Is Delta Singing The End Of Song?

[Flying Freddie]

Is Delta Singing The End Of Song?
Lisa DiCarlo, 01.03.05, 1:05 PM ET

http://images.forbes.com/media/assets/spacer_white.gifhttp://images.forbes.com/media/assets/spacer_white.gifNEW YORK - Delta Air Lines' reported plan to overhaul its pricing strategy may not only ignite a price war with other legacy carriers but also call into question the need for its low-cost subsidiary, Song.

According to reports, Delta (nyse: DAL - news - people ) will implement a simplified price structure that will result in lower prices, a less confounding array of available fares across the U.S. and the elimination of loathsome restrictions. It's a strategy that has helped drive low-cost carriers like JetBlue Airways (nasdaq: JBLU - news - people ), AirTran (nyse: AAI - news - people ) and others.

But if Delta functions more like a low-cost carrier (which is clearly the plan) does it need to continue supporting Song?

Delta's airline-within-an-airline was launched in the spring of 2003 to fend off encroachment by JetBlue. Song, which flies primarily along the overserved U.S. East Coast, bills itself as a low-cost carrier. Like JetBlue, it has leather seats, free live television and a laid-back staff that greets customers by their first names.

It operates more efficiently than its parent (single-class planes, point-to-point routes, quick turnarounds), but perhaps not as cheaply as it could if it were not part of Delta. Song's pilots are Delta pilots, paid Delta-level wages and work under big-carrier union rules.

It's impossible to gauge operational details about Song because Delta doesn't divulge them. Delta's most recently quarterly filing, in September, makes nary a mention of Song in all 67 pages. Delta did not return a call for comment today.

In a December report, Merrill Lynch (nyse: MER - news - people ) airline analyst Michael Linenberg noted that the East Coast was oversupplied with seats, and that he didn't expect to see revenue-growth improvement in that sector until June 2005 at the earliest.


The situation at Delta has become only more dire over time. Chief Executive Gerald Grinstein suggested last year that by 2006 the company would be dramatically different. In a filing with the U.S. Securities and Exchange Commission in September, he noted that Delta's high costs put it at a "serious competitive disadvantage" and that "permanent structural changes" would be necessary.

The company pledged to restructure more than half of its route network by the end of January, including ending the use of Dallas as a hub. The company expects the transformation, which also includes job and salary cuts, to deliver $5 billion in savings by 2006, compared with 2002.

The savings can't come soon enough. Through the first nine months of 2004, Delta had a staggering $3 billion loss on $11.3 billion in revenue. Long-term debt climbed, as did labor and fuel costs.

 

[FDJ2]

It's more likely that Delta will become Song.

Despite the authors speculation, Song will be getting 12 more 757s this year.

 

[a320drivr]

And it will still lose money.

 

[General Lee]

Song is not losing money, even though you wish it would. That is one of the more successful units of Delta, and that is why it is getting 12 more 757s. Song's product is better than mainlines, and that scares Neeleman. Have a great one.



Bye Bye--General Lee

 

[dkwid]

Song is not losing money, even though you wish it would. That is one of the more successful units of Delta, and that is why it is getting 12 more 757s. Song's product is better than mainlines, and that scares Neeleman. Have a great one.

I am not disputing your statement, just curious how you know. Delta seems rather stuborn in reporting their success in Song...assuming it is a success.

Adding airplanes we would assume means good things about the product but once again we must be reminded that airline management is not always flawless.

That all said I am optomistic about DAL. They seem to be moving in a proactive sort of way, unlike UAL and USair.

 

[Eagleflip]

So, General. How do you "know" that Song scares David Neeleman? Or, are you (gasp!) entertaining a bit of hopeful conjecture?

Here's my real question--is there any resentment or feedback from the pilots when flying a Song jet vs. a normal Delta-labeled jet? I know everyone just uses the Delta callsign, but I wondered if there was any psychological "pushback" from the pilots.

Not that it matters. At issue is the profit margin, which will come out (be announced) eventually, methinks.

