WorldCity Business Magazine

Watching the horizon

by Mary Dempsey

Delta Air Lines thinks it has a secret weapon in its struggle for survival: Latin America.

The carrier, which filed for bankruptcy protection in September, is slashing its domestic service and redeploying part of its fleet to profitable long-haul routes in South America, as well as destinations in Central America and the Caribbean that are underserved.

“Our Latin American division has been a financially sound division for the last five years. In the midst of the reorganization, we realized there was great potential for us to take some capacity out of the United States, where in some markets there is fierce competition,” says James Sarvis, Delta’s director for Latin America and the Caribbean, based at corporate headquarters in Atlanta.

Between November 2005 and June 2006, Delta will have inaugurated service on 23 new Latin American and Caribbean routes, Sarvis says.

Industry analysts say long-haul routes into Latin America are attractive because they are more profitable, benefit from lower local wages in the destination countries and have the greatest potential for growth.

“Delta’s strategy is working – and is smart,” says consultant Robert Booth, whose Aviation Management Services firm specializes in Latin America.

Weighed down by more than $20 billion in debt, the Atlanta-based carrier is looking for savings of $3 billion this year and next. That will come, among other things from salary cuts and up to 9,000 layoffs among its 52,000-person workforce. Delta is also seeking $300 million in wage concessions from its holdout pilots’ union; the matter was in mediation as WORLDCITY went to press.

If the airline follows through with the strategy it outlined to a bankruptcy judge, it could return to profitability by late 2007.

American Airlines will retain its solid dominance over U.S. air traffic to the region but, before the end of this year, Delta is expected to become the No. 2 carrier serving the Caribbean and Central and South America. Continental Airlines, staging its own expansion into Mexico, will continue to have more extensive service to that country.

No-frills threat

Sarvis says competition from low-cost carriers, including Southwest Airlines, AirTran and JetBlue Airways, was part of Delta’s undoing. The low-cost carriers offer service on 66 percent of the routes that Delta flies.

“We have the greatest exposure to lowcost carriers in the United States,” Sarvis explains. “We were defending our turf at a time when 80 percent of our revenue was domestic. It was a slaughterhouse in markets that were overserved.”

To make aircraft available for flights to Latin America, Delta is reducing domestic service on routes where it faces the greatest competition. In September, it cut more than a quarter of its flights from Cincinnati, where Southwest Airlines, AirTran and JetBlue are anxious to gain a hold. It is also slashing flights between New York and Florida where it competes with JetBlue.

The airline is busy with the Latin American expansion, making one announcement after another about new routes and additional service on existing ones. In March it began flying to Honduras, daily from Atlanta to San Pedro Sula and weekly to Roatan. In June, it adds Guayaquil, Ecuador, service. It is also expanding service to Brazil, Ecuador, Jamaica and Puerto Rico this summer. Its expansion in Mexico includes 12 new routes that should be in place before July.

Cargo, while still a tiny portion of Delta’s revenue, is targeted to become 4 percent of total revenues. It is now only 2 percent.

“We have an important perishables center within the airport here in Atlanta. The shipment of perishable goods is not only profitable, but it is increasing dramatically – fresh fish from Chile, asparagus from Peru, papaya from Brazil. So there’s a lot of opportunity,” Sarvis says. “We are promoting the cargo service actively.”

Delta hopes to leverage its hub in Atlanta, which is the second-largest international gateway in the United States after New York’s JFK and a growing Hispanic market. For business travelers, Delta maintains that Atlanta is an appealing connecting spot because of the daily volume of domestic flights in and out of the city.

With Delta’s expansion, Booth says passengers to Latin America will benefit from more flights and better connections. “I don’t think prices will come down significantly, however,” he adds.

That said, Booth acknowledges that the current burst of homegrown low-cost carriers in Latin America may change the aviation landscape in the region. He predicts that Delta and other legacy carriers will look for ways to ally, rather than compete.

In addition to Latin America, Delta is increasing transatlantic flights from the United States and Canada. Nearly four dozen additional daily flights to Europe are expected to begin between June and September.

“In the ‘90s, the percentage of our operation in Latin America was 5 percent,” Sarvis says. “By the end of 2006, it will be 20 percent. And another 20 percent will be across the Atlantic.”