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CEO Interview - A Head for Figures

Delta Air Lines CEO - Richard H. Anderson

Delta Air Lines Chief Executive Officer Richard H. Anderson talks about the discipline necessary to succeed in today’s market

Delta posted a 51% rise in net profit for the third quarter 2011 despite the very challenging United States economy and sustained high fuel prices. To what do you attribute this strong performance?

We’ve been able to significantly improve our revenue performance to capture a substantial amount of the higher fuel costs we’ve been experiencing. We’ve also been pretty aggressive in managing our capacity to properly reflect demand and we’ve been pretty aggressive about non-fuel costs. So we’re performing well, even with these fuel headwinds and I think it’s interesting that for the first time in my experience in this industry we are collecting the cost of fuel in our ticket prices and our revenue performance.

 For Delta, what that has done is enable us to generate cash and we’re putting it back into our balance sheet to pay down debt. As we continue to do that, our interest expense continues to drop. In the next three years, we’ll take our interest expense down by about $500 million a year. But we’ve got to stay pretty vigilant to keep our costs in check, particularly as we’re managing capacity to meet market conditions. There are difficulties in the European economy, for example, so we’ve got to stay pretty focused in managing our non-fuel costs.

We’re also very good at managing fuel costs. For the most recent [2011 fourth] quarter, I think we had the lowest per gallon cost among the United States carriers. We’ve done a nice job on hedging fuel and managing our fuel expense and we’ve got to continue to do all of those things as we adjust capacity in response to challenging economic circumstances around the globe.

Does this strategy set you apart from other airlines that are more focused on growth?

I think that setting return on investment and net margin targets is crucial to any for-profit enterprise whether you’re in this industry or any other. We’ve got to have sustainable profits and returns on our investments regardless of the economic factors that we face. We take a really hard look at our schedule and we won’t fly routes that have no way of covering the total cost of operation.

We have the luxury of having a lot of airplanes that are paid for and because of that, we can adjust capacity and not have a fixed asset that we’re still paying debt or leasing costs on. I think that capacity discipline has been mirrored for the most part by other airlines because it is capacity that drives the ability of the industry to return to consistent profitability.

What kind of results are you seeing from your alliance with Virgin Australia?

We just launched it on 6 November 2011, so it is a little bit early to talk about results, but we are excited about the prospects of partnering with a really good airline with service to Australia and the South Pacific. We are now code-sharing on flights between Los Angeles and Sydney, Melbourne, and Brisbane as well as other destinations within Australia and the United States. Virgin has relocated to Delta’s Terminal 5 at Los Angeles International and we are doing all the things that will make it really easy for customers to connect up to our networks: frequent flyer reciprocity, lounge access, easy connections.

We are pretty good at figuring out how to do these alliances. The folks we have doing this did the first one of these domestically, which was our alliance with Alaska Airlines. That goes back to 1986. Then we have the experience of the partnership between Northwest and KLM, which was really the first joint venture alliance and that goes all the way back to 1990. So we know what we’ve got to do; we know the technology, the corporate sales process, the frequent flier process, the joining up of the reservation systems, the yield management systems and so forth.

Australia is a very important market for us and Virgin Australia is a very good partner.

Can you compare and contrast the pros and cons of a merger versus an alliance?

You get more synergies on the cost side in a full merger, but I think our partnerships with Air France KLM—and KLM in particular over the Amsterdam hub—proved that you can capture all of the synergies on the revenue and network side with an immunized joint venture. Given the constraints on cross-border ownership—whether they are legal constraints, labor constraints, or just the sheer difficulty of figuring out how to do it—you’ve got to have another mechanism to capture the benefits of cross-border consolidation. That mechanism is immunized joint ventures.

Tell us about your alliance with Aeromexico and the decision to invest $65 million in the carrier.
Mexico is a very big market and one of the fastest growing. It’s a gateway to the Latin America region and Delta can be a gateway for Aeromexico into the United States. Aeromexico has done a phenomenal job of building their airline and our investment and joint venture commitment cement an investment that gives Aeromexico capital to continue to fuel its growth. It also includes a maintenance, repair and overhaul (MRO) joint venture so that we can begin to tap into the MRO business in the Mexican market.

