Delta President Ed Bastian says putting together the world’s largest carrier – and running the existing business – is no simple task.
World leader: Delta President and CFO Ed Bastian was the key figure in his airline’s Chapter 11 restructuring
Delta Air Lines has long been a major economic engine for Atlanta and Georgia and a big reason Hartsfield-Jackson Atlanta International Airport is the world’s busiest. Last year Delta emerged from bankruptcy, after successfully repelling a hostile takeover bid from US Airways in 2006. Earlier this year, Delta announced plans to merge with Northwest Airlines, via a $17.7-billion all-stock transaction. The merger will combine Delta’s strengths in the eastern United States, Latin America and Europe with Northwest’s in the Midwest and Asia.
Edward Bastian, Delta’s president and chief financial officer, was the key figure in Delta’s Chapter 11 restructuring. He oversees Delta’s network planning, revenue management, sales, marketing and business development. He will serve as chief executive and president of Northwest Airlines, expected to be a temporary subsidiary of Delta.
Bastian talked to Georgia Trend’s Susan Percy in his office at the airline’s world headquarters near the airport. Following are edited excerpts from the interview.
GT: How about an update on the merger?
Bastian: We are making great progress. When we put together our plans to merge with Northwest, we had set a number of milestones with regard to the regulatory process, transition plan, expectation of when the deal is going to close, and working together with the pilots’ group trying to get the pilot deal done. I can tell you on every one of those metrics we are either at least at or better than expected.
It’s a challenging process, because putting together the world’s biggest airline is no simple task. While the merger is the sexy, exciting new thing going on ... running the business is the most important thing we do both at Northwest and at Delta, keeping focused on the base business while you also plan for future. You need to do both. They’re not optional.
GT: And you’re committed to keeping Delta in Atlanta?
Bastian: Absolutely. That was one of the tenets we put out right at the start. We were only interested in a deal if it was going to [keep] the headquarters in Atlanta. It needed to be called Delta, needed to be led by Delta people, have the Delta brand of service and needed to make certain employees of the company are protected as related to their seniority and their jobs. And we’ve accomplished all those goals.
GT: What adjustments are you making – and what about layoffs and retirements?
Bastian: With fuel getting up to $135 a barrel, it has caused an enormous amount of stress on the industry – not just on Delta. As a result of that, we’ve needed to adjust our flying schedule to accommodate higher costs of operation and call out those parts of our network that were not profitable at these low levels.
We made the decision that we were going to reduce some of the U.S.-based domestic flying but continue with expansion overseas. As oil continues its rise, we’ve had to pull back further in the U.S., so we’re going to be down over the back end of this year about 13 percent. We’re going to be a 13 percent smaller domestic airline than we were a year ago, and we’re going to be growing about 15 percent internationally. As you reduce flying, you need to adjust headcount levels as well.
We announced back in March we were going to provide early retirement opportunities for 2,000 employees. The program was well received – oversubscribed, in fact. We had a little over 4,000 people that signed up to take the offer, and we’re going to accept all 4,000 employees. So, by the end of the year, our payroll will be reduced, which fits in nicely with the reduced capacity that we’re flying. You’re seeing a lot of airlines today announcing big layoffs.
GT: The cost of fuel – how bad is it?
Bastian: It’s bad. It’s unprecedented. Fuel today is taking over 40 percent of our revenues. Just a few years ago it was less than 10 percent. For some airlines, the discounters, the low cost fares, it’s closer to 60 percent of their revenue base. So the fuel environment is severe. What we’re doing about it is making certain that our capacity is right-sized to the demand level. So as costs increase, we have reduced the amount of flying we are doing domestically.
The other thing it [fuel cost] is doing is establishing an opportunity within the industry for us to solve some of the long-running problems of instability. If you look at what’s the bedrock of why the airlines in this country have been relatively unstable – there is too much capacity, too many aircraft.
GT: Would you talk some more about capacity?