 

[FDJ2]

Here's my real question--is there any resentment or feedback from the pilots when flying a Song jet vs. a normal Delta-labeled jet? I know everyone just uses the Delta callsign, but I wondered if there was any psychological "pushback" from the pilots.

PMFJI, but I'd say that about a third of my trips seem to be Song flights and I have zero "resentment" over the Song label. On the contrary I enjoy the Song flights and the Song folks, both agents and F/As seem up beat and positive. The customers seem to enjoy the ride and the feed back I get from them is positive about the Song product. I'd say that most of my fellow DAL pilots feel the same way and wish that mainline would adopt even more of the Song service. In the meantime Grinstein, who use to be an opponent of the Song brand, has decided to increase Song by a third this year with 12 more 757s. Needless to say Mr Grinstein has seen the results and apparently he likes what he sees, hence the expansion. The rumor I hear is these will mostly be flying East-West from the north east.

 

[MedFlyer]

In the meantime Grinstein, who use to be an opponent of the Song brand, has decided to increase Song by a third this year with 12 more 757s. Needless to say Mr Grinstein has seen the results and apparently he likes what he sees, hence the expansion. The rumor I hear is these will mostly be flying East-West from the north east.

Using your logic (and the General's), you guys must think RJ's are really successful and quite profitable for Delta. DL Connection continues to expand the RJ fleet, so that must mean RJ's are successful.

Song isn't designed to be profitable (yields are too low). It's designed to prevent/reduce marketshare erosion and keep people in key markets (BOS,NYC,MCO,FLL,etc) loyal to the DL brand. If Song was profitable, you'd here management crowing about their success and how smart they are. Instead, we hear nothing.

I wouldn't be surprised if Song has a similar life cycle as DL Express.

 

[a320drivr]

Med flyer,

I couldnt agree more. If DAL was so proud of Song they would post results. Song cant make money with the DAL cost structure.

 

[FL000]

Song is not losing money, even though you wish it would. That is one of the more successful units of Delta, and that is why it is getting 12 more 757s.

So, DAL keeps a separate book on Song, but not on ASA/Comair? How would we know if they are or are not losing money? How is their accounting different from that of DCI WO?

Hmmmmm.

 

[FDJ2]

Using your logic (and the General's), you guys must think RJ's are really successful and quite profitable for Delta. DL Connection continues to expand the RJ fleet, so that must mean RJ's are successful.

I notice very little growth at CMR next year, but other DCI carriers will see growth, what's that tell ya?

 

[FDJ2]

Delta's Song To Launch New Routes To West In Summer
By Steven Lott
12/07/2004 08:27:13 AM


Delta's Song division is finalizing a 2005 expansion plan that will see 12 more 199-seat 757s joining its fleet, likely helping to launch new transcontinental routes from New York Kennedy starting next summer.

In one of her first interviews since taking over for former Song chief John Selvaggio in October, Acting Song President Joanne Smith told The DAILY that the carrier expects to unveil the new routes in February and start service in June. The carrier will add about one plane every two to three weeks starting this summer, with all of the additional aircraft flying on all the new routes by November.

"The game plan is to use the Song product to compete vigorously in some of those tough competitive markets where there is a lot of demand and low-cost competition is fierce," Smith said. The 12 new planes will let Song add service to another four to six "high-density" markets. Two of the top transcontinental routes that may get Song service are Los Angeles and San Francisco, both of which are served from JFK by Delta's mainline product.

Song already serves LAX from three Florida cities and the only other western city to see Song so far is Las Vegas. Song about a year ago was planning to roll out an aggressive expansion plan to the West, but the launch was put on hold after there was a change in leadership at the airline last winter (DAILY, Jan. 29). Delta CEO Jerry Grinstein for months noted his skepticism for Song inside the airline and out, but he wanted to see a full year's results before deciding Song's fate.

Smith believes that Grinstein's September approval of Song's 2005 growth plan is an endorsement of the strategy and adds some credibility to their claims that the operation is achieving its goals (DAILY, Sept. 9). "What really convinced him is that the costs are coming in where they should be, the margins were improving and, more than anything else, was the strong customer response," Smith said.

