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VOL. 126 | NO. 84 | Friday, April 29, 2011

Delta Exec: Parking Jets Takes Time

By Bill Dries

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Delta Air Lines Inc. executives seemed set on post-Labor Day as the time when the Atlanta-based airline will cut its capacity at its Memphis International Airport hub as well as overseas.

In a first-quarter earnings conference call this week with analysts and reporters, Delta CEO Richard Anderson made one reference to Memphis and its reorganization as he talked of a $318 million loss in the first three months of the year.

The reorganization is to position Memphis International as Delta’s hub for the overflow of passenger traffic from its flagship hub, Hartsfield-Jackson Atlanta International Airport, the world’s busiest passenger airport. The Memphis Delta cuts to come are all in regional flights, while service to the top 50 markets are remaining intact.

For the Delta worldwide system including Memphis, Anderson’s message this week was clear: The capacity likely won’t return.

“If we assume fuel costs will remain high, we will be surprised if fuel prices drop,” he said. “And we will have our capacity well in hand.”

Most of the first-quarter loss was from rising fuel prices, and Delta’s capacity actually rose during that period – evidence that it takes time to park jets, and that raising ticket prices until you can park them will not always be enough for an airline’s bottom line.

“Think about it. Analysts expect the U.S. industry to be generally profitable in 2011 with jet fuel at $135 per barrel,” Anderson said to a telephone audience of analysts as he touted Delta’s performance in a “difficult” quarter that is also a seasonal lull before the spring and summer travel season.

“That is very remarkable progress. But we still have a lot of work ahead of us at Delta to make our business consistently profitable regardless of fuel prices.”

“Seventy percent cost recapture isn’t enough. We must fully recapture our costs on every flight every day to maintain and improve our earnings.”

 – Richard Anderson,
Delta CEO

Delta’s revenue growth offset 70 percent of the fuel cost run-up in the first quarter.

“Seventy percent cost recapture isn’t enough,” Anderson said. “We must fully recapture our costs on every flight every day to maintain and improve our earnings performance.”

So, Anderson and the other executives added to the number of parked jets by about 20 with the call, making 140 Delta jets to be parked in the next 18 months, including the regional flights at Memphis International.

Delta’s problem isn’t the domestic market or the South American and Latin American markets. By sector, both posted the best results in the first quarter, and Anderson said Delta almost covered the cost of the fuel run-up there.

The Pacific and Asia region is still recovering from the earthquake and tsunami in Japan, where Delta had and continues to have a significant investment. Anderson described Delta as making “excellent traction” in the region before the quake.

The problem is the transatlantic region, which Delta President Ed Bastion termed “disappointing” and “largely driven by over-capacity.”

Glen W. Hauenstein, Delta executive vice president of network planning and revenue management, quoted transatlantic discount airline pioneer Freddie Laker, who once said anyone can make money flying during the summer travel season. The trick is the winter off-season.

“The game is not to give back the profits you make in the summer during the winter,” Hauenstein said. “We didn’t do a good job of that.”

Reducing capacity in Europe won’t be as easy as it is in the U.S. Delta has partners it has to consult with before specific moves can be made.

Meanwhile, Southwest Airlines executives announced this month they expect to close on their acquisition of AirTran Holdings Inc., which has flights at Memphis International Airport.

The acquisition has led to speculation that the deal could lead to a larger Southwest presence at Memphis International as well as Atlanta, and increased competition overall with Delta.

Memphis-Shelby County Airport Authority president Larry Cox has said repeatedly that the airport would be interested in talking with Southwest about an increase in flights into and out of Memphis International.

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