Delta pursues low-cost structure

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Delta Air Lines, which nearly filed for bankruptcy last year, has set itself the ambitious goal of reaching within 10 per cent of the cost structure of low-cost carriers within the next year, according to a senior executive.

Michael Palumbo, finance director, said Delta's costs were about 30-40 per cent higher than low-cost carriers. “We are trying to drive ourselves, within the next 12 months, to within 10 per cent of that competitive disparity, and in 2006 to the moderate to low single digits differential. Our plan is about that level of change. Delta's is a unique solution, where we can deliver unique productivity.”

The comments follow Delta's biggest loss in its 75-year history of $5.2bn in 2004. That has forced it to rethink its business model.

Last month it shook up its fare structures. Delta's fourth-quarter costs per available seat mile, after neutralising the cost of fuel, were 10.15 cents, against low-cost rivals JetBlue's 5.89 cents and AirTran's 7.64 cents.

Robert Ashcroft, analyst at UBS, said: “This is a highly aggressive, but likely necessary goal. We would expect to see Delta adopting many of the same tactics pioneered by American [Airlines] to adapt low-cost carrier techniques.”

On Monday, Delta moved in that direction when it overhauled 51 per cent of its flight schedule, quit its unprofitable hub in Dallas, and changed its hub operations in Atlanta to make them more efficient. With better utilisation of its aircraft and gates, it expects to free 19 additional aircraft which, in turn, will generate up to $100m in new revenue.

However, to meet its costs goals, especially for 2006, Delta must secure a legislative solution for its burdensome defined benefit pension costs. It also needs to review its mixed fleet of aircraft, which bring costs in complexity and pilot training. “They have introduced a Southwest-type pricing approach, yet Southwest does not have big hubs, regional jets or a mixed network,” says Hubert Horan, an industry consultant.

Mr Palumbo acknowledged that bankrupt airlines could emerge with lower labour costs, but said: “We don't need to match up line item by line item. We need to match up in the aggregate.”

Although fuel prices at $46 are above Delta's earlier assumptions of $40 per barrel in 2005, Mr Palumbo said: “Last year there were multiple attempts at price increases [to pass on higher fuel prices to passengers], none of which stuck. That changed in the fourth quarter, when fuel was above $45. We saw four to five price increases, some led by low-cost carriers, which did stick.” Delta has already drawn down $811m of its most recent $1.13bn credit facility. Mr Palumbo said: “The liquidity facility was important to have in place to permit the implementation of our plan.”

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