Bastian: Because our industry is one in which it’s a perishable product – once it takes off, the opportunity to sell that seat will never exist again – it has a downward effect. So while you may increase pricing, if the customer doesn’t bite at the increased price, you still have to fill the seat, which causes the marketplace to have to rationalize down the level of demand and price point to what the market is willing to pay. So if you don’t adjust the capacity quotient, the market will not accept higher price points. Your ability to pass along the cost of fuel is limited.
That’s why we have to reduce the capacity and create less opportunities for downward pressure on pricing so, at the end of the day, the airline economics work and we will be able to provide transportation at a price that, number one, covers our cost and also still is affordable.
GT: What about affordability?
Bastian: I know there has been a lot of media attention around airline ticket prices and what the higher costs of fuel are doing. Today, domestic air travel is still cheaper than it was prior to 9/11. Still. Post-deregulation, on a GDP-adjusted basis, an inflation-adjusted basis, airline travel is about 50 percent cheaper than it was prior to deregulation; and it’s continuing to steadily decline. One of reasons for that is large amount of capacity… and new entrants [new airlines] that got spurred. Now as we look at fuel and adjust our flying levels to what we can fly and make a profit, what it’s doing is it’s cutting out the lower end, the discounters that can’t make a profit at these levels. The capital markets are not providing the capital for all for the new startups to take that equipment, change the colors of the plane and go back into the business as some new little startup entrant. It’s not happening.
GT: Can you explain?
Bastian: That’s the dynamic over the years that has occurred. Airlines will get in trouble. Airlines will go through bankruptcy. Lessors will take the plane, paint it new colors, start up as a new carrier. [They’ve] already got skilled workers on the street.
Because our main product is an aircraft and it flies, it’s mobile. By definition, it can be moved. The capacity issue never got solved. So the corporate names may change, the brands may change, but the issue has never been solved. So now we’re at the point we’re solving the issue, which is the number of aircraft flying in the domestic system, and making certain that the only aircraft that fly are the ones that can afford to fly in this price environment.
GT: Are the cutbacks permanent? If the economy improves and oil prices come down, are some of those domestic flights likely to return?
Bastian: It’s possible that if fuel prices were to recede to a level south of $100 that you would see some incremental domestic service added. But I would say the majority of the cutbacks that are being taken are probably going to be fairly permanent.
GT: Sounds like a lot of changes for customers, especially those looking for bargains.
Bastian: It will change somewhat, some of the dynamics. I don’t think it will ever go back to an elitist form of transportation, which is what it was prior to deregulation. Deregulation was a raving success. This country has never had more service, and it’s never been cheaper to fly. It created opportunities for a lot of new entrants. There’s a lot of concern as to whether the government should allow free market forces to work, allow airlines to consolidate, to gain strength, to deal with some of issues we’re talking about.
At the end of day, there are too many airlines in this country. I think there’s no disagreement about that. While the consumer benefits from lower prices, if it’s an unstable industry, it doesn’t benefit the consumer. We need to find the right balance between the right number of airlines, the right amount of choice, the right price point. I do think we’ll see some reduction of low-end travel, but I still think there will be tremendous opportunity and choice.
GT: Delta is increasing its international flights. Are they more profitable?
Bastian: They are. A big part of our restructuring in the last few years had been to change the entire landscape of how we fly, where we fly. Three years ago when we started this restructuring, in 2005, Delta was largely a domestic hub-and-spoke airline. Over 80 percent of what we were operating was here in the U.S. Now we’re down to less than 60 percent this summer in the U.S. and more than 40 percent of what we are flying is international – more than twice what it was three years ago. Even with the cutbacks, international is still growing.
Bastian: First it is a more profitable operation. The competitive set is less intense, there is not as much capacity for international as there is domestic. You’re working with, especially in Europe, stronger currency. The majority of our trans-Atlantic customers’ trips are now being paid in euros, rather than dollars. America’s on sale. A lot of European visitors are coming to the U.S., buying in euros. [That] provides us a significant amount of profit opportunity. International is going into growth parts of the world, [places] that are growing at a very different pace than the U.S.
GT: Where exactly is this international growth?
Bastian: We’re moving into countries – or continents – like Africa, the Middle East, Eastern Europe, Asia, growing in 6, 7, 8 percent year-over-year GDP ranges. As a result, that growth is moving into environments that are able to support and sustain that growth as compared to the U.S., which isn’t growing.
