Delta Prez Eyes Econ.

By BTN / June 24, 2001

Delta Prez Eyes Econ.

Delta Air Lines' Fred Reid last month was elevated to president and COO from his previous role of chief marketing officer. Now second in command in a post vacant for two years, Reid will handle most of the airline's internal management and help Delta CEO Leo Mullin with certain external matters. Reid earlier this month spoke with BTN airline editor David Jonas about the slow economy, product development and the nation's congested air transportation system.

BTN: The industry as a whole continues to see a decline in corporate travel. How is Delta weathering the storm?

Fred Reid: The fortunes and misfortunes of the airline industry are exceedingly linked to the strength of the economy measured by the GDP. You go from a 5 percent growth in 2000 to a 2 percent growth in the first quarter. While nobody knows what the future will bring, it seems to me the growth this year will be half of what it was in 2000. Business travel is dropping off precipitously. It is natural for it to be seriously curtailed. There is nothing we can do to stimulate business travel. It is a function of the health of the business community at large. We are in the deepest slump I have seen in a decade or more. It is showing up in our numbers, but we are trying to retain our share.

BTN: Many people are looking for a rebound in the third quarter. Are you?

Reid: No. Airline forecasting is very good 60 or 90 days out, but pretty iffy after that. I do not see a rebound in the third quarter. Since February, you see an ever-deepening drop in industry business travel year over year, to the point that the drop is in the teens now. May produced perhaps a 10 percent reduction in unit revenue. That is the worst monthly unit revenue performance in about a decade. We don't see it getting deeper, but we also don't see signs of it getting materially better. Everybody has thought so far that the upturn would occur sometime in calendar 2001. I still hold that as a possibility, but certainly am not banking on it. The light at the end of the tunnel isn't there for us.

BTN: With that light not yet apparent, are there things Delta is doing with corporate clients, such as extending deeper discounts, offering additional perks and incentives?

Reid: Sure. Everybody is doing that right now. In a market of falling demand, you adjust the conditions in which you supply against that demand. Revenue management systems aren't working as hard as they are used to. They tend to function at their optimal when you are managing too much demand. Delta is in close long-term partnership with its corporate accounts. We had about 150 travel managers in-house for the past few days. We showed them our strategy and have been very open with them. We tend to maintain a premium share that is at, or usually above our share of capacity.

BTN: What were those 150 customers asking you for? Was it mostly price, or other things?

Reid: They were asking us for an understanding that they are under cost pressures, same as we are. We are a supplier, and we also have suppliers. We are talking to our suppliers and saying, "Hey guys, cut us a break. We need some help. What can you do?" And we are a supplier to these corporations and they are saying, "What can you do?" We are doing what we can. We are cooperating and responding to the marketplace realities and it is always a mixed bag. Generically speaking, there is always price and volume and share shift, and such issues as upgrades.

BTN: Has Delta identified specific areas for cost reduction?

Reid: Sure. Our unit costs in the past month have risen in the very low single digits, which is pretty good considering the spike in labor and fuel costs. We defer spending, put projects on hold, curtail capital expense and we reduce expenses in contracted services and professional fees wherever we can. We've trimmed as much as we can without compromising the welfare of our employees and customers. As the situation evolves, and if for any reason we think we'll be in a bearish market for a number of years, then the industry certainly will have to re-examine its growth plans. One good thing now versus a decade ago is that the ability of airlines to curtail aircraft orders and move aircraft types around, and therefore adjust capacity, is much more flexible than it used to be. Also, airline pricing ultimately is a function of supply and demand, and we are trying to be rational in our introduction of supply into the marketplace. That means we will have very low capacity growth rates this year and probably next year.

BTN: Any inflight services or amenities on the chopping block?

Reid: Yes, we made some adjustments, but not of a momentous nature. We trimmed where we could. Maybe you take the pre-landing Godiva chocolates off, that sort of thing. But the last line where I am not willing to make compromises is on completion rate and on-time performance.

BTN: Another part of this whole economic equation obviously is fares. Delta traditionally has been neither a leader nor a spoiler in terms of fare hikes. Are you content to keep it that way?

Reid: Yes. We really follow the market and not the competition. Of course it is necessary and desirable to remain competitive, but we tend not to be the leader on either side because we are responding to the demand on our own network.

BTN: Up until the recent economic downturn, we have been witnessing a new wave of inflight competition, certainly Delta has participated in that by bringing BusinessElite to domestic routes. In what other ways is Delta preparing to meet inflight competition?

