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Ready for takeoff

Though Delta carried more passengers than any other airline last year, it still was hit hard with a record loss. But Frederick Reid, company president and chief operating officer, says business is starting to come back.

By STEVE HUETTEL, Times Staff Writer
© St. Petersburg Times
published February 24, 2002

Like most airlines, Delta Air Lines was roughed up last year as the recession and travelers' fears after Sept. 11 lowered demand for air travel. Delta lost a record $1.2-billion.

Frederick W. Reid, Delta's president and chief operating officer, talked about the industry's challenges with the St. Petersburg Times this month while attending an transportation conference in Venice.

The airline's No. 2 executive predicted a slow recovery for the industry and Delta, which last year carried more passengers than any other airline worldwide and at Tampa International Airport.

Reid also discussed why people aren't flying, how tighter airport security is affecting the business and increased competition from low-cost competitors. And what does he think of complaints from business travelers about the prices they pay? Don't get him started.

* * *

Q. You'd probably rather not talk about last year. How is Delta's business -- the number of passengers and what they're paying -- recovering?

Reid: Both traffic and yield have returned very gradually and very modestly. And if you take the combination of yield and traffic -- expressed in revenue per available seat mile -- the drop was a horrendous 25 percent in October, it narrowed to 19 percent on November, minus 17 percent in December, and in January "only" minus 13.

Traffic has returned at a slightly faster rate than yield, which is good because you can't do anything if you don't have passengers. You start with the passengers and then you hope you can get some pricing power as time goes on. So it's modestly encouraging.

* * *

Q. Why aren't more people flying?

Reid: The principal driver of the revenue softness is uncertainty in the economic environment, which is showing up in reduced corporate or business travel. In fact, corporate or business travel is down by substantially wider margins year-over-year than leisure travel.

Of all the shortfalls we're having today, the revenue shortfalls, 80 percent of it is due to economic pressures, 15 percent is due to the hassle of security and 5 percent is fear of flying.

At the end of the day, people are still being rational and can do the math. There's more awareness of the risk, but it's so unbelievably safe. You don't have any other means of transportation remotely this safe. I'm not saying there's no fear of flying. It's out there. But (the problem is) corporations saying: We're not making money. The balance sheet is getting weaker. Don't fly.

* * *

Q. To what degree are people deciding that the extra time required to clear airport security makes flying more trouble than it's worth?

Reid: We are seeing slightly more dropoff on very short-haul flights where people are saying, "I can drive 120 miles, thank you very much." There's no magic point. But anywhere in the 80- to 150-mile area is where I'd start. There's no black-and-while point where it snaps back.

But over time, people will realize that road traffic pollutes the atmosphere, sadly the mortality rates are higher and you've got traffic jams and stuff like that. I think that people will drift back to flying. But the hassle factor is there, and I'm not denying it.

* * *

Q. What's your best guess about when business will bounce back and which sectors might bounce back quicker than others?

Reid: We're taking a fairly bearish view and don't anticipate positive year-over-year traffic comparisons until the second half of '02, starting very modestly and hopefully ticking ever upward. International is already responding better. The Latin American and Atlantic areas are performing slightly better than the domestic environment. And, as I said earlier, the drop in business traffic has been proportionately worse than the drop in leisure traffic.

* * *

Q. Southwest, JetBlue and other low-fare carriers are expanding and gaining market share. Does it worry you that they might permanently steal some of your bargain-conscious customers?

Reid: If you look at the history over a period of time, in the Southwest and in the West, I would say low-cost carrier penetration has reached kind of homeostasis. It's growing relatively faster in the Northeast and the Southeast because the overall penetration of low-cost, low-price carriers is less here than it is in other parts of the country.

We are vigilant to low-priced competition. Delta Express (the airline's low-fare division) has been a great offensive and defensive tool in this segment. I don't deny that they're making inroads now. But I don't recall in the last quarter century low-cost carriers gobbling up the franchises of large network carriers.

We carry more passengers than anybody else in the world -- at our peak it was about 120-million (a year). Somewhere between 40 and 45 percent of that was on fares of under $200. We are a very big low-price carrier.

* * *

Q. Some business travel observers predict that major carriers are going to move toward fare structures more like the low-fare airlines with fewer fares and lower walkup fares. Do you see that happening?

Reid: Anybody who makes a linear comparison of a seat flying 390 miles with a $170 fare and a seat flying 390 miles with a $700 fare is totally missing the point.

It's not the distance flown, it's the restrictions. You have no other industry on the planet . . . where you don't cancel, don't show up and you can switch to another airline with no penalty whatsoever.

It's the equivalent of you buy a Mercedes-Benz and just before you get to the dealership, you turn left and go into the BMW lot and buy a BMW and Mercedes gives BMW your money.

Concerts, theater tickets, tour operators, cruises -- find me any other industry anywhere where you have this paradigm going.

So, the business traveler says to us, "Look, I'm going to book multiple airlines, multiple seats, and God help you if you don't have my seat available." So, what they're really paying for is the option to fly any competitor, any flight with no restrictions.

If the business market wants fares to go down, sign me up. But we'll make it like everything else. They can't have it both ways.

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