We’re growing to some very different markets. We’re the only U.S. airline flying to Africa now. We have six destinations in Africa that we’re flying direct to. We are the leading carrier to the Middle East. We just announced service into Kuwait City, we have service into Dubai. We just launched service into Cairo and Ahman, Jordan. They are all doing very, very well. We launched service into India, launched service into Eastern Europe, into South America. We’re now going to new markets, new countries, new economies growing at a much higher pace than the U.S.
It’s also giving Delta the chance to get a first mover advantage into these markets. We want to be there first, to create the franchise, to create the market share, to put Delta first – I think those will be longtime brand opportunities and franchise opportunities.
GT: Do you expect other carriers to try to make inroads on the international routes?
Bastian: I don’t think so. We’re the fastest growing international carrier; we have been for several years. The reason I say that is that other airlines don’t have order books on new aircraft … .
One of the big weaknesses Delta had was that it had too many big wide-body internationally-capable aircraft flying and captured in the U.S. domestic system. The core part of our restructuring three years ago was to unlock those aircraft out of the domestic system, to go international with the aircraft and, as a result of that, fund that growth with our existing fleet.
Carriers like American, United, do not have order books on new aircraft coming in, and they have already fully optimized their domestic system. So we’re growing and others are watching us. We’re doing it, number one, from our existing asset base, and secondly, we do have a new order book. We are taking new aircraft.
When you’ve got the right aircraft, you’ve got the right order position, it allows you to move faster than the other guys.
GT: Do you worry at all about the quality of the consumer’s flying experience?
Bastian: We obviously are concerned. Customer satisfaction has to be our number one priority – next to safety, of course. We’re going through a kind of evolutionary period in the air travel industry. The excess capacity in the U.S. puts limits on ticket pricing, in terms of how much airlines can charge and how much consumers are willing to pay, which forces airlines to look for other forms of revenue than travel and our customers [to] decide whether they want to purchase or not.
At Delta, we haven’t matched the first-bag charge. You’ve got carriers like American, United, US Airways that are charging for the first bag. We’re not going to do that. Now the second bag – we have, across the board in the industry, needed to charge for the second bag.
GT: A lot of things are changing for the customer and the industry.
Bastian: There is a re-education that’s going on for the airline industry in terms of figuring out what customers will pay for and if they prefer to have higher ticket prices or would they prefer to be on more of an a la carte method in terms of charging for services as they are rendered.
Another classic example is reservations. If you call for reservations today, talking to a person, there is a service fee. If you go online to delta.com, it’s cheaper for us and there is no fee. The customer decides that. If you go to make a change to a ticket, there’s a cost to that. We’re in the process of changing the model on the revenue and cost front. We need to find a place where the customers are accepting – more than just accepting, satisfied that the value we provide them is commensurate with what they’re paying. Now I think it’s not so much a price issue, more of a concern around the hassle of the experience.
GT: Anything else?
Bastian: We’re adding food options. Food for sale has been a widely-heralded new service we’ve provided this past year, where customers are paying for food, but it’s high-quality food; and customer ratings are quite high.
Food is a classic example – airline food. When we had it out there, everyone complained about it. Airline food was the butt of all the jokes. You take it away and people complain even though they didn’t like it.
Bastian: So what we’ve done to change the model is say we’ll provide you higher quality – you’re going to have to pay for it, and you decide if you want it or not. We’ll let you bring food on board if you want.
So giving a choice is important, but at the same time you still have to define what your basic commitment to your customer is going to be. We’re working hard to improve the product, the amenities, the features, onboard service, the attentiveness of our employees.
The recent JD Powers survey just came out. While the airline industry took a notch down in terms of its overall satisfaction levels, Delta retained its second place amongst the major networks – to Continental – in that rating. We fell less than everyone else fell, so by definition, we increased. But that’s not the way you want to do it. We do accept that the transportation environment is one that’s challenging today. We owe it to our customers and the government owes it to its citizens to provide better infrastructure as well.