One Year Later…A Delta Executive Remembers and Looks ForwardPublished: September 11, 2002 in Knowledge@Emory
Delta Air Lines did not lose any planes on September 11, 2001. Yet Delta, along with the entire airline industry, is still scrambling to recover from the events of that day. The last year has tested their resolve, but Delta and the industry will survive, says Vicki Escarra, executive vice president and chief marketing officer for the Atlanta-based airline. Aviation is essential to the national economy, she adds, although we will never again know the relaxed feeling of arriving at the airport main entrance and breezing through security.
Escarra spoke to students on September 5 as part of the Goizueta Leadership Speaker Series at Emory University’s Goizueta Business School. With the September 11 anniversary fast approaching, she addressed the overall issues affecting the airline industry and Delta specifically, followed by a quick glance at Delta’s forward-looking strategy. The airline expects to release its full strategy in the next few months; it has already shocked the public with its new baggage limits and fees for flying standby.
But back to September 11, 2001. As chance would have it, the Delta executive team was together that Tuesday morning, minutes into a weekly meeting. Escarra shared the thoughts that Delta’s top executives experienced minutes after the attack. After the first tower was hit, the executives believed it was an accident. “We thought it was a regional jet that had inadvertently flown lower than planned,” she says. The second hit erased all doubts. “We knew we were involved in an attack. We felt strongly that we were involved in a war.”
The team immediately headed to Delta’s operation control center, in the middle of the Delta complex—the gathering place for any serious scenario. “One of the best decisions that we made as a team was to ground all of our airplanes,” says Escarra. “It was a tough decision, because it has never happened in the history of aviation. We’ve never stopped flying in the course of 75 years. But it was a great decision, because who knows what could happen with other airplanes if other terrorists were aboard.”
The day that followed seemed like a week, says Escarra, who didn’t make it home until her own family was sound asleep. Airline executives conferred with Congress and the President. “One thing I’m really proud of is the position our chief executive officer (Leo Mullin) took. He really did step up and make some decisions that were in the best interest of the airline business. And he took on that leadership role in reasoning with Congress to grant the airlines a significant amount of money in the short term, which helped us keep operating. Had that not happened, clearly two or three airlines in the first three days would have gone out of business. That would not have been good for our customers or the industry.”
The Economic Affect
One year later, there are still signs of fallout. “More than 120,000 jobs were taken out of the travel and tourism industry over the first quarter, and 50% of those came out of the airline business,” she says. “Traffic is looking a bit better, yield and revenue are not looking considerably better though, and things still are not recovering as we anticipated based on the past.”
The main culprit is the economy, which sank even further after the attacks. “We were making a bit of a rebound the first part of the year,” says Escarra. “The first six months Delta hit the revenue forecast plan that we had set out to achieve for 2002. But then we began to see all the issues with corporate indiscretions, misrepresentation of balance sheets, and so forth…we saw a lack of confidence in people’s spending. It caused another stutter in the overall economy.” Despite this, Escarra is optimistic. “We expect the industry and the economy to recover by the middle of next year.”
According to Escarra, the airline industry has never made huge profits. In 2000, Delta’s overall profitability was more than $800 million. But in 2001, “as an industry we lost almost $8 billion, and we are projected as an industry this year to lose another $5 billion. Fares are at the lowest mark that they’ve been in 15 years,” explains Escarra. “Clearly, at least in the short term, there is no pricing power in any segment of the airline industry. This is an industry in turmoil.”
Another issue is the growing disconnect with the Consumer Price Index, which is now forcing the industry to forecast in the dark. “If you look at years 1991-2000, and adjust for inflation, airfares are down 25%,” says Escarra. “In real terms since deregulation it is 45%. If yields were the same as 1991, and airfares had kept pace with inflation, we as an industry would have $24 billion in additional revenue.”
The new century has been a wash out. “There is a $20 million gap in revenue for 2002, compared to 2000. When you look at the average price on a 1000-mile ticket, it fell to $110, which is the lowest its been since 1987.” Attempts to raise fares have not worked. “We’ve tried, more than 30 times,” notes Escarra.