Reid: There has been a lot of competition, particularly in the elite cabin and we will follow that. It is hard to beat 60 inches of seat pitch, but that may eventually go to lie-flat 180 degrees, though we don't have specific plans yet. I have not seen one penny of share shift for British Airways on the routes where we compete with their lie-flat business cabin. What drives passengers to an airline is, how much you can maximize your network in their travel patterns. It is really a combination of inflight comfort and service, price, schedule, frequency, frequent flyer program and the price-value equation. You have to keep your eye on all those things at once.

BTN: Regarding inflight, first on United Airlines, and then more broadly on American Airlines, coach passengers have been getting more leg room. Is Delta going to follow that trend?

Reid: No, not now. Again, we have not seen one penny or 1 percent of share shift on the wing-to-wing routes where we compete with airlines that have a different seat pitch. I know that seat pitch is a nice issue, but if you go to a 36-inch pitch, you are taking 6 percent of your seats away. If you do that, you will spill traffic to another competitor and you will have less seats for your frequent flyers. About 77 percent of our frequent flyers get a redemption seat on their first try. We have done share analyses over the past four years between us and both American and United, and the only time that measurable share shifted from one airline to the other was during service disruptions or labor disruptions.

BTN: From the Delta perspective, what is the government's role in improving the air traffic control system?

Reid: It's a multiple choice question and the answer is D, all of the above. I am very encouraged that the dialogue has changed. There had been a lot of finger pointing. One mantra was, "The root of all evil is airline management." Another was, "The government has squandered billions of dollars in passenger service charges and used it to balance the budget, but screwed the infrastructure." I sense a distinct change in the tone of the discourse in the past eight or nine months. Generally, the Federal Aviation Administration took its own course in the past, and each airline did its own thing. Now, there is a more collaborative system.

BTN: What are your thoughts on privatizing the ATC system, similar to the way it was accomplished in Canada?

Reid: Privatization is one word you can use to get to your call. Another is called a non-profit corporation that still has government oversight and control but is operated on the principal of a corporation with performance standards and market-based pay. The airlines pay on a user basis. We see more advantages than disadvantages in going in this direction. I wouldn't say we are married to the concept of privatization as such, but we are married to the dire need to make the system more accountable and more efficient than it is today. I cannot picture the United States of America, economically or socially, without a vibrant, safe, affordable and competitive air transportation system.

BTN: What has Delta done, specifically, to improve day-to-day operations?

Reid: We just completed on April 1 the most radical redesign in years of the Atlanta hub. We spread out the banking and reduced the intensity of the movements from 90 an hour to 55 to 70 an hour, but 12 connecting banks instead of 10 within an 18-hour day. So, we didn't lengthen the day, but smoothed the oscillations and reduced a lot of the stress on the airport. The hub redesign prompted our operational excellence back to ratios we haven't seen in three years, specifically on-time within 15 minutes in the 82 percent to 83 percent range and completion rates in the 98.5 percent range, versus 97 percent to 97.5 percent in the first quarter of the year. We are very encouraged by these numbers and will continue to focus on top performance in the complaint category. We get the lowest amount of complaints of any carrier by a margin second only to Southwest Airlines. And in terms of involuntary boardings, we are the best in the industry, after being the worst three or four years ago.

BTN: Looking overseas, are you still seeing the same intensive level of competition on the North Atlantic? Is it still a buyer's market, as far as business travel is concerned?

Reid: The amount of new capacity in the marketplace has abated somewhat over 1999 and 2000, and that is a good thing. We are seeing some softening in the transatlantic arena that mimics, to some extent, what is going on in the domestic U.S. market. That phenomenon is spreading.

BTN: Regarding SkyTeam, what will be your role in coordinating alliance activities and in bringing new members onboard?

Reid: In my new job as president and COO, I have kept alliances as a direct report. We regard Star as the leading alliance in terms of size, scope and above all, what people tend to ignore, is the integration of customer services. We regard SkyTeam as a clear number two ahead of Oneworld. First of all, the SkyTeam network, which is about to get bigger, spans 82 percent of the world's traffic potential. Number two, we have the most integration across the lines of any alliance in terms of full reciprocity of elite privileges, airport products and frequent flyer products. The real people who use the alliances are the road warriors. Oneworld is a very good brand and combination of carriers, but they don't even have total reciprocal codeshare or even base frequent flyer reciprocity between AA and BA, who together have 80 percent of the capacity of the whole alliance.

BTN: When you were first named to your new post, you indicated that you would be helping Leo Mullin with certain external matters. Aside from alliances, what might those be?

Reid: Leo is the chief strategist of the company and the principal interface with Wall Street and the U.S. government. And that is of huge importance these days. I will help Leo in Washington. If he does the White House, I'll do the Senate staffers, for example. Leo is the head of the state and I am the interior minister with part of the external affairs portfolio.

BTN: Any parting words for the corporate travel buyer?

Reid: We will partner with you in good times and bad times.

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