Delta Air to Unveil Plans For a Low-Cost

[General Lee]

Oppsah,

I didn't mean to put you down, I just get frustrated sometimes. I want everyone to do well, and I hope the LCC works. I hope everyone gets what they want and all the furloughs come back.

Bye Bye--General Lee

 

[Jeff G]

So, a lot of your folks commute free to JFK. Hmmmm. They better on $2600 a month wages in NY. I thought all of your seats are full. It might get tough to commute eventually, and then they might not be as happy.

The seats mostly are full, and that hasn't changed. But we've still got four jumpseats, and it's not often you have that many commuters on a given flight. Fortunately, we mostly just add frequency when flights fill up, so that leaves more options for everybody. We'll put you and any FA's on the two cabin jumpseats, too, by the way. Just show your ID at the gate. You just can't sit up front anymore, unfortunately. Our people can, though.

But, we easily did it on the 737-200, and all we can do is try----and people have said that they are experimenting with new boarding procedures---stuff that United did on the Shuttle---that might expedite the process.

I'd love to see you succeed here. Like I said, we'd love to steal your best ideas.

And, the 757 is a fast plane, and will make up the difference in the air, trust me. (all we have to do is state the arrival time and add 20 min each time---easily making it on time---if we determine the route will take 3hrs---make it 3hrs 20 min in the schedule---then we have extra time---also to get food for the pilots..)

There's an art to scheduling, though. Pad the schedule too much and you hurt productivity. Fast turns mean nothing if the plane usually ends up sitting there for an hour anyway. But if you don't pad enough your operation starts to fall behind if you start running late. The speed of the airplane doesn't matter if you get a two-hour gate hold. Your schedule has been prebuilt with that speed in mind. Also, the more you use the airplanes, the worse you're impacted downline with any delay. Welcome to the world of LCC.

BTW, run the numbers. How long are you really in cruise? For a 2-3 hr leg, about 70% of the flight. If you fly 0.85 vs. 0.75, you still only save 10 minutes or so. And again, your planners will count on something close to 0.85, so any time to make up will be minimal. Believe me, I've tried. For instance, I wanted to make up time on a transcon, fully four hours at altitude in cruise. The computer wanted only 0.77 because of a strong tailwind, vs. a typical 0.79. I dialed in 0.81 (0.82 is redline) and the computer predicted only 5 minutes of time savings but more than 1000 lbs more burn. It's not worth it. Your mileage may vary, but going really fast in cruise may not make up as much time as you think. Remember, profit sharing. Oh that's right...

And, there wouldn't just be 2 allnighters from Vegas a night Jeff G, there could be other city pairings for allnighters----like SNA to JFK, or OAK to FLL---who knows? Not you.

And not you either. But you did answer my question. Thanks.

 

[Ty Webb]

Seats at a loss- make it up in quantity!

Any LCC pilot knows that you don't make up time in the air . . . you make it up on the ground. And therein lies part fo the problem for DAL.

CAL, DAL, USAir, UAL . . . all have tried LCC's and all have failed. It's not a matter of having more seats, or more fuel economy. It's things that your management can't even grasp, your high-priced consultants can;t define, and your pilots won't accept, but it will sound good to your shareholders, at least for a while, and will get them off of Leo's back.

In the end, ithough, when it becomes clear that it was a losing proposition, it will probably come back to bite him in a huge way, and they will call for his head.

I also have to chuckle at DAL's ridiculous plan to stop AirTran from taking market share- namely, charge the same thing as AirTran, and dump a bunch of seats on the market. . . . only problem is, we are making money at these prices, while DAL is losing hundreds of millions doing it . . . now, they want to make it up in quantity. . . . Good Luck!

 

[General Lee]

Jeff G,

I am not trying to be hostile, I am just frustrated sometimes when people speculate and do not really know the outcome. Leo Mullin has proven himself a good and smart leader, and won't lead us down the wrong path. Our Express operation was not a total failure, it mainly broke even---it just had the wrong type airplane on it. A lot of people are not privy to this LCC info, and most have signed confidentiality agreements. Why? I don't know, but maybe they have something good. They have had time to look at the other failures---like CalLite, Metrojet, and even our breakeven Delta Express, and they are probably tweaking the formula. They already are making changes in pay for most people, pilots will probably be soon, and they have chosen the right plane I believe. Marketing will be agressive, and they will go after Jetblue mainly, and Southwest to an extent. Should you be weary? I don't know, but good competition will not help your bottom line. You offer a great product (My Brother said so) and it is up to us to try to do the same.

