How management 'pack' revived Delta Air Lines
- Article by: JOSHUA FREED
- AP Airlines Writer
- June 26, 2013 - 2:20 PM
NEW YORK — Delta Air Lines is on track for its fourth straight annual profit, its best stretch since the six years ended in 2000. Its passengers file fewer complaints about lost bags and late flights than those flying its chief rivals. Delta's merger with Northwest is considered a blueprint for combining airlines.
That performance has come under the guidance of CEO Richard Anderson, who started as CEO in 2007, just after Delta exited bankruptcy protection, and just before fuel prices jumped and the Great Recession began.
But Anderson says he isn't the only one with the answers. "The senior management team hunts as a pack," he says.
The hunt has led to opportunities in some key markets. In the New York area, Delta has raised its passenger count by 10 percent in the past three years and is challenging United as the dominant airline there. Delta's partnership with Virgin America will give it a bigger share of the New York-London route, the world's busiest.
The pack also ventured into uncharted territory for an airline. Management took the unusual step of buying an oil refinery, in an effort to exert some control over the price of jet fuel. At $12 billion, fuel is Delta's biggest annual expense. Delta also added in-flight internet access faster than other airlines.
In an interview at The Associated Press headquarters in New York, Anderson and Delta President Ed Bastian talked about how Delta initially considered buying an oil company before settling on the refinery, how it restored its reputation and how passengers may eventually see security wait times of no more than 15 minutes.
Below are excerpts, edited for length and clarity:
AP: Spirit, Allegiant, and Frontier are charging to put a bag in the overhead bin. Is that something that you could imagine for Delta?
ANDERSON: That's not in our plans. (We see) more carry-ons going in the belly. Those carriers have a different business model, right? There's no first class, there's no Economy Comfort, there's no assigned seating. No leg room. At Delta, we're really focused on providing a really premium product, for all travelers.
Our operating performance is stellar. If you don't have a tornado in Oklahoma City, a typical day for us is 95 percent of our flights arriving under DOT rules, on time, and no cancellations. That level of operating capability was really unheard of in this business ten years ago.
AP: Delta didn't always have that reputation in recent years. What has happened at Delta to make that work?
ANDERSON: Well, you know, Delta has great employees, and we went through that tough period after 9/11 and really restructured. All we did was pull the Delta values out again, where you value the people, you value the customer, and give the employees the tools and the direction that they needed. And they've just done a phenomenal job.
Now we put a lot of research and industrial engineering know-how into the operation. Our customer complaint numbers, in the first quarter of this year, were lower than any time since the DOT has been collecting the data, since 1997. And we just continue to drive improvement in the operation.
AP: Is there an example you can share?
ANDERSON: We put a flat tire rule in place, for someone that misses their flight. (The rule allows customer service workers to waive a change fee and get passengers on the next flight if they were delayed by something unforeseen, like a flat tire.) We put a lot more discretion in our front-line employees. We brought back redcoats. Delta was always famous for the redcoats, who were the senior airport customer service agents who were there to solve problems on the spot.
AP: Have you made enough progress over the last decade to eliminate, or at least ease, the boom and bust cycle in airlines?
BASTIAN: I think we've made tremendous progress in that regard. 2012 was the third straight solidly profitable year for Delta, and we're off to a good start in 2013. Our return on invested capital was over 10 percent for the last several years. We'll probably do a little better than that (this year), a low double-digit return, which is something that has never been seen from one company, much less the industry. Consolidation has had a lot to do with that. We think consolidation is still in the relatively early stages, with more to come that will provide more stability.
One of the things that's allowed for that stability is higher fuel prices. Candidly, while we hate where fuel prices have gone, it's become our new normal, we've had to plan for it. It requires us to be disciplined about the supply we put out, about the offerings we provide. It requires us to be as productive as we can. It also means the new entrants that historically have disrupted the industry have a difficult time financially.
AP: If it's harder for new entrants, is that a good thing for the traveling public? And where do you see fares going?
BASTIAN: I think we have more rational disruptors. There's always going to be a low cost, low fare component to the aviation space. Years ago it was Southwest. Today it's Spirit and Allegiant.
Fares are still lower today than they were then. We charge differently, with a fee component and a base component, and charge travelers for what they value in a product. But it's a much more stable, rational business that benefits everybody.
AP: Does the Transportation Security Administration need to make changes to get your travelers to their gates quicker?
ANDERSON: We're the third biggest industry in the U.S., after agriculture and oil. So if we want economic development and economic growth, and we want this city full of people traveling here, we need to let people know that you're never going to have more than a 15-minute wait in security. One of the key ways to get there is with PreCheck (the government's pre-screening system). Our ultimate goal needs to be 75 to 80 percent PreCheck.
It's going to be a matter of using the data. It's amazing how much information is out there. If you go to a normal consumer data company like Axiom or Nexis or Equifax, they have massive databases with scoring technologies. And so I think it's a matter of taking the kind of technology that we have in the financial world and bringing that to bear at the security checkpoint.
