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Old 07-25-2004, 10:40 AM   #1
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As I've Said, This Is What the Dbakers Fear Most

For those of you who've tried to figure out what makes dbaker tick, what's his major malfunction, what motivates his propaganda, this should shed some light on the situation. Three "genuine" industry experts chime in on what's wrong with the entrenched legacy business model and why that dinosaur is doomed. And that frightens dbaker to his core. A few excerpts from the article:

Quote:
Piecing Delta back together

By RUSSELL GRANTHAM
The Atlanta Journal-Constitution
Published on: 07/24/04


Next month, Delta Air Lines' executives are expected to put the finishing touches on a strategic review of the ailing carrier.

A lot is riding on their months-long effort. Delta's losses have mounted to a staggering $5.6 billion since 2000, and the Atlanta carrier is still seeking deep pilot pay cuts it says are needed to avoid bankruptcy. Even if last week's sweetened offer from pilots leads to a deal, the airline won't be out of the woods, analysts say.

Creditors that have supplied Delta with aircraft, capital and other needs will be watching, too, for a viable exit strategy from the morass...

...With that in mind, the Journal-Constitution asked three longtime airline-watchers what they think Delta's strategic plans should include.


Kevin Mitchell

Chairman of the Business Travel Coalition, an advocacy group for airlines' corporate travel customers



...Much as Wal-Mart has trained a nation of bargain-hunters, the ease of fare shopping on the Internet and buying cheap tickets from discount carriers has taught air travelers to expect everyday low prices, he said.

What that means for Delta is "absolutely the most gut-wrenching of restructurings that you can imagine," he said.

His prescription for Delta is bitter: more job, pay and benefit cuts; shedding unprofitable routes and assets; and rethinking many jobs and operations.

"I think [Delta's] biggest problem is its own understanding of the current marketplace and where the marketplace is going," said Mitchell, who admits that his own thinking also has evolved in the face of discount carriers' rising market power.

In the past, he dismissed Song, Delta's 16-month-old discount unit based in New York, as a "gigantic management attention-diverter."

But now that discount carriers like Southwest, AirTran and JetBlue control about a quarter of the market and influence fares far beyond their direct route networks, he has changed his mind. Within a year or two, discounters will be flying to Europe and other international destinations, opening another battle front, he predicted.

Their market power is "at a killer level right now," he said. "Delta has got to become Song or some version of Song across its whole network, and it's got to get out of markets it's losing money in, and it has to have also an opportunity to innovate in other markets like ... international long-haul"...

..."It's a conundrum," he said. "There's no escaping the fact that it's got to include some very, very significant cutbacks, and maybe changes in the very nature of the jobs and how they're compensated and how they're rewarded over the long term"...

...He said Delta needs to cut capacity, especially in leisure-oriented markets where it has lost the battle to low-cost carriers. He cited the New Orleans-Fort Lauderdale, Fla., route, where Southwest has 69 percent of the market.

"They're in certain markets where they can't compete, and they're wasting money," Mitchell said.

..."The longer it takes, the weaker it's going to be when it gets there, and the more market share it's going to lose."


John Luth

Chairman of Seabury Group, an investment banking firm that specializes in airlines



John Luth's New York firm helped shepherd US Airways and Air Canada through recent bankruptcies and helped Continental and America West restructure outside Chapter 11.

While he declined to talk about Delta specifically, Luth's advice on how big hub-and-spoke carriers need to change in order to survive could apply to the nation's third-largest carrier...

..."You have to start with 'I have to have a competitive product,' " he said. "And then by defining where the competitiveness needs to be, and where those markets are going to be, and what the competition is likely to be, you redefine your network, how big you're going to be, whether you have the right-sized planes, and how you fly the system."

...These days, big network carriers can only count on getting about $15 more on the average one-way fare because they offer more flights, destinations and other perks than discount carriers, he said.

That's not enough to cover most traditional airlines' higher costs, Luth said. Moreover, they must match discounters' simpler, less-restrictive ticket rules someday, he said. That requires lowering costs even more...

...But there is no longer a clear link between travel spending and the economy because of the growing power of discount carriers.

The competition will only get tougher over the next few years, Luth said, because new low-cost players like Independence Air and Virgin America are popping up. The ever-growing use of the Internet raises the profile of smaller airlines, which used to be "invisible," Luth said.

Within three to five years, he predicts, discount carriers will control a third of the market and largely dictate pricing in 85 percent of the U.S. market, because they only have to have a small presence on a given route to affect fares. Low-cost carriers now hold 26 percent of the U.S. market, according to Seabury Group.

"There's going to be an excess supply vs. demand of product in the coming couple of years that ultimately will cause some shakeout," he said. Some old-line carriers will contract or fail "unless they get competitive."


Darryl Jenkins

Professor of airline management at Embry-Riddle Aeronautical University, former director of George Washington University's Aviation Institute



Age works against Delta, says Jenkins.

It's hard to make a fresh start when you're a 75-year-old company with billions in debt and "contracts that go so far back that none of us can remember why we even negotiated them the way we did," said Jenkins, who has done consulting work for dozens of airlines over the years.

"That's kind of a discouraging place to start," he said.

In contrast, young carriers like AirTran and JetBlue have lower costs in part because employees are younger and lower-paid, with little or no pension liabilities. Planes are newer, with lower maintenance costs. Quicker promotions boost employee morale.

"I'm doing some work with some start-ups now, and it's so much easier to start with a clean slate that it's actually fun again," said Jenkins.

So what should Delta do, given that it's already loaded with baggage?

Shed about $5 billion in annual costs. That almost certainly means at least one trip through bankruptcy, he added...

...Jenkins said old-line airlines like Delta don't need to scrap their hub-and-spoke networks, which some say are too costly to compete with discount carriers' simpler networks.

"I see hub-and-spokers making money," he said. "AirTran's a classic hub-and-spoke carrier, and these guys run a very good airline"...

...If Delta files for Chapter 11, it should consider radical surgery, said Jenkins.

"Look at the places where they make money. That's where you stay. Look at the places where you don't make money. You ditch them."

Does that mean the future Delta may consist largely of its regional carriers and its international routes, the two operations that industry analysts say are making money?

"If I had my way, that's how I would do it," said Jenkins.
It's not just Delta, it's industry wide. Continental recently reported losses in the billions, much worse than expected. The legacy model just isn't competitive anymore and as a result restructuring and deep cuts and bankruptcy looms for those carriers. Which in turn bursts the pampered and wasteful triple platium crowne elite club bubble of the dbakers of the world. AirTran and JetBlue and Southwest have stormed through the market and overturned the apple carts, so the money changers are none too pleased...

Now you get it?
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Old 07-25-2004, 10:59 AM   #2
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To Further Simplify

In even plainer English:

A couple of uncompetitive legacy carriers just may go the way of Pan Am, TWA, and Eastern. And the Deltas and Uniteds just might have to become Song and Ted across their entire networks, domestically speaking. Hey, Southwest and AirTran and JetBlue and Song are an absolute pleasure so I really don't have a problem with that

The legacy carriers will probably end up focusing much of their efforts on international markets, differentiating themselves from the discounters with distinguished luxury and service perks on those longer flights. Like the royal treatment over at Virgin. The domestic markets will be ruled by the JetBlues, the Frontiers, the Southwests, the AirTrans, as well as legacies in disguise (Song, Ted, etc). But with brand new aircraft and leather seats and Dish Network and XM radio at every seat, all at 1/3 the price that the legacies used to charge, I'm not complaining...

See how wonderful free market capitalism can be
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