I know that padding the schedule might decrease productivity, but it depends on the airport. Places like BOS or JFK may take forever to take off in those congo lines, and that will be taken into consideration. But, if we are running late, Delta often let's us increase our cost index in the FMS, allowing a little more thrust for time. And, considering fuel in that situation, nobody hedges fuel better than Delta----over 75% of our fuel is hedged.

I am glad that you guys allow a lot of jumpseaters, even ours. I would love for our company to do the same, and they would if it were up to me. We are just happy we have a cockpit jumpseat or backseat for pilots-----we didn't have that until 96 I believe.
That is what it should be like at all airlines----and I am sure many of our people fly on Jetblue and appreciate it. Our 757's do not even have a flight attendant jumpseat---not even for our flight attendants. (Other planes have many---like 767 and 777 etc.)

I hope I am surprised an pleased with our new LCC---and I hope the name isn't goofy. It ought to be interesting at the least, and we will supposedly hear more about it next week.

Bye Bye---General lee

 

[General Lee]

Ty Webb,

You are right about making up time on the ground, and that is why the new LCC will not be going to our big hubs. It will be point to point, from airports like FLL to places like SNA or OAK. The traffic hassles are not as bad as other airports. And, Air Tran has not been "banking tons of cash" at ATL, and I read an article that said Delta has been giving you a run for your money. Now you are getting RJ's, and using the 717's to take us head on. Good. I think competition is good, and it keeps Delta from pairing away frequency. And, if you have read any of the press releases about the huge losses, you will take note that there have been a lot of "special charges" that are one time charges designed to make it look as bad as possible, probably to get Congress to help out with security. Remember Ty, we have $5 billion in unencumbered assests that can still be mortgaged. That can last for a long time--really. And, we are putting extra cost cutting programs in there. When the economy comes back, watch out---we will have a mainline with Intl heavies, a LCC with 757's, and 1000 RJ's. You will have 100 or 120 717's, and 10 RJ's. Caution wake turbulence.

Bye Bye---General Lee

 

[Ty Webb]

Ty Webb,

Air Tran has not been "banking tons of cash" at ATL, and I read an article that said Delta has been giving you a run for your money. Now you are getting RJ's, and using the 717's to take us head on. Good.\You will have 100 or 120 717's, and 10 RJ's. Caution wake turbulence.

Bye Bye---General Lee

I don't know if we are "banking tons of cash", but I will tell you this- we are making money . . . . both of the last two quarters, and for all of 2002 . . . . and that is while taking delivery of 2 new airplanes every month since I have been here, and hiring the pilots to fly them. We also have plenty of cash, but we don;t fritter it away competing with DAL. We're running a business, not a charity.

Look for an announcement of larger aircraft before the end of the year, but look for them to be utilized on routes where we can make money. See, our strategy is to make money where there is money to be made, not to piss it away competing for customers we can't afford to serve, which is what the LCC sure sounds like to me.

 

[mad691]

You may be interested in the following written by a SWA pilot. I don't necessarily agree with all of it, but it makes for interesting reading. He faults labor AND management for failing business models. Here are a few sample paragraphs focusing mostly on labor:

"The mainline airline pilot captures money from really only one source (hard pay and benefits), but his airline attempts to capture multiple income streams outside of mainline flying (RJs, IT, and alliances). By design, the SWA Model is the exact opposite. The SWA pilots capture money from multiple sources (hard pay, profit sharing, and stock appreciation), while the airline only generates income from one source - flying passengers in the back of B737s.

When the mainline pilot's company makes money from "partnering" with RJ carriers, does he benefit? No. (There is a management notion that RJ flying generates more mainline flying, but this downturn truly proves that theory is bunk.)

Does the mainline pilot get money when his airline joins wordwide alliances? No. His union gets to form a new committee and travel around the world to participate in "pilot alliance coalitions" but with little benefit to the mainline pilot.

When an airline forms and funds information technology (IT) subsidiaries (Sabre, Apollo, Orbitz, etc) do any of the benefits flow to the mainline pilots? No.

