Archive | May 10, 2013

Delta Sees New Terminal as Symbol of an Air Travel Makeover


As Delta Air Lines executives tell it, the carrier’s bright and spacious new terminal at Kennedy Airport in New York reflects the industry’s new priorities.

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Rather than compete on the lowest fares — a race to the bottom over the last decade that just weakened them — the airlines are now seeking to lure passengers with better amenities and service. That new strategy points to the improving financial health of the industry, a turnaround that can be traced to both the string of megamergers among the big carriers and the industry’s single-minded emphasis on cutting excess capacity since the depths of the recession.

Delta, the first of the major carriers to go into a merger — with Northwest in 2008 — is also in the strongest position to reshape its goals. And the $1.2 billion investment in a new terminal in New York, which will replace two grim 50-year-old and woefully inadequate terminals at the end of the month, is the latest and most visible sign of its new approach.

The airline has already been flexing its muscles. In the last two years, it has focused on improving its balance sheet as well as its operations, expanded its global partnerships, invested in airlines like Virgin Atlantic and even bought an oil refinery. On Wednesday, it said it would reward shareholders with $1 billion in quarterly dividends and share repurchases over the next three years.

“The airline industry has been broken for decades,” Edward H. Bastian, Delta’s president, said in a recent interview. “It was fragmented. People worried if the airlines were going to make it or if they were going to be bankrupt. Today, everybody has scale, customers have choices and people have seen that service matters.”

In this new world of fewer airlines and less capacity, airline executives hope to achieve a level of stability that has eluded them since the federal government deregulated air travel in 1978. While Delta’s merger is complete, more work remains on United Airlines’ merger with Continental Airlines and Southwest Airlines’ tie-up with AirTran. American Airlines and US Airways, which announced in February that they would merge, are just starting the process. But most have begun putting Wi-Fi and individual televisions aboard their planes, installing more comfortable seats for business passengers and investing in mobile technology that gives passengers more control over their travel plans.

Not all the changes have been welcomed by travelers. Airlines charge more fees than ever, requiring passengers to pay for services that were once free, including checking bags or booking seats with more legroom. These fees are also rising and account for a bigger share of the airlines’ revenues. In the latest of these, United increased its ticket-change fee to $200 from $150, a move that was matched by most airlines this month.

Airline executives argue that the industry needs to be profitable for service to improve. Fares have risen in recent years, but they remain lower than they were in the 1990s when adjusted for inflation.

Delta, which left its 19-month bankruptcy in 2007, has also been financially conservative, reducing capital expenses and using cash to cut debt. The carrier posted a net profit of $1.6 billion last year, up 30 percent from the previous year, giving it four years of rising profits despite high fuel costs.

The company said on Wednesday that it would start to pay a quarterly dividend of 6 cents a share and buy back $500 million of its shares in the next three years.

The airline also said it would continue to reduce its debt in the next three years, to $7 billion from $17 billion in 2009. In the next five years, it also plans to spend $2 billion to $2.5 billion a year on its fleet, airports and technology.

Paying a dividend is rare in an industry with losses of $60 billion in the last decade, although there have been exceptions. Southwest Airlines now pays a quarterly dividend of one penny a share, while Alaska Airlines and Allegiant Air buy back their own shares.

Delta’s shares have gained more than 60 percent in the last 12 months, outpacing United but trailing Southwest. On Thursday, they closed at $17.70.

Hunter Keay, an airline analyst with Wolfe Trahan, said investors were looking at the airline industry with more interest since airlines merged and cut their combined capacity substantially.

“Delta is clearly establishing itself in a leadership role in terms of cash generation, returning cash to shareholders and profit margins,” Mr. Keay said.

At Kennedy, Delta will move most of its flights to Terminal 4, where it is completing an extension. There will be more gates and security lanes, a large lounge for frequent fliers and an outdoor observation deck. The doughnut-shaped Terminal 3, which has a leaky roof and plastic buckets that collect rainwater, will be torn down.

The Kennedy expansion came after a complex deal that Delta engineered in 2011 to expand capacity at La Guardia Airport in New York by swapping takeoff and landing rights there with US Airways for some of its own slots at Washington’s Reagan National Airport. Delta now has nearly half of all departures at La Guardia, where daily capacity is capped.

Delta is also taking the offensive at London’s Heathrow Airport, another congested airport with limited capacity. In December, Delta spent $360 million to buy a 49 percent stake in Virgin Atlantic. The partnership with Virgin will expand Delta’s daily flights to Heathrow to 23 from nine and increase its market share between New York and London — the world’s top business route — to 37 percent from 10 percent.

Delta surprised analysts last year, though, when it acquired the Trainer oil refinery in Pennsylvania to provide more steady prices for its jet fuel supplies.

Operating a refinery has proved tricky. Hurricane Sandy disrupted supplies and its gasoline production unit, forcing a temporary shutdown. Delta took a $22 million loss on the plant in the first quarter. Still, executives remain optimistic about the refinery, on which Delta has so far spent $250 million. By contrast, the company’s fuel bill averages about $12 billion a year.

The investment, however, is based on the notion that oil prices are unlikely to fall much in the future. If that happened, Delta could pay more for its jet fuel than its competitors, analysts said.

The company has also remodeled its fleet substantially in recent years, shedding a large number of its 474 smaller, 50-seat airplanes, which have become expensive to fly because of high fuel prices.

Delta, replicating a strategy used at Northwest, has bought a large number of secondhand planes at a substantial discount. Delta thinks it can save money in the long run because the planes cost far less than new ones. Passengers are not likely to see a difference: the planes will get a thorough mechanical check while the cabins are entirely refurbished.

Delta also spent $140 million over two years to develop a new GW2 Gold Web site, which it unveiled last year. The site allows the airline to sell more services to passengers, including upgrades to premium seats, or booking hotel rooms or cars. At a conference last year, one executive compared the company’s aims to something Amazon has on its Web site — the ability to bundle offers or suggest products based on a passenger’s history and preferences.

“We had to go through this dark period of elimination of the weaker carriers that was perhaps necessary,” said Glen W. Hauenstein, Delta’s head of network planning and revenue management. “And you’ll find in the next few years an industry that is healthier and that is going through a bit of a renaissance.”