"Delta bankruptcy could tighten grip"

Wednesday, August 11, 2004
 
Delta bankruptcy could tighten grip
By James Pilcher
The Cincinnati (OH) Enquirer


Chapter 11 bankruptcy reorganizations of US Airways and United Airlines
gave smaller low-fare carriers the entre to invade or expand at the big
carriers' so-called "fortress hubs." 

But as Delta Air Lines faces possible bankruptcy, many airline experts
say the Atlanta-based carrier is likely to further fortify its hub at
Cincinnati/Northern Kentucky International Airport. 

That might be good news for the more than 4,300 Delta workers based in
Cincinnati, but it could make it more difficult for a discount airline
to slip into the market, analysts say. 

"If anything, bankruptcy is going to make Delta more competitive, and
they have already shown how aggressively they defend their turf," said
Mike Boyd, president of The Boyd Group, a Colorado-based
aviation-consulting firm. 

The nation's third-largest carrier, Atlanta-based Delta has lost more
than $5 billion since the Sept. 11 terror attacks, including $1.96
billion in the second quarter of this year alone. In a regulatory filing
Monday with the Securities and Exchange Commission, the airline said it
is burning through cash because of pressure to keep fares low and high
fuel prices. Delta says it must cut costs, including $1 billion annually
in pilot compensation. 

But the airline and its pilots are not talking. And investor confidence
continues to erode. On Wall Street Tuesday, Delta stock lost another 6.5
percent of its value, closing at $3.72 a share. 

Status quo at CVG? 

Delta owns more than 90 percent of the local market, which has allowed
the airline to charge much higher fares. A Department of Transportation
report shows Delta passengers from Cincinnati pay 56 percent more than
the national average on many flights. 

As a result, travelers from Cincinnati sometimes fly from Dayton,
Louisville or Indianapolis, where low-fare airlines operate. 

Delta's dominance of local gates has given it the muscle to fight off
low-cost competition. Major carriers often lower fares and add flights
to counter forays into a hub market by low-cost carriers. 

"The problem for us is that we serve too many markets," said Bob
Holscher, aviation director for the local airport. 

That makes it difficult for us to compete head-to-head against Delta on
a particular route, Holscher said. Still, Holscher said the airport will
continue to woo discount airlines. 

Delta officials won't comment on what could happen to the Cincinnati hub
under a Chapter 11 filing. However, analysts say reorganization probably
would not affect the local operation, since it is a mainstay for Delta
and its regional affiliate, Comair. 

Boyd said the local market is not big enough to fight over. While
Southwest Airlines started service to Philadelphia in May, a little over
a year after US Airways emerged from Chapter 11 reorganization,
Cincinnati, "is not a huge plum," Boyd said. "The inn is full, if you
will. That is a lot different than say, Philadelphia, where the metro
area is much larger and the potential traffic is much greater." 

Low cost strategy 

Southwest says its Philadelphia flights are profitable and it intends to
expand in the fall. Meanwhile, US Airways says its aircraft are much
fuller on routes where it has matched or beat its competition's prices,
but the airline is losing money because it has not cut costs enough. 

Southwest spokeswoman Brandy King would not comment on Southwest's view
of Cincinnati in light of a possible Delta bankruptcy. But overall, she
said the airline considers cities that are overpriced, underserved and
can immediately support 15 flights a day. 

With the Delta/Comair capacity for local flights, that would seem to put
a damper on Cincinnati's hopes. 

"Cincinnati may be overpriced, but if anything, it is way overserved
because of the hub," said analyst Sam Buttrick of UBS Investment
Research. "It's not coincidental that