Glen Hauenstein
Delta Air Lines executives on Tuesday spoke with analysts and media regarding the company's financial performance, recent developments and outlook. Executive vice president of network planning and revenue management Glen Hauenstein fielded questions on international traffic and capacity, pricing and a joint venture with Air France-KLM. Excerpts follow.
What are you seeing out there on pricing initiatives, domestic versus international?
Clearly, international is being more impacted than domestic currently, and certainly the reduction in capacity domestically has done a good job in offsetting a significant decline in demand. Internationally, you don't have the same scenario going on. The international flag [carriers] are usually late in the process of eliminating or reducing capacity. But we have seen some movement by the international carriers lately in reducing capacity, so that is an optimistic development.
On the international revenue decline, how much of that is fuel surcharge? When we last talked, oil was at $100 [a barrel] and now it's down a lot, and in some cases it seemed as if the fuel surcharge was as much as 50 percent of the total fare or maybe more.
Yes, the fuel surcharges have gone down. It depends on the country; it depends on the region. They are very sticky, so it takes a long time for them to come down but the bias is definitely down. To the extent we can, we are rolling them into the base fares. In Japan, for example, it is a formula based on the historic price of fuel, so it takes several months for those to unwind. International in general, we have seen a lot of strength in some markets, like the Pacific with coach yields and exchange rates being quite favorable. Africa continues to remain very strong. Latin [America] seems to be holding up quite well. The laggards are really the London market where [traffic from] financial services [firms] in the front cabin has taken a beating. We have taken some very aggressive scheduling actions to mitigate that. In January, we canceled Seattle-Heathrow, we canceled Detroit-Gatwick and we canceled our second daily Atlanta-Gatwick. Additionally, in April, we will re-time our weakest New York-Heathrow trip, from a morning departure to a well-timed evening trip to substantially improve revenue. And by summer, we'll offer full lie-flat [first class seats] in all U.S.-Heathrow markets, so that should help our front cabin mix, as well. In addition to Heathrow, there also is the conflict in [Israel]. We are a big player in Tel Aviv, so that has impacted us disproportionately. But historically when those conflicts are resolved, traffic tends to come back quickly. And [after] the incident in [Mumbai], we have seen traffic in India impacted by two factors: a lack of business traffic into [Mumbai] and an overcapacity situation in all of India. We'll be addressing that over the next few months. We have already reduced our footprint in India significantly.
A lot of new international marketswere turning on this time last year, and that probably contributed to some reasonably healthy ramping up in the fourth quarter. If you strip that out, can you discuss first-quarter demand more on a same-store sales basis?
There's actually some core strengths in there, surprisingly, even in some of the new markets. You have kind of a mixed bag of some really good things and really awful things, so we are trying to address the really awful things and do a little less of them.
You have described the four-way joint venture [between Delta, Northwest, Air France and KLM] as 15 percent-plus margin business, very profitable. How does that stand up given what is going on?
We are working very hard with Air France right now to conclude the Air France-KLM joint venture agreement. Another important development is that Air France was the winning candidate in the Alitalia bidding, so that really gives us an incredible position in Europe point of sale. The balance of the JV is on both sides. Reducing costs for both carriers is actually something we will accelerate given this economic environment. And then selling more on each other, or selling differently more on each other. When you put Air France-KLM and Alitalia together ... by far the largest frequent flyer program in Europe and by far the most corporate accounts--and we still have not leveraged that yet--that is what the joint venture is all about. Now with the merger of Northwest and Delta, we have the largest corporate accounts on this side of the pond and the two greatest U.S. hubs in [New York] JFK and Atlanta, and the best European hubs in Amsterdam and [Paris] Charles de Gaulle. So when we put the frequent flyer programs together, when we put the corporate sales together, when we put the hubs together and synchronize them, on both sides of the ledger it will drive both unit revenues and unit costs to get those kind of margins. They are still fully achievable, even in this environment.
It sounds like there is no intention of scaling back on the capacity side of the JV. But if you do change your mind, are you willing to take a hatchet to transatlantic capacity, if necessary?
We have no levers on the current agreement on capacity levels. We are fully confident we'll achieve those margins even in this type of economic environment, and we have no constraints with any of the carriers as far as capacity in this environment. In phase one of the joint venture, London Heathrow is included, and so all these reductions were actually in the joint venture that exists. That demonstrates the flexibility that we have.