AP: In the next five years, what do you expect would be two or three changes the flying public could see?
ANDERSON: We were really the first to pioneer a ubiquitous Wi-Fi product, so we have Wi-Fi across our system. And the next piece of what we're going to do there is stored content; so the ability to provide entertainment on all of our airplanes through stored content to your own device, on the internal Wi-Fi of the airplane.
AP: For a fee?
ANDERSON: We're talking about that. We actually think there would be a piece that we would probably offer to all the passengers on the airplane. And then if you wanted, you could buy other things.
AP: How about allowing voice communications?
ANDERSON: No. Our customer survey data tell us that consumers do not want that on the airplane.
AP: Business travelers are willing to pay a premium to fly Delta. What about the guy just looking for the fare that's $10 cheaper on Expedia.com?
ANDERSON: Well, we believe that we are in the market to serve all customers. From the value-minded customer that wants to buy four months ahead of time to the IBMs and Procter & Gambles of the world (which buy at the last minute). It's still an incredibly competitive marketplace, with American, United, Delta, Southwest, Jet Blue, Spirit and Allegiant. Which is how it should be.
AP: We've had 9/11, we've had volcanic ash, we've had Federal Aviation Administration furloughs. What's the thing that's keeping you up at night?
ANDERSON: You know, I don't know that there's really anything that keeps us up at night. The business is running well and continues to run well. There are risks out there, but I think the industry is now consolidated to a point where we have a very stable model.
AP: And oil prices?
ANDERSON: We assume oil is going to stay high, and even if it doesn't we would rather build our business plan assuming jet fuel is going to be $4.40 or $4.50 a gallon in a few years.
AP: Whose idea was it to buy an oil refinery?
ANDERSON: Well, we actually first started looking at buying an oil company. We didn't have one picked out. You've got to take control over every aspect of your business. You can't let any of your suppliers dictate the way the refiners were dictating to us. Our business model has to capture the full cost of fuel, but when it's $12 billion, you've got to invest and figure out how you're going to keep that cost under your control. We talked about oil companies, we talked about refineries. It took us a couple of years, but then this one came on the market for the price of a 787.
AP: How often do you check your stock price?
ANDERSON: You know, some days I don't check it. You know what I check more than that? I check fuel and crack spreads, unit revenue, and how the airline is running.
AP: What's a day is like for you? Are you one of those guys who's there at 6 a.m.?
ANDERSON: Well see, you make it sound like it's an "I'' problem. It's not an "I'' problem, it's a "we" problem, right?
AP: I realize that you're not gassing up the planes.
ANDERSON: I live a normal life like you guys do. I get up in the morning and drive to work and get to work and have meetings. I live close to the office, so my trip is 15 minutes. Atlanta may have a traffic problem but it doesn't have a New York problem. I get up really early, do my email, and drink coffee with my wife, pet the dog, get in the car, drive to work, drink coffee on my way to work, get in the office and bother Ed.
AP: As you fly around, where do you sit?
ANDERSON: I was in row 28 coming up here. I wear my badge. And I fly in coach.
AP: And enough people know what you look like?
ANDERSON: Oh, yeah, because of that movie. (Anderson introduces the pre-flight safety video). That's when you get the newspaper and kind of go like this (raises imaginary newspaper over his eyes).
AP: Do you always fly coach, even on long-haul to Asia?
ANDERSON: I've done long-haul to Asia. You know what I like to try to do? I like to try to fly on the competition when I go long-haul. I take my little black book and just make notes and observe what's going on and how the airports are operating, and how your competitors are operating.
AP: You were once a prosecutor. How do you get into this mindset, of dealing with operational data and redcoats?
ANDERSON: Well, just when you're a bad lawyer, you've got to be able to do something more productive. ... I've done a lot of different things. Lawyer. I even spent time as the chief counsel to the criminal trial court judges in Houston. United Health Group was a lot of fun.
AP: What have you learned about managing from all those jobs?
ANDERSON: It's probably just a mishmash of a lot of little rules, right? You know, always return your phone calls promptly, always be on time for your meetings. Always be the person that people look forward to go into a meeting with. Don't ask people to do things you wouldn't do. Be kind to people. I don't know — it's probably how you were raised or something. I was raised in a very big Catholic family, so you know, you were taught to be polite.
I never took a business course in school. I didn't take an accounting class in school. I thought I was going to practice law, but I got married and had children. My mother and father died from cancer, my dad, when I was 20, my mom when I was 21, after long illnesses. I just didn't have any money.
So I went to night law school. You get out and you go, "Well I'm just going to practice law." Then you get married and have a child and you've still got student loans. Sue said, "When are we going to ever pay off these student loans?" So, you know, I think life is serendipitous in that regard.
AP: Did you get those student loans paid off?
ANDERSON: I did, finally, but I was the vice president at Northwest Airlines. It took a while.
AP: Well, if your interest rate is low enough, then maybe it's prudent debt?
ANDERSON: No. As you learn at airlines, there's no such thing as prudent debt. That's the lesson, we've learned it.
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