Does SWA management use airline generated funds to finance RJs, code-share alliances, IT efforts, or to pursue any other endeavors? No. They buy 737s and pay down debt.

Mainline pilots justifiably have only one religion - hard pay. The SWA pilots have nearly a billion dollars tied up in SWA stock in one form or another. Each dollar increase in SWA stock is worth millions to the SWA pilots. (One analyst states that some airlines who make it through the present downturn will see up to 300% appreciation in stock value)

Fighting hard only for hard pay may be a valid strategy for the normal mainline pilot, but that does not necessarily mean it is the wisest strategy for SWA pilots.

Four days after 9/11, Southwest made a $180 million payment to the employees profit sharing accounts. Simultaneously, the mainline carriers started declaring "force majeur" and announcing furloughs.

Since labor at mainline carriers rarely participates in stock appreciation, they are actually unintentionally pitted against the investor. The more labor gets (wages); the less the investor gets (profits) and vice-versa. The SWA Model - evolving from the beginning - was designed to make labor and investor more congruent. If investors get rewarded (more profits), the pilots participate with profit sharing and stock appreciation.

One of the fundamental flaws in the airline industry is an undercurrent struggle between labor and investor. The byproduct is that labor is ignorant of investor's needs and investors often see labor as screwing up their investments. Not surprisingly, this often produces disastrous results for both parties.

Delta plans to acquire over 500 RJs to be flown by Comair, ASA, Skywest, and ACA pilots. By the end of 2005, every major carrier will have between 1000 - 5000 pilot jet jobs at their regional carriers. Currently mainline pilots fly none of these regional jets (although that seems to be changing at USAir). If these pilots had made different decisions, all their furloughed pilots could be flying with many of those 1000 - 5000 RJ pilots below them on their seniority list. The next time a mainline pilot mumbles about SWA wage rates, ask them why they have been such capitulating wimps by letting their managements outsource their jet jobs. (ALPA is currently being sued by a second regional carrier for failing to properly represent them - big surprise!)

Some managements are indeed scoundrels, but most are rather simple-minded:they look for ways to be profitable. If they cannot make money flying big airplanes, they are going to try and make money flying small airplanes. Mainline airlines have priced themselves out of the market and management has to turn to other income streams, such as RJs."

 

[AlbieF15]

Interesting and good article...

Likely to be flame bait here, but from my "Pollyanna" perspective, I have often wondered why labor/union negotiating has to be so US verses THEM.

One thing JetBlue and SWA have done very successfully is lash the pilots to the ship in the form of stock options and profit sharing. If the ship does well, then the investors are happy...and so are the pilots. Now...the latest stock market downturn and mulitple corporate scandals illustrate why someone should NOT have all their eggs in one basket, but by putting a certain percentage of compensation in the form of stock, stock options, or profit sharing, it seems like both union and management could find some win-win outcomes.

I know, I know...I'm from Mayberry and this is a pipe dream. We are told to say "my union negotiates for me" whenever someone from management says "what about XXX". Still, I can't help but wonder if on our next contract if we had some sort of profit share/stock option link if ultimately the gap between Mgt and labor might shrink just a bit...

 

[VaB]

ultimately the gap between Mgt and labor might shrink just a bit...

Albie,

Nice thought, but I guarantee that most guys here during '97 aren't going to make nice, if ya know what I mean. I hope I'm wrong, but there are some angry, smited feeling fellas running around out there. By the way, I wasn't here then, so that's just my opinion.

Later

 

[mad691]

This is my take on LCC. First you have to give Delta credit because they are at least trying to compete. They really have no choice. Better change with the times or you will perish. Pan Am, Eastern, Braniff, you get the idea. Delta is in better shape they most. Even though Northwest has more cash on hand(actually cash and not encumbered assets) Delta has a better balance sheet than most. So General Lee is right. They can last a long while. The only problem with that scenario is that are those encumbered assets really worth anything? Maybe and maybe not. How many banks at the moment are going to give Delta or any carrier any money and use 737-200s, MD-88s, MD-11s and any other aircraft that are paid off as calatoral to get money. I suspect not too many. Look at UAL, 2-3billion in encumbered assests,can't even get a loan based on that. Thay have to go to uncle sam to guarantee the loan.

