Large airlines are looking overseas to lift their profits

Delta Air Lines and Northwest Airlines entered bankruptcy on the same day in 2005, emerged from Chapter 11 this spring, and now are banking on international flying to anchor their financial recoveries.

Eagan-based Northwest has committed about $5 billion to modernize its international fleet, which includes launching the Boeing 787 Dreamliner next year.

Delta, based in Atlanta, announced Thursday that it will begin offering nonstop service from its Salt Lake City hub to Paris as part of "the largest international expansion in its history." Delta serves 36 transatlantic markets.

With intense competition from low-fare carriers in the U.S. market, major legacy carriers, such as Northwest and Delta, see greater profit potential in overseas markets.

Northwest executive Neal Cohen said, "One of the key elements of Northwest's business plan is to profitably grow its international business."

Cohen, an executive vice president who oversees international operations, said that Northwest had 47 planes devoted to overseas flights in 2006. By the end of 2008, there will be 68 planes dedicated to international flying -- a 45 percent increase.

Gerald Grinstein, outgoing chief executive at Delta, said that former Northwest CEO Richard Anderson was selected last week to lead Delta in part because of his grasp of the worldwide airline business.

"He led a company that had terrific international expansion, particularly in the Far East and Asia, which fits the Delta growth plans," Grinstein said in an interview.

A close look at the numbers makes it clear why international is the strategy of choice for mainline carriers. For the first seven months of this year, yields on the fares that passengers paid in the Atlantic market increased 8.5 percent. Yields jumped 8.3 percent in the Pacific market. In the domestic U.S. markets, however, yields dropped 0.6 percent. ("Yield" refers to passenger revenue per passenger mile flown.)

That dramatic divide in revenue trends was documented by the Air Transport Association, an industry group, based on revenue collected by seven major airlines, including Northwest and Delta.

In Northwest's case, about one-third of the $6.1 billion in operating revenue it generated during the first six months of this year came from overseas flights (21 percent from the Pacific and 11 percent from the Atlantic).

Cohen said that the international slice of the revenue pie will grow, but he did not put a precise percentage on it.

In the five-year business plan that Northwest filed during its bankruptcy case, it estimated that its international flying would increase an average of 4.3 percent a year through 2010. Meanwhile, it forecast that its domestic flying would decline by an average of 2.7 percent a year.

For 2006, Delta reported that North American operations accounted for 75 percent of passenger revenue while international flying provided about 24 percent.

"Historically, Delta was a very strong domestic airline," said incoming CEO Anderson, who described Delta's Atlanta hub as the "most successful" in the world.

But in an interview, Anderson characterized Delta as "underdeveloped internationally" and said he wants to use Delta's brand and domestic network to support an international expansion.

"We have some [Boeing] 777s on order that will help us serve Asia, particularly China and the Middle East," Anderson said.

Delta and Northwest are both members of the international SkyTeam alliance, which allows for business cooperation and joint marketing of flights.

Ben Hirst, an attorney who served as a Northwest executive while the carrier was developing partnerships, said the Northwest-KLM alliance has been successful because it allowed the airlines to coordinate schedules and pricing and consumers benefited from more flight choices.

Northwest is seeking federal antitrust immunity that would allow it to fully cooperate with Delta, KLM and Air France on transatlantic service.

In today's international marketplace, Hirst said, "you've got a couple of competitors who are teaming up to compete with others."

SkyTeam is one of three large worldwide airline alliances. American Airlines and British Airways are members of the Oneworld alliance, while United Airlines and Lufthansa are members of the Star alliance.

Impact of Midwest deal

This month, Northwest became a minority investor in a deal with TPG Capital to acquire Milwaukee-based Midwest Air. That transaction will allow Northwest to preserve a code-sharing agreement with Midwest that it plans to implement next month.

That will permit a passenger to book an itinerary involving flights on Midwest and Northwest and be treated like a customer traveling on one airline. "It is a good business strategy for Northwest to code share with Midwest and get the high-end business travelers," said Aaron Taylor, a vice president at Eclat, an aviation consulting business.

Taylor predicted that there will be some revamping of the Midwest schedule, so that Midwest passengers can feed more efficiently into Northwest's European and Asian flight schedules.

While Midwest serves about 50 percent of the Milwaukee passenger market, Northwest also has a strong presence there with 18 percent of passenger traffic.

Milwaukee customers are a good source of passengers for international traffic, Cohen said, and he suggested they may see improved service options in the coming months.

He noted that some Milwaukee travelers drive to Chicago to catch international flights, while others fly into Northwest's Twin Cities or Detroit hubs to connect to overseas flights.

While he did not provide details, Cohen said that Northwest is studying options for offering "an enhanced level of service" for Milwaukee customers who want to travel to Europe.

Cohen, Northwest's former chief financial officer, said that Northwest will take delivery this year of its 32nd Airbus A330, which makes Northwest the largest operator of A330s.

With a fleet of modern A330s and 787s, well-established Tokyo and Amsterdam hubs, and strong alliances with other carriers, Cohen said, "We are well-positioned to grow our international business."

Liz Fedor • 612-673-7709

Liz Fedor • lfedor@startribune.com