When Bob Cortelyou looks back a mere few years, he has trouble recognizing his own company. “Before the merger (with Northwest Airlines) we basically were Atlanta plus Florida,” says Delta Air Lines’ senior vice president of network planning, “and some actions did not make sense from today’s point of view: We had Boeing 777s flying between Atlanta and Florida, the 767-400 was a domestic aircraft, Cincinnati was a 50-seat regional jet market, and New York was fragmented for us.”

Delta not only looked different in 2007, its strategy appeared to be confused. The very large airline had recently emerged from Chapter 11 bankruptcy restructuring, during which time it fended off a hostile takeover attempt by US Airways. But it had no clear direction for growth.

To say that the man behind Delta’s transformation into a focused powerhouse is self-confident would be an understatement. Richard Anderson is justifiably self-assured. After a few years away from the industry—and following a term as Northwest CEO—he is more powerful than ever. Now he, American Airlines CEO Doug Parker, and United Airlines CEO/President Jeff Smisek are in control. But given Anderson’s head start when it comes to integrating two U.S. majors, his influence on the current shape of the industry is significant.

“We are just better at it,” he says, referring to Delta’s relatively low maintenance cost on aging aircraft. But he could apply that statement to many of his airline’s recent moves. Anderson does not shy from criticizing business partners like Boeing. He has called their new 777X an “experimental aircraft.” And of course, he is convinced that the merits of the Virgin Atlantic deal will be “huge,” although Delta’s new European partner has not been profitable in recent years. Other than providing Delta with better access to London Heathrow Airport, Virgin Atlantic is generally not considered to be a major asset.

“It has been an amazing story of change,” Cortelyou says. “This company had been coasting, but Richard brought leadership.” He orchestrated the 2008 merger with Northwest that is now, arguably, one of the most successful integration projects in airline industry history. But this was only the beginning of Delta’s consolidation drive. Anderson bought additional stakes in Aeromexico, Gol Linhas Aereas Inteligentes and, intriguingly, Virgin Atlantic.

Delta’s bold moves in mergers and acquisitions have made it a role model for the industry. The initiative forced United to react (and merge with Continental) and it helped convince American’s management to agree to combine with US Airways—a move lon

g sought by the equally ambitious Parker, then its CEO. The consolidation of the U.S. airline sector has had highly beneficial consequences for the industry: Profits are up almost across the board and the once-beleaguered carriers are ready to invest again in new aircraft and passenger amenities.

Anderson says he does not know of any major integration projects left on his to-do list. Ex-Northwest Boeing 747-400s are now a familiar sight at the Atlanta hub—Hartsfield-Jackson Atlanta International Airport—a sign of how integrated the network has become. 

And if Anderson is right, the growth story is not over, at least not for Delta. Besides the Virgin Atlantic deal, there will be the simultaneous ramping down of the Tokyo hub while creating one in Seattle.

As far as its financial status, the company once was highly leveraged, but post-Chapter 11 and post-merger its robust operating performance has placed it on solid footing. Anderson believes the carrier will reach its target of $7 billion debt faster than envisioned—within the next 18 months. Ultimately, he sees the airline reducing its debt to $5 billion, although “that is a longer-term process.” The lower-debt levels are a reflection of its profitability: In 2013, the airline reached a $2.7 billion net income (pre-exceptionals), up $1.1 billion over the prior year. Revenues reached $37.7 billion.

Noting that “in the U.S., consolidation is principally done,” Anderson foresees three, not two, main international carriers, plus “three strong national carriers”—Alaska Airlines, JetBlue Airways and Southwest Airlines.

His strategy of entering into both smaller and larger equity investments—Aeromexico, Gol and Virgin Atlantic, respectively—is markedly different from American’s and United’s. The Delta CEO says such deals forge a strong basis “for exclusive commercial arrangements. It brings the carriers much closer together.”

“In Latin America, we had a choice of investing a lot or taking a more creative approach,” says Delta’s vice president of alliances, Charlie Pappas. The more creative path led to the equity investments in Aeromexico and Gol, which could be key. The former low-cost GOL has morphed into somewhat of a hybrid, akin to a legacy carrier. It has a dense domestic network in Brazil, Latin America’s biggest market, but it has not served any long-haul routes ever since its experience of taking over what was left of Brazil’s former unofficial national carrier, Varig. The beauty of the Delta deal is also that “Gol is now selling the Brazil-U.S. network through their own channels,” Pappas explains. That way it can effectively compete with TAM while also creating a strong local point of sale.

Delta’s decision to buy the former Singapore Airlines’ 49% stake in Virgin Atlantic was an even more significant move. The new affiliate “filled the London gap for Delta,” says Cortelyou. The joint-venture arrangement for the London transatlantic services has just been launched, but Delta is already convinced of the merits. 

But there is a cloud hanging over the arrangement. The European Commission (EC) has launched an investigation into whether the deal complies with European ownership and control regulations that limit non-European Union investment to 49% and do not allow a non-EU entity to have effective control. This situation does not mean the outcome will be negative; the EC might request changes that would satisfy its cause. But Virgin Atlantic will have to prove it can still make decisions in line with its corporate governance. The EC’s concerns center around the number of board seats Delta holds at Virgin Atlantic (three) and the fact that the latter’s CEO, Craig Kreeger, is a U.S. citizen.

The next big project is to build the hub in Seattle. Delta inherited from Northwest the once-famous Tokyo Narita Airport hub, but that is “becoming a harder proposition” for many reasons. A lot of routes into China have become so strong that they justify nonstop service from the U.S. Extended-range aircraft enable carriers to operate farther into Asia. In short: “We are working toward bringing the Asia hub home.”