Is the $2 billion invested in customer service improvements to Delta’s fleet, facilities, and technology giving you a good return?

If you look at our fourth quarter 2011 revenue and yield performance and the growth of corporate revenue and traffic, I think our performance has been quite impressive. So we’re really pleased with those investments and our internal customer satisfaction scores have dramatically improved in virtually every area of the business. We just wish we could get them all done faster. Additionally, our operational performance is at the top of the industry as measured by the United States Department of Transportation statistics on baggage delivery, customer complaints, involuntary denied boardings, and on-time performance. It’s all paying off for us.

This year, Fortune Magazine named Delta the most admired airline worldwide. What does that mean to you?

That was a really great achievement for the people of Delta. It was a testament to their hard work and their commitment to the company as well as our commitment to our employees. It was a recognition of the great strides we’ve made in building a premiere global airline that truly serves customers, employees, investors, and all the communities we fly to. It’s nice to be recognized for that.

We were also named the top airline in the Business Travel News annual survey. We’ve launched significant investments in improving the customer experience with our mobile apps. And we’re going to re-platform We have at least 200 important IT projects under way. Some are internal projects that affect our decision-making technologies and yield management pricing systems but most of our investment is to make the operation run better and allow us to do a better job for our customers. We have momentum and we’re intent on building on it.

What can airlines and associations do to influence the tax debate and get governments to see the enormous value aviation creates for the economy?

Both IATA and Airlines for America (A4A) are really gearing up on this issue. In 1993, the United States industry was taxed $3.7 billion, excluding income taxes and state/local taxes. Today, it’s $17 billion. And over that same timeframe the industry’s probably lost $50 billion.

I think it’s a real problem and if you look at China you can see an example of a government that sees aviation as an economic growth engine rather than a piggy bank. In China, they have concluded that their return on investment in civil aviation is around one to eight: for every $1 they invest they get $8 of economic return and so they view airlines as a key development tool. They are building 56 airports in the next five years and the airplane fleet is going to grow 400% over the next 15 years.

I think we have to do a better job of explaining that air transport is among the biggest exporters and economic job creators. For example, I think there are only two industries in the United States that create more jobs or have a bigger economic impact: agriculture and energy. We have a bigger economic impact than airplane manufacturers on the economy.

The City of Atlanta believes that Delta’s hub in Hartsfield creates something like $45 billion a year of economic activity. There are not that many $45 billion economic engines in the Southeastern United States. Just think about what big hub airports in Frankfurt, Paris, London, Tokyo, and elsewhere around the world generate and how they facilitate trade. It’s truly remarkable what we contribute. And it’s not that we don’t understand our obligation to pay taxes. It’s just that our tax burden is onerous.

How would you characterize your business relationship with Hartsfield-Jackson Atlanta Airport?

Atlanta Aviation General Manager Louis Miller is a first rate professional who is well experienced, very knowledgeable, and does a fantastic job. And Atlanta Mayor Kasim Reed is really one of the leading mayors in the United States. If you’ve flown into Atlanta any time this year you’ve seen a lot of signs celebrating the fact that this is our 70th year as the city’s hometown airline. I think that in good measure that is attributable to the great partnership between Delta and the City of Atlanta.

It started with [Delta Air Lines founder] C E Woolman and [Atlanta Mayor] William B Hartsfield when Mr Hartsfield persuaded C E Woolman to move his airline from Louisiana to Atlanta in the early 1940s and it’s been a really important relationship and partnership. We just concluded a seven-year extension on our lease agreement. That was not just for the benefit of Delta. It was for the benefit of all the carriers in Atlanta.

We are in the process of opening a new international facility. The airport just finished buying about 60 acres of land contiguous to the airport on the north side and we’re cementing our long-term planning process with the airport’s long-term facilities plan. It’s an incredible airport. It has a take-off or landing every 45 seconds and we are number one in on-time performance of all the United States network carriers. So it’s a great story and it’s a great partnership.

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