Fuel costs, 'foolish' steps put Delta in jeopardy
By Chris Kauffmann
Orlando Business Journal
Updated: 7:00 p.m. ET March 27, 2005
ORLANDO -- Soaring aviation fuel prices have pushed Delta Air Lines further into a financial tailspin that some analysts say already was deepened by "foolish" strategic moves. As a result, they say, what takes off has to land -- somewhere, even if it's in bankruptcy court.
That fate is the problem yet again facing Delta, Orlando International Airport's largest passenger carrier, just a few short months after it squeezed about $1 billion in concessions out of its pilots and put in place a restructuring plan.
"The biggest wild card we see for Delta is fuel. They are pretty much at the mercy of fuel prices," says Brian Hayward, a transportation analyst with Zacks Investment Research in Chicago.
Aviation fuel prices have gone up more than 40 cents a gallon since January -- to $1.56 as of March 15 -- and 64 percent since March of 2004, according to the American Petroleum Institute.
"I see this as a very serious challenge for Delta," says Henry Harteveldt, a San Francisco-based airline analyst for Forrester Research Inc. "The big difference between this time and the last time is (Delta) doesn't have a lot to play with this time."
As airline analyst Michael Boyd of The Boyd Group Inc. in Colorado sees it, this "is a crisis" impacting not only Atlanta-based Delta, but all airlines because "all airlines are effectively losing money. Things could get a lot worse because if you cut costs, they take awhile to manifest themselves, but when you pump fuel, it hits you right then," Boyd says.
Spokesman Anthony Black says the Delta (NYSE: DAL) won't "discuss the speculation of others." Delta, he adds, put its restructuring plan in place in September and has no plans to change anything at this point because of higher fuel prices.
Neither Harteveldt nor Boyd is terribly impressed with them, Harteveldt is more critical and sees fewer options.
Harteveldt says decisions by the carrier to eliminate things such as pillows and meals on certain types of flights do little to save money and even less to make the airline appealing to flyers, thereby giving them fewer reasons to choose it.
"They should be thinking about customer retention, but they are making absolutely foolish moves that will bite Delta right on its big southern behind," he adds.
Boyd, however, says eliminating pillows and meals in a liquidity crisis are perfectly fine, proactive moves because "most people don't even think about (those things)."
Still, Boyd believes Delta -- and the other airlines -- needs to do a lot more if it wants to become solvent, starting at its headquarters.
"They need to take a chainsaw to the place and get rid of anything that doesn't put a tushy in a seat," he says.
"They need to get rid of extraneous people and extraneous systems. Maybe they don't need two vice presidents of marketing or a secretary for every vice president," Boyd says. "How many check-in people do you need at the gate when everyone has already been checked in?"
When it comes to Delta's fare structure, neither Harteveldt nor Boyd have particularly good things to say.
Boyd notes that the airline cut a lot of fares customers couldn't buy anyway, while Harteveldt says the fact Delta hasn't raised fares on walk-up customers "signifies stupidity" because as last-minute shoppers, they are less price-sensitive.
Although there has been a lot of speculation that Delta might sell off subsidiary carriers such as Comair and Atlantic Southeast Airlines, analysts don't see it as an especially viable long-term solution.
"First, they have got to find a sucker to buy them," Boyd says, adding the subsidiary carriers generate their revenue tied to a system that has at the head an airline that isn't making any money.
Meanwhile, Karen Miller, spokeswoman for the Washington, D.C.-based Air Line Pilots Association, says the 64,000-member union is willing to give Delta the benefit of the doubt for the time being.