A major difference between Delta and the two other carriers in the Big Three is: “We own our markets,” says Cortelyou. Delta’s market share at its hubs at Salt Lake City International, Minneapolis–St. Paul International, Detroit Metropolitan-Wayne County and, of course, in Atlanta, is often much greater than that of its chief rivals at their respective main bases. Delta is making major inroads into the New York market—which used to boast only a Continental hub at Newark (N.J.) Liberty International Airport. 

In order to make a viable hub at Seattle-Tacoma International Airport (Sea-Tac), Delta needs feed. Historically that has been provided by partner Alaska Airlines, but Delta wants to do more on its own. Some industry pundits predict that Delta is targeting a takeover of Alaska. “I don’t focus on it,” says Anderson.

The rationale is clear from Anderson’s point of view. While Delta has a significant domestic presence at Los Angeles International and long-haul service to Sydney and Tokyo, building material connectivity is impossible due to infrastructure constraints at the airport. San Francisco International is a United hub, so “Seattle is the only option left.” And Anderson believes the airport has been “relatively underserved,” given the size and number of large corporations in the area (Microsoft, Boeing, etc.). “The market is bigger than Minneapolis.” And he must know, having run Northwest’s Minneapolis/St. Paul hub during his pre-merger years.

“The geography is perfect, now the focus needs to be on building a big West Coast gateway to Asia,” Anderson says. “You can fly Boeing 767-300ERs to Asia”, says network chief Cortelyou, “which gives us the ability to open smaller markets.”

In the summer timetable, Delta is offering nine daily international nonstop services from Sea-Tac. It is adding flights to Seoul, Hong Kong and London Heathrow (directly competing against British Airways). Ten widebodies are going to be based in Seattle.

And Alaska? The relationship “has always been evolving and that continues,” says Pappas. In the future, part of the West Coast feed will be provided by Delta, but the Alaska code-sharing agreement “will continue, absolutely,” Cortelyou insists. “It is good for us.”

Delta is known for its very specific fleet strategy—keeping aircraft longer and shying away from buying new types early. Nonetheless, the airline is now seriously looking into replacing part of its long-haul fleet and has issued a request for proposals.

The new aircraft are meant to replace all of the airline’s 747-400s and a significant part of the 767-300ER fleets. The airline is also showing a strong interest in the proposed Airbus A330neo. Delta currently has 16 747-400s, the oldest of which was delivered in 1989 (to what was then Northwest). The airline is looking at replacing them near the end of the decade, before the next D checks are due. Anderson also wants to start the replacement cycle for its 58 -300ERs; their deliveries spanned 1990-2001.

Its current long-haul aircraft orderbook is limited: 10 A330-300s are on order (the 242-ton increased-maximum-takeoff version is due to arrive in mid-2015), and it is awaiting 18 Boeing 787-8s inherited from an old Northwest order. Since its bankruptcy and subsequent merger with Northwest, Delta has only placed two orders for new aircraft—100 737-900ERs booked in August 2011 and 30 Airbus A321s late last year.

As far as the new deal is concerned, Delta has four options on the table: The Airbus A350-900 and -1000, all three models of the Boeing 787, current versions of the A330 and a reengined A330. It is not looking at the 777X. By contrast, an order for a reengined A330 is a strong possibility. “I hope (Airbus) offers an A330neo,” Anderson says. “There is a huge need for a small widebody. We really need Airbus to step up and reengine.” He is pushing for a new 275-seat aircraft with a 5,000-5,500-nm range. He argues that “aircraft that underfly their range are uneconomical. You cannot make a 777 consistently profitable flying only East Coast to Europe. Those routes are 1,000 or 2,000-nm shorter than what it was designed for.”

For the narrowbody fleet, Delta is taking 84 more 737-900ERs, 30 A321s and 68 more 717s. It has 117 MD-88s and 88 MD-90s in the fleet. And unlike the recently retired DC-9s (ex-Northwest), is does not look like the MD types will be gone soon. In terms of hours and cycles remaining in the design life, Delta could theoretically operate the MD-90s for another 50 years, based on the current dispatch profile. And the airline has learned to live with the fuel-burn disadvantage by deploying the MD types mainly on shorter routes where fuel is not such a dominant factor. The 737s at Delta operate an average stage length that is about twice as long as the MD-80’s.

One way to tackle maintenance costs is Delta’s strategy to buy aircraft and break them up for spare parts.

Delta has not yet decided on a next-generation aircraft. Executives say they would rather wait and see the A320neo and the Boeing 737 MAX perform according to specification before making any major decisions.

The airline is also seeking  a good 115-120-seat aircraft, slightly larger than the 717s it is taking over from AirTran. “The 737-700 is not economical and the -800 is too large,” Anderson says. One option could be the Bombardier CSeries, for the geared turbofan engine in particular. “Our engineers have a lot of confidence in that gearbox, but we want to see the aircraft in the marketplace before we place an order,” he explains. 

Tap the icon in the digital edition of AW&ST for Delta’s financial results and operating statistics, or go to AviationWeek.com/deltastats

 

Delta Air Lines Fleet

 

 

In Service

On Order

Options

Airbus

A319

57

 

 

A320

69

 

 

A321

 

30

 

A330

32

10

 

Boeing

717

13

 

 

737

95

88

30

747

16

 

 

757

154

 

 

767

95

 

6

777

18

 

6

787-8

 

18

 

Bombardier

CRJ

 

28

24

Embraer

175

 

 

27

McDonnell Douglas

MD-88

117

 

 

MD-90

65

 

 

TOTAL

 

731

174

93

Sources: Delta Air Lines and Aviation Week Intelligence Network Fleet Database