Low cost carriers are another thorn in the side of mainline carriers like Delta. “They are growing three times faster than the mainline carriers,” says Escarra. “We do not anticipate that this growth will dissipate—in Southwest’s last annual report there are more than 120 new markets on its list of places to grow. There is no stopping this. We are going to have to find ways to compete as an industry with low cost competition for a lot of reasons, and the most important reason is that it is what the customers want.”
In addition, airline costs have skyrocketed in the last year, primarily because of security and insurance. “Ninety percent of our costs are fixed,” Escarra continues. “If we want to change our costs, we are going to have to change our cost structure. These are some of the things that we as an industry are going to have to grapple with in the days ahead.” The additional “hassle factor” at airports is causing more people to drive on trips of 200 miles and less—that alone accounts for a $6 billion loss.
Delta alone expects to pay more than $130 million in terrorism insurance in 2002. Escarra says most airline CEOs are spending their days in Washington, voicing their concern for relief over what they see as an issue of national security. “Over the course of 30 years, airline margins were right at three-tenths of a percent when compared to the Standard & Poors 500, around six percent. I’m sure you are asking yourself, ‘why would anyone want to get involved in this industry?’”
Why, indeed? “We believe that deregulation is still playing out,” Escarra adds. “We believe that eventually it will be the survival of the fittest, and you will see more consolidation in the industry, and that will be good for everyone.”
Over the next 18 months, Escarra says that Delta will be “focusing attention on costs and maintaining close control around capital and preserving cash.” The airline can claim many strengths, including a diverse product line and the largest regional jet fleet in the industry. The latter is extremely important, because it means Delta can make changes and use smaller aircraft as the market is shrinking. In addition to [the regional airlines] Delta Express and Delta Shuttle, Delta is the leading transatlantic airline, anchoring a strong international product.
“We have the largest airline hub in the world with more than 900 daily flights in Atlanta. We have a wonderful workforce who, even in light of the issues I just mentioned, is for the most part enthusiastic about helping the company see us through this difficult time. We have a good cost structure when you consider how we compare to the majors; it is about seven percent better than United, American, and USAir, so we have about $4 billion in cash.”
So where does Delta go next? “We intend to position ourselves in the picture,” says Escarra. This includes Delta recent announced codeshare alliance with Northwest and Continental that will allow the three carriers to book passenger’s on each other’s flights. Once approved and added to SkyTeam, Delta’s global alliance, it will double the amount of destinations for customers to fly to and accrue Frequent Flier miles. The move strengthens Delta in the ever-important Northeast market, while adding Northwest’s strengths in the Pacific and Continental’s in Latin America.
The airline also plans to grow its other international partners (Air France, Czech Airlines, Alitalia, Aeromexico, Korean Air) and strengthen its Atlanta hub. “We are working closely with the city on the fifth runway, which will be on line in 2006. Quite frankly, I will say that Atlanta is the most important part of Delta’s strategy for the future.”
Look for changes at secondary hubs as well, as Delta seeks to optimize its facilities in Cincinnati, Salt Lake City, and Dallas-Fort Worth. “We need to find ways that we can actually use all aircrafts in and out of those hubs. It will make them more profitable. It will bring more opportunity of growing them. More point-to-point flights are an important part of the overall strategy,” says Escarra.
The Northeast will remain a focus, she adds. “USAirways is weak, and so you will see us in the next couple years and beyond really focus attention on customers there.” Delta has also placed one of its senior leaders in charge of strategy for beating the low cost carriers.
“We are focused on more efficiency with aircraft, getting our costs down so they are in the range of the low cost carriers, and using the Delta fleet to take advantage of the upturns and downturns in the cycle of traffic. You’ll hear more about that in the next couple months. Certainly, it is a very challenging time for airlines in general and Delta specifically. But the good news is aviation is a key to the success of our economy, and we feel that once we get through this we will be well positioned to be successful in the days ahead.”