Now lets talk about LCC. Delta has delta express part 1 today. At the time when they set it up it looked like a good idea. And I suspect it was working when the economy was booming. Metro jet , CON lite, United shuttle, all were set up within a company to go after LUV. Back then Jetblue and Airtran weren't on the radar screen(well VJ/Airtran weren't a real threat back then). So basically you have the majors going against LUV with there low cost unit. General Lee said nobody really knows that DE part 1 really made money. Well I can tell you that it didn't. Why? Because if it did they would have expanded even more by now. Well How do I know? Just theory really. Maint. costs, fuel costs, gate space, landing fees, overhead stays the same. The difference, pilots take a pay cut. None of the other labor force takes any form of a cut. So basically none of the costs change except the pilot group. So now you say well what else can management do. Utilize those airplanes more. instead of the average 8-9 hours day, you bring it up to maybe 10 hours a day. Now remember how the saying goes, airplanes don't make money on the ground. So that helps a little. Throw in 25 minute turns a you have yourself something. Throw in a nice frequent flyer program that can take all over the world as General Lee said because remember LUV doesn't go to Spain and you have yourself DE part 1. All of the low cost units had the highest load factors in the industry. Metrojet had an average load factor in the 80s. Thats really good. DEpart1 had(i don't know now) also 80s load factor. Lets talk about the 25 minute turn. 737-200 has 117 passangers right? So lets say each passanger checks in 1 bag. 117 bags is pretty managable number. So basically the quicker you get the passangers off the quicker the turn will be. Fuel, baggage, and catering are really a none issue. Remeber LUV has been doing this for 30 plus years. They invented the quick turn. I think DE part1 held its own until 2001 when the economy started to slow. Better than any other low cost unit. when Sept. 11th happened the first thing that almost all the carriers did was ditch the low cost unit. Metrojet gone. United shuttle gone. Delta cut DE part 1 in half. So that says something. But they never got rid of it. they just cut it. Maybe General Lee knows something we don't?

Lets talk about DE part2. We really don't know what its going to be called so we will leave it at that. rumor is its going to be 757s all coach configuration. So we will go with that. Now the first thing that comes to mind is Virginia Ave needed help. None of the important people made good decisions about how to go after the low cost guys. Leos not a happy guy. He has a code share threat from UAL/U and the low cost carriers who had only 7% of the market now have 14% of the market. So they have to pay money to hire outside firm see if they can get a handle on this. One of things the firm does is fly on all the low cost carriers. LUV, SWA, Jetblue, ATA, Frontier, and Airtran. They come up with a plan and now Leo and his team will announce this plan soon. the question comes up why 757s? Well the 757 has the lowest operating costs of any narrow body aircraft. Thats a good idea. All coach configuration. Thats good. More seats, you can spread your costs out a little more. This is all good. I would assume that the frequent flyer program will be the same, thats also good. Heres the problem. Again the over head is going to be about the same. This time the reverse the labor costs. Pay the pilots the same and everybody else gets a pay cut. Fuel costs stay the same(may go down a little because 757 is alittle more fuel efficient). Maint costs stay the same, landing fees go up because the airplane is heavier and leases on the gate stay the same. There is one very important thing here you can not measure. Thats called customer service. One other important item here is good employee moral. Delta at one time was the customer service king. Great employees, great moral, **CENSORED****CENSORED****CENSORED****CENSORED** they bought 767 for the company. Thats impressive! I don't think any other airline has done that. But times have changed. 15000 employees gone, so moral is not what I call very good. And if they hire outside employees and not offer jobs to the furlough employees moral will be really crappy. lets talk about CASM. that is king. CASM is everything when you are a low cost carrier. Lets compare CASM. As of 3rd qtr of 02 . Jetblue leads the pack at 6.5 cents a mile, SWA is 7.5, Airtran is 8.2 cents, ATA is 6.7. If you take out the charters ATA does, the CASM for scheduled service is 8.5 cents. What factors play in this? Well, quick turns, a/c utilization, stage lengths, how many employees it takes to turn an airplane, etc. Very important stuff. Jetblue flys there airplanes 14-16 hour a day. SWA has 11- 12 hours a day, Airtran is up to 11 hours also. they all do quick turns, they get more out of there employees per hour basis than Delta ever could. And the most important thing all of these low cost carriers have is good customer service. With out it, they all would disappeared a long time ago. The proof is in the pudding. Look at jetblue and airtran. Both have expanded ten fold. AND been profitable. All airlines can expand, but to do it and still make a profit is something. As far as the 757s doing 25-30 minute turns. That will be something. 200 people plus 200 bags, unload and then board 200 people and 200 bags all in 30 minutes. That would be impressive to see. Will it work? Who knows. Time will tell. Those red eyes that AWA, and Jetblue do, I think that will help Delta keep the hours up on the airplane but to go against southwest in Vegas is crazy. Vegas is twice the size of MCO as far as flights go. look at ATA they have 757s. I don't think they can do 25-30 minute turns on there 757s. Well, time will tell on this one, if it works, the others will follow. If it doesn't Delta will bleed bad. Remember, the average fare for swa, is about 89.00 and the make money, airtran last quarter was 72.00 dollars, i forget what jetblue was, probably low 99-105 range, and still made money. That will be a hard act to follow.

