Cargo is no longer the stepchild at Delta Air Lines, Chief Executive Richard Anderson declared last week to a packed hall of several hundred air freight and logistics executives in Palm Beach, Fla.
"This can be a $1 billion business for us," Anderson said.
Most executives for combination carriers treat cargo as a byproduct of their passenger service, willing to fill extra belly space with cargo to gain incremental revenue without factoring in cargo's contribution to operational costs or working to maximize its true revenue potential.
At Delta, cargo has become "an intense and high priority focus," Anderson said at the Cargo Network Services annual conference. "It's the most profitable part of any flight, at least on the domestic side."
Cargo has played a much larger role in decisions about adding or changing service and the type of aircraft to fly on particular routes since Anderson took over the third-largest U.S. carrier last September.
"When we decide to buy a plane it's based on the passenger and cargo mission," he said.
Delta took delivery of its first Boeing 777-Long Range aircraft in late February and has eight more deliveries scheduled through early 2009. The extra time aloft will allow the planes to carry more freight and more opportunities for cargo revenue will be available as Delta shifts 13 widebody 767-400s to international from domestic routes this year as part of ongoing efforts to take advantage of more lucrative international markets.
Delta has an extensive international network "and we've got to put that (belly) capacity to work, particularly in this fuel environment," Anderson said.
The unusual appearance of a passenger airline CEO at a cargo-centric conference one day before testifying to a U.S. Senate committee and while trying to complete a significant merger with Northwest Airlines, also signaled Delta's seriousness about cargo.
Beyond Anderson's rhetoric, Delta has also taken concrete steps to bolster its cargo operations, which were neglected as the airline struggled along with the rest of the industry following the 9/11 terror attacks and eventually sought bankruptcy protection.
In December, Anderson hired Neel Shah from United Airlines Cargo to be vice president of cargo at Delta. Shah, in turn, brought in Tim Strauss, a top executive at Northwest Airlines Cargo, to help rebuild the cargo division.
Delta has also raised the profile of cargo by including figures in its monthly performance reports previously devoted to passenger results.
Last year, the Atlanta-based carrier had $482 million in cargo sales.
In April, it reported a 21 percent increase for freight to 102.4 million cargo ton miles compared to 84.9 million in April 2007. Freight volume times distance flown year-to-date is up 12.2 percent to 373.4 million cargo ton miles versus 332.9 million cargo ton miles during the same four-month period last year.
It said cargo revenue grew almost 50 percent in April compared to April 2007. First quarter cargo revenue increased 20 percent to $134 million from $112 million in the previous year quarter.
Cargo is still a small piece of Delta's business (2007 passenger revenue was $12.8 billion), but in many cases the yields are better on below-deck customers.
Anderson, who discussed Delta and the airline industry during an informal question-and-answer interview with PBS talk show host Charlie Rose on a makeshift set, argued that the pending merger with Northwest should meet regulators' antitrust concerns because the two airlines have very few overlapping routes (12 out of 800 city pairs).
The merger is significant, he said, because it would create a truly international airline with a worldwide network instead of a domestic airline with international service. It's the first time that a U.S.-based airline would be first or second in every market in the world -- in addition to being the world's largest airline and largest U.S. cargo airline.
The Delta-Northwest linkage has several advantages over previous or potential airline mergers. Front-line employees are retained, both companies have the strongest balance sheets and cost structures in the industry following their exits from bankruptcy, and it creates $1 billion in savings on redundant systems. Another advantage is that both airlines are part of the Star Alliance and share the same mainframe, which should help integrating their two reservation systems, Anderson said. He was optimistic that a collective bargaining deal with Northwest pilots that addresses seniority concerns can be completed before the transaction closes.
Record highs in fuel prices were a major impetus for the merger. Delta has responded with a series of fare increases in line with previous statements by Anderson that U.S. airlines must increase ticket prices by 15 percent to 20 percent just to break even at current fuel prices.
At CNS, the Delta chief noted that freight customers pay the full cost of carriage via indexed fuel surcharges tied to weight and that airlines have to learn how to apply the same discipline to the passenger business.
Delta is also combating fuel costs by more aggressively hedging jet fuel futures, resulting in hundreds of millions in gains during the last five months, Anderson said.
During the final quarter of 2007, 21 percent of Delta's fuel consumption was from advance purchases at fixed prices, resulting in an average fuel price of $2.61 per gallon as fuel prices reached $2.77 at the time. Delta said it realized about $40 million in cash gains on fuel hedge contracts settled during the quarter.
Delta hedged a quarter of its fuel in the first quarter of 2008, and bought fuel futures for almost one-third of its need in the second quarter, 15 percent of its estimated consumption in the third quarter and 10 percent in the fourth quarter at prices ranging from $2.69 to $2.77 per gallon. Jet fuel is currently trading at about $3.77 per gallon, according to the International Air Transport Association.
Some carriers are responding to the fuel challenge by slowing down their aircraft, but Delta plans to take the opposite strategy.
¡°It actually makes sense to speed up planes, especially in a hub-and-spoke system to make those schedules,¡± Anderson said. Airlines such as JetBlue and Southwest primarily fly point-to-point and can afford to cut flight speed without any ramifications for their network. Delta¡¯s system is based on feeder flights connecting to larger planes at its major terminals, such as Atlanta and New York. The carrier has determined that when planes are late it is more difficult to transfer bags to the connecting flight. The airline suffers additional costs having to personally deliver mishandled bags to each passenger in the destination city as well as the threat of losing a disgruntled customer.
¡°We¡¯re putting in a program to speed up because even though you burn a little more fuel, it helps make connections and saves money in the long run,¡± Anderson explained following his public comments. The plan is for dispatchers, assisted by flight management systems, to direct pilots to maintain faster speed if they anticipate congestion in the Air Traffic Control system.
Anderson said a better strategy for saving fuel is to take some planes out of service so that the remaining ones fly at near full capacity.
"I think the federal government needs an energy policy and jaw-boning OPEC occasionally is not a strategy," he said of the need to combat record oil prices. He echoed calls by the American Trucking Association and Senate Democrats for the government to stop filling the Strategic Petroleum Reserve and crack down on speculators in the oil markets.
(The American Trucking Associations has gone a step farther by asking for a draw down of the nation's Strategic Petroleum Reserve to increase supply and reduce fuel prices.)
Delta has also ordered pilots to taxi with a single engine when possible and is converting its ground equipment to natural gas and propane to save fuel and reduce emissions, Anderson said. |
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Source: americanshipper
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