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VOL. 127 | NO. 244 | Friday, December 14, 2012

Delta Buys Stake in Virgin Atlantic, Holds Investor Day

By MICHAEL WADDELL

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On the heels of agreeing to buy a 49 percent stake in Virgin Atlantic from Singapore Airlines for $360 million on Tuesday, Delta Air Lines Inc. held its annual investor day conference on Wednesday, Dec. 12, in Atlanta and detailed the restructuring of its fleet, which will affect flights between Memphis and Birmingham.

The $3 billion transatlantic joint venture with Virgin Atlantic will give Delta more access at London’s Heathrow Airport, one of the world’s busiest hubs. Takeoff and landing rights are limited because of high demand and tight capacity. Delta and Virgin will now have a combined 25 percent share of flights between the overall U.S. and Heathrow and 37 percent share between Heathrow and New York.

Virgin Group, led by the British billionaire Sir Richard Branson, still controls a 51 percent majority in Virgin Atlantic.

Delta held its first investor day in 2007, and this year’s event featured details on the ongoing restructuring of Delta’s fleet as part of its domestic fleet optimization plan.

The airline announced in June that it will introduce 88 Boeing 717-200 aircraft to its fleet starting next year.

Delta, which will lease the planes from Southwest Airlines Co., will take delivery of 16 Boeing 717s in 2013, 36 in 2014 and the remaining 36 in 2015.

“The 717 opportunity popped up. … If you saw the prices and the capital, you would say you could never pass that deal,” Delta CEO Richard Anderson said in the investor day webcast.

Delta plans to reduce its fleet of 50-seat RJs from 474 in 2009 to only 125 by 2015.

“I affectionately refer to the 50-seat RJ within our family as the Rodney Dangerfield of the fleet. It can’t get respect from anyone,” said Edward H. Bastian, president of Delta.

The move will affect flights between Memphis and Birmingham.

“As we refleet the airline and re-engineer it to be more efficient, we believe that by eliminating the 50-seat regional jet service between Birmingham and Memphis and upgauging the Birmingham to Atlanta service to be on medium-sized RJs or smaller, narrow bodies like the 717s we will be able to produce a product that is not only more appealing to our customer base but also will be much more efficient for us to produce,” said Glen W. Hauenstein, Delta executive vice president of network planning, revenue management and marketing.

The airline will save $400 million to $500 million in maintenance costs over the next three years by not performing heavy maintenance on the aging 50-seat planes.

Last week Delta announced an order for an additional 40 CRJ-900s, and it plans to increase its two-class RJ inventory from 219 planes in 2009 to 295 by 2015.

Overall, Delta will increase its mainline aircraft total from 594 planes in 2009 to 675 mainline aircraft in 2015.

The new Virgin deal gives Delta chance to acquire a fully refurbished fleet from Virgin, and it enables Delta to refleet and operate at the same capacity with many fewer airplanes. Anderson called it a “perfect trade” for Delta.

“The important thing about our fleet plan is when you own 90 percent of your fleet and you have a large number of airplanes that are fully depreciated without a monthly payment you can manage your capacity to match supply and fuel prices,” Anderson said. “We do not get focused on one supplier or another supplier or a certain fleet type.”

Delta also hopes to grow its newly designed website, delta.com, into one of the top travel sites in the world for booking flights, hotels and rental cars. The company has invested $140 million into the new site over the past two years.

Industry consolidation of the past few years has resulted in the mergers of Delta/Northwest, Southwest/Air Tran, and Continental/United, and an American Airlines and U.S. Airways merger could be completed soon, taking the airline industry down to four main participants in the U.S.

“Having concluded our mergers quite successfully, it has given us a significant lead in the industry,” Anderson said. “And it’s a lead that we don’t intend on relinquishing. Consolidation will continue both domestically and internationally.”

Despite a $50 million impact on Delta’s business this year from Hurricane Sandy, 2012 is on target to be strong for the airline.

“2012 will shape up to be quite a good year,” said Anderson. “We expect a profit of about $1.6 billion, which will be about a 30 percent improvement year-over-year or $350 million.”

Delta achieved a 10 percent return on invested capital (ROIC) during 2010, 2011 and 2012, and generated $4 billion in free cash flow during the three-year period. The company has also reduced its debt and will reach its debt goal of $10 billion next year.

Next year Delta expects to benefit from lower fuel costs.

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