She believes that Grinstein was encouraged by the high marks passengers were giving the Song service, which many observers believe is better than the mainline product. Grinstein also could not turn his back on the tremendous financial investment that was made in Song.

One of Grinstein's goals for the airline is to boost customer service and the inflight product. Just last week, Song unveiled its upgraded inflight entertainment system, which will be installed on all 36 planes by yearend. The upgraded Matsu**CENSORED****CENSORED****CENSORED****CENSORED**a system offers 10 on-demand movies for a fee and digital music that allows passengers to create individualized play lists. The system also has 10 video games along with the live television.

The 2005 growth plan is essentially the same one put on hold last year, Smith said, except with a "few tweaks," and Smith believes Grinstein's green light means Song will be around for years to come. Even though Delta eventually will close the cost gap between itself and low-cost carriers, Smith believes Song is still crucial to Delta's long-term strategy. "We believe that two brands are better than one," she said.

Delta has been able to prove internally that it has gained incremental passengers thanks to a new brand. "Delta will eventually become a low-cost carrier but Song will continue to be a small part of Delta," she said. "There is no plan that says we are going grow to half the size of Delta." Smith predicts that Song will continue its role as a "test bed" for Delta for new products and processes as it slowly grows its own presence in key leisure markets.

Smith acknowledged that yields at Song are weak, as they are for the whole industry, blaming fare wars and overcapacity this summer leading to weaker yields on many routes. "We're feeling pretty optimistic about 2005," she said. "Better awareness leads to stronger demand, which leads to higher yields." Meanwhile, Smith said "traffic is building in the face of added capacity."

 

[satpak77]

earnings date?

Jan 20, 2005?

http://www.earningswhispers.com/stocks.asp?symbol=dal

 

[Dizel8]

"We believe that two brands are better than one," she said."

If that is true, three must be better, or maybe four or five

 

[General Lee]

Eagleflip,


Resentment? What? Where in the heck did you get that? We get paid the same flying Song or Mainline. I, like FDJ2, really enjoy flying Song, the stews (or "talent") are fun to fly with and have great attitudes. I try to bid trips that have Song legs because it is so laid back and fun. Does the 737FO in CVG resent me? What? He can fly Song too if he bids the 757/767. The good thing is that after I fly a Song turn from FLA to JFK or LGA, then the next day I get to fly a 767-300ER and get to say "Heavy." It really is nice to have variety, like one day flying Song to FLL, and then next a 767-300ER to Portland, OR. I am also fairly close to holding the 767-400 in ATL as an FO (or 765 as it is called due to the INTL flying), and those trips from ATL have some long legs---like HNL and Lima, Peru. The only difference training I will have to go through is 3 or 4 sims total. Sounds great, eh?


a320drivr,

Grinstein actually came out and said in public(an article) that Song was profitable. Ever since Enron, what a CEO says in public can be held against him. You can't mislead the public anymore, or you will go to jail. We are expanding and adding transcons from New York to LA and SFO soon, and the passnegers that may fly you guys will see how much better our IFE system is than yours.


Medflyer,

There probably are some areas that could use more point to point RJ service that maybe could not sustain a mainline jet, and those may be used to compete directly with Jetblue's Emb190s. Those Republic E170s will probably do a good job, even without the IFE on those planes. How many new airplanes are you guys getting? Oh, that hasn't been determined yet.



Dizel8,

One of our management honchos used to run GM, and they have several brands that are customized to different types of customers. Some people want that upgrade to 1st class, some people want IFE, some people don't care. Gerry Grinstein has made millions of dollars on his own, and is a smart guy. He wasn't really jazzed about that idea of Song at first also, but then saw the numbers and liked it. Why don't you call him up and tell him he is wrong? He would laugh in your face. He has the numbers, and he is in charge. Leo Mullin didn't really want to take on too many competitors or cause ripples in the water, but Grinstein is different. That is why Neeleman is nervous.


Bye Bye--General Lee

 

[FNG320]

Song is not losing money, even though you wish it would. That is one of the more successful units of Delta, and that is why it is getting 12 more 757s. Song's product is better than mainlines, and that scares Neeleman. Have a great one.



