the economy. I don't see a lot happening really until the majors are all out of bankruptcy, so that's us and Northwest left to emerge.

The benefits are generally overrated and the costs are underrated, so it would have to be very compelling. I'm not sure that it will happen in this cycle. I certainly think it's far from inevitable. Stars have to align, both in Washington in terms of their openness to deal and where we stand relatively in the cycle and in terms of labor. I know a lot of people thought that somehow in this cycle it was going to force something to happen, but I generally think of consolidation happening at the low of the low and we clearly seem to be coming out of the low of the low of the cycle. I'm probably less optimistic that something happens than others. To be very clear, we are absolutely laser-focused on emerging stand-alone and so at this point we are not contemplating consolidating in the least.