Thursday, September 11, 2003

Airlines slug it out

Recovery slowed by price pressures, security costs

A year ago, as the one-year anniversary of the Sept. 11 terror attacks approached, Delta Air Lines chairman and chief executive officer Leo Mullin acknowledged that the airline industry was in a dire situation, but he said the jury was still out on whether the industry was permanently altered or could eventually get back to the way it had traditionally done business.

Now, two years after the attacks, Mullin has clearly made up his mind. In an interview this week with Enquirer reporter James Pilcher, the head of Delta and the de facto spokesman for the industry says that the airline business has seen "irrevocable changes."

Atlanta-based Delta, which operates its second-largest hub at the Cincinnati/Northern Kentucky International Airport, has lost just over $2 billion since the Sept. 11 attacks. Its stock has fallen from nearly $40 a share in the month before the tragedy to just over $14 currently. It still is the nation's third-largest carrier, but actually saw total ridership drop in August compared with the same month last year.

As for the industry, airlines as a whole lost nearly $20 billion in 2001-2002 alone, with the slump continuing through the first half of this year.

And Mullin says a recovery process originally thought to take three years will probably now take five, thanks to these changes.

Those start with the fact that business travelers won't pay what they had been for last-minute travel, especially knowing that vacationers may have paid hundreds of dollars less. And they include the downward pressure on prices due to the multiple outlets on the World Wide Web to the surge of competition from low-cost carriers.

Mullin also touched upon the future of regional jets (operated by such Delta subsidiaries as Erlanger-based Comair) as well as ongoing security issues, including costs:

Question: Do you think the airline industry, especially the big six legacy carriers, have been permanently changed in the two years following Sept. 11?

Answer: Last year, we were just at the beginning of sorting it all out, and it is apparent now that these changes are irrevocable. But I will say that the changes we are talking about are creating a grave difficulty in the short term and are seen hopefully in my view as a transition to a better tomorrow.

Q: Many have said the main change is that the business traveler will never come back to the previous model where he/she paid thousands of dollars for a last-minute flight. Do you agree with this, and why or why not?

A: I endorse what you just said, especially since we're seeing a continued decline in our yield (the revenue gained from flying one passenger one mile) even though our load factors are up, and there are two key reasons for it. First, there has been tremendous change in the competition in the industry, especially from the low-cost sector. It was strong prior to Sept. 11, but has become tremendously stronger in the two years since.

Carriers such as JetBlue and AirTran have really done a good job of exploiting our weaknesses and our need to retrench with their expansions. JetBlue has done this quite brilliantly, actually, and AirTran has given us an appropriate competitive time here in Atlanta.

The major factor is the ubiquitous nature of pricing information. That was always available before the attacks for sophisticated business travel departments and was increasingly becoming more available on the Web. But with the Internet, the man on the street has the ability to shop until he drops for the lowest price, and believe me, he does.

Q: But isn't this good for the consumer as a whole? More competition equals better prices and service, right?

A: Removing myself from the Delta platform and speaking on the industry as a whole, these can be viewed as good trends for the long run. But in the short term, it's a very difficult challenge for legacy carriers to absorb the price implications of this and our ongoing restructuring costs.

We're still in a three-year period of recovery that is quickly turning into a five-year period. I really think that if we are successful at Delta, where we have already cut $1.5 billion out of our cost structure and are looking to cut $3.5 billion by 2006, we will be on a good footing to engage in a competitive slugfest with the low cost carriers by then.

Q: Part of the company's restructuring has included drastically cutting flights on larger Delta jets and supplanting them with more flights on smaller regional jets owned by subsidiaries such as Comair, especially here locally at the Cincinnati hub. Is this a temporary solution that could become a permanent crutch?

A: I would use the term ramp-up instead of crutch, and this matching of market to the right size of aircraft is a crucial ingredient to our success. We want to market 50 or 70 seats a couple of times a day rather than 130 or 150 once a day. That being said, we should have roughly 400 regional jets by the end of next year and then I think the growth in RJs will be much slower at that point as we balance our aircraft mix.

Q: Last year, you said one of the changes that the airlines had to deal with was the "hassle factor" caused by the new security regimen. Is this one of those irrevocable changes you mentioned? And what about the continued cost to the airlines?

A: Security will never go away after that tragedy, and it's something the airlines and their customers must demand.

That being said, we are now wedded to a partner in the traveling experience that used to be controlled almost exclusively by the airline that is run by the government and that has a powerful and defining effect on the customer experience. I will say that they are doing a good, but maybe not great job, in addressing the hassle factor, and I've seen a big difference here in Atlanta.

But there is another aspect here. Delta is carrying an additional $500 million in costs a year in extra security costs that we feel should be appropriately reimbursed by the government. We did get the one time payment during the war with Iraq, and we are grateful for that. But these are permanent costs on a beleaguered industry that are not going away and the federal government has got to come to grips with this. And I know that the government and the public wish the airlines would go away with this, but we can't.


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