Bye Bye--General Lee

I think you may be drinking the "green coolaid". When you add in all of the cost that go into operating Song (pilots, flight attendants, maintenace, ground support, reservationist, customer service etc, etc, etc) you will get a cost per seat mile almost in excess of the capablity of the aircraft to make money at the current Song ticket prices (would require a 95% load factor fleet wide for Song). The statement that Song is making money is only true if ignore that so much of the Song's support/cost is hidden/passed on to mother Delta (Maintenace, ticketing, customer service, gates, baggage handlers, etc, etc). That is why Delta doesn't break out Song in its reports. Then the stockholders and the rest of the world would see that Song actually looses money. Maybe not as much as mainline, but still loses money. Not to say that maybe Delta in the US may become all Song, but the inertia of the DAL is hard to overcome.

Still, good luck
FNG

 

[FL000]

I'm obviously on GL's ignore list.

 

[Dizel8]

Yes, GM has a lot of brands, however, people also got so discouarged daling with GM products, that GM found it necessary to create a "new" brand, Saturn.

Saturn was supposed to solve many problems: Gain the lost customer back, fight the japanese, show a gentler kinder side of GM and make money while doing so. The Saturn idea worked, at least for a bit, now GM is making changes to Saturn that brings it away from the original concept and are going through changes in management. The losses are mounting and no longer is Saturn creating new customers.

We can argue the profitability of Song until the cows come home, DAL for reasons best known to themselves, does not distinguish the different brands and probably never will. I have watched the "big" argument between mainline vs DCI W/O, they both claim to be the money maker, yet DAL as an entity is losing money.

As for accountability, when saying Song makes money, I think you overestimate the ramifications. It all comes down to cost allocation. If all cost, other than a few, are borne by DAL, then Song, as a separate division may indeed be making bundles of money, there is just no way to tell and because of that, the accountability issue is moot.

Now, Song as a concept does make sense. Even if it loses money, it aims to curtail the growth of jetblue. From a competetive standpoint that does make sense and it does make jetblue work harder.

As for people preferring different products, I would be interested in knowing, what the passengers prefer between Song vs Mainline. It seems to me, that Song would be preferable having more amenities, that is to the great "unwashed". After all, Song offers more legroom, IFE, "perkier" employees, less restrictions on travel and lower prices. As you wrote: Song's product is better than mainlines".

 

[General Lee]

FNG and Dizel8,


None of us have the books to see if there are profits at Song, even though our CEO publically stated that Song was profiatble, something that cannot be ignored in this post-Enron business environment. Sure, it takes money initially to paint the planes, get the uniforms, buy the IFE system, etc. Jetblue had to do the same thing for their planes. They weren't free, were they? (except for the free maintenance---which should be expiring soon.......maybe that was a joke.....)


The key to Song right now compared to mainline is that the planes do fly more, carry more passengers (for probably less money per fare on average, but the extra seats can help make up that difference), and fly to cities that have good loads between them. DCI could have the same argument----they are profitable often because they (the RJs) were put on old 727 routes that used to be full---so they should have no problem being full....right? Song is undoubtably being used also to be a buffer against successful Jetblue, but to say that Song couldn't be a profitable entity at the same time is just guessing. We can only go by what management states in public. There are penalties for lying, you know. He really didn't have to say anything, but he chose to anyway.


Bye Bye--General Lee


PS--time for a long 4 day trip. See ya!

 

[HowlinMadMurdoc]

... even though our CEO publically stated that Song was profiatble, something that cannot be ignored in this post-Enron business environment.

Ever heard of the term, "creative use of words"? CEO's and Corporations use creative words all the time. So, GG publically said Song was profitable. Did it ever occur to you that term "profitable" means anything above $1 or a penny? "Song was profitable (we just won't say by how much)". As long as Song's profit was more than a $1, sure it made money.

Try reading the SEC filing to get a better understanding of DL's financial state. You actually might learn more from those filings than from any company or union press release. Lord knows you have plenty of time to read on those Song flights.