Bankrupt Delta Air Lines in the next two years plans to reduce domestic mainline capacity by as much as 20 percent and eliminate as many as 9,000 systemwide jobs. The nation's third-largest carrier this month also retreated further from the spirit, if not the letter, of its SimpliFares commitments. These measures are part of a renewed transformation plan meant to achieve billions in annual cost savings and revenue enhancements, in addition to the previously targeted $5 billion
(BTNonline, Sept. 8, 2004).Meanwhile, Northwest Airlines plans to reduce regional flying and continues to trim international service. Like Delta, it is preparing for significant job cuts, including as many as many as 1,400 flight attendants, and also is involved in a legal dispute regarding an American Express action to withhold millions of dollars in tickets purchased with Amex credit cards
(BTNonline, Sept. 28).These developments follow the back-to-back Delta and Northwest Chapter 11 filings in September
(BTN, Sept. 19) and provide some early glimpses into the difficulties that these carriers must face as they restructure.
"Airlines die slowly since there continue to be ample sources of financing to keep them going, plus liberal bankruptcy laws," said Calyon Securities analyst Ray Neidl. "However, it has been proven in the past, through the liquidations of such once-giants as Pan Am, TWA, Eastern and Braniff, that time eventually runs out for anyone, no matter what their history, if management cannot turn things around."
Delta this summer raised the cap on one-way fares that it had established in January as part of nationwide SimpliFares and altered minimum-stay requirements on some tickets
(BTN, Sept. 5). More recently, it placed an additional restriction on the lowest fares in certain markets by forcing customers to chose between a three-night minimum or a Saturday-night stay. A spokesperson said only some citypairs are impacted and since customers have the choice, Saturday-night stays still are not required on any tickets.
Meanwhile, in planning its domestic retreat, Delta said it would remove an additional 80 aircraft from service and now is evaluating a smaller regional jet fleet. Conversely, international capacity is expected to increase as much as 25 percent by the end of 2006, an aggressive bump that surprised some analysts.
"Our transformation will be sweeping and fast-paced. It must be if we are to survive and thrive as a standalone company in control of our own destiny," said Delta CEO Gerald Grinstein. "The transformation plan's business model has been designed to fortify Delta against the clear and present threats from our competitors."
According to an analysis by J.P. Morgan Securities analysts, Delta's more dramatic capacity cuts from its Atlanta hub will occur on routes to Baltimore, Charlotte, Dallas, Denver, Jacksonville, Kansas City, Milwaukee, Minneapolis, Newark, Philadelphia, Raleigh and Tampa, among others.
However, a study by the Boyd Group, an Evergreen, Colo.-based consultancy, found only minor changes in Delta's Cincinnati and Salt Lake City hubs, compared with service levels at the beginning of the decade. At Salt Lake City, new service is being added to hubs operated by partners in Cleveland and Memphis.
"When viewed in the context of traffic growth over the past four years, the fundamental traffic trajectory of both these airports remains positive," said Boyd Group president Michael Boyd. "They are not opportunities for other airlines—especially low-cost carriers—to move in and fill any sort of vacuum, simply because there isn't any."
Meanwhile, Northwest is suspending from the end of October to the beginning of March 2006 its daily nonstop flights between Minneapolis and London Gatwick. A spokesman said the decision—similar to the previously announced indefinite suspension of New York-Tokyo service—is not related to bankruptcy proceedings, but rather the result of high fuel costs. From mid-January to early March, the carrier also will reduce Detroit-Paris frequencies from daily to five times weekly.
Northwest also asked regional partner Pinnacle to park 15 50-seat regional jets, effective Nov. 1. "We suspect that Northwest will severely shrink the marginal Memphis hub, which is primarily an RJ hub," Neidl said. Northwest also plans to reduce by two-thirds the total seat miles flown by regional partner Mesaba, following Northwest's planned termination of leases on all 35 Avro regional aircraft now operated by Mesaba. According to a Mesaba financial filing, the decision "will result in a substantial decrease in Mesaba's revenue and will have a material adverse effect on the company's financial results."
Regional partners are not the only ones experiencing a negative impact from Northwest's restructuring. An expansion plan at Minneapolis/St. Paul International Airport has been pushed back at least one year after Northwest told the local airport authority that it would not need additional gates until 2008, at the earliest. "We will see where things are at next year before making any longer-term decisions," said a spokesman for the MSP Metropolitan Airports Commission.
Meanwhile, multiple airline bankruptcies complicate matters for the remaining solvent network carriers—American and Continental—which would become disadvantaged in such areas as labor costs.
In other circumstances, competitors of Delta and Northwest stand to gain as the bankrupt carriers retreat. AirTran Airways, for example, said it is well-positioned to capitalize on Delta's service cuts from their mutual Atlanta hub. Southwest Airlines, meanwhile, is "not willing to cede any market to anyone," said CEO Gary Kelly, referring to other low-cost carriers with designs on expanding into markets where bankrupt carriers reduce service. Kelly said Southwest "must monitor and continue to evaluate" a possible entry into New York LaGuardia Airport, though no decisions are imminent
(BTNonline, Sept. 21). Both Delta and Northwest share space at LaGuardia in Delta's main terminal.
Meanwhile, there has been continued speculation that Delta and Northwest are considering a merger. However, according to corporate travel managers briefed on the situation, Northwest would more likely consider a dual-brand approach similar to that of Air France-KLM than a fully integrated entity, such as the "new" US Airways
(see story).Some analysts are not convinced any integration would work, at least for the foreseeable future. "We would prefer to see two strong carriers emerge from bankruptcy with financing, and then consider a merger," said Calyon Securities' Neidl.