Of course I could be wrong(but I did stay at a holiday inn last night)....

 

[Ty Webb]

Thanks for an insightful post . . . .

Now, other food for thought . . . what if AirTran gets B737-800 aircraft, and also uses the Air Whiskey CRJ200 on the lighter runs . . . .

It could get very interesting.

 

[rjcap]

Here's one to get your brain spinning.

Any possibility the LCC is really a sideshow to get the Delta MEC too sign off on raising the DCI block hour limits from 32% to 49% ??

I beleive Delta has something like 350 a/c. Is 30-40 757's allocated to the LCC really a big deal. Also consider it will take months and months to get this new LCC up and running.

 

[Publishers]

LCC

Regardless of the success of the new offering, the real and more significant question is whether they will be able to hold fares and traffic on the mainline.

I have been at HDQ for Spirit, AirTran, and Delta. They are not the same and there is more to keeping your cost down than by what is an accounting qimmick as much as anything. We are going to put into the new carrier the costs we want to and then proclaim success at taking business basically from us as well as others.

Think about it, one of the people you are going to have an impact on is yourself. In fact, if the customer remains loyal to SWA and the rest, the person you may hurt the most is yourself.

That is why they do not work for the most part.

 

[mad691]

Now, other food for thought . . . what if AirTran gets B737-800 aircraft, and also uses the Air Whiskey CRJ200 on the lighter runs . . . .

I hope that Airtran sticks to the 717. As long as they stick to 1 fleet type then you can play the game. That is why SWA is king and shall be for a long time.

DE part 2 will not compete a whole lot with Airtran. It will go after Jetblue for sure. Since 85% of airtrans revenue is out of ATL, to go after airtran would cancel DAL mainline out. All coach configuration 757s against two class 717 would not work. Delta may go after other Airtran flights out of MCO, which I think Airtran knows about already.

I really do believe(maybe I am nieve)that delta is just trying to make money. Pure and simple. I don't think they are trying to change the scope clause, break contracts. Time is critical here. Most analysts agree the 2003 is a wipe out for the industry as a whole. So cash is #1.

Jetblue has alot going for them at the moment. Great marketing, great customer service, brand new airplanes which bring along safe, reliable, on time service, and the best part for a cheap price. A hub in the #1 O&D market in the US. I think in the month of August Jetblue had a 100% completion factor for the month. Thats pretty good considering they are only 2.5 years old. First impressions are very important and they have made a good one. Delta has a lot cut out for them in the next few months. Things will be interesting for sure.

 

[SpeedBird]

Publisher's quote:

"Think about it, one of the people you are going to have an impact on is yourself. In fact, if the customer remains loyal to SWA and the rest, the person you may hurt the most is yourself."

I have to agree with you on this point. Delta mainline has the greatest exposure for loss with the start-up of the LCC. In addition to your points, there are forecasts of 50-90% growth rates in the low-fare segment of the US market over the next five years. As LCC moves into this segment, there will be enough passenger growth to accomodate the extra capacity they'll bring without putting much stress on their true low-cost competitors who already have a big head start over them.

Meanwhile the mainline operations will have more difficulty finding people to fill their own seats as LCC competes against them for the leisure & frugal business passengers that dominate the entire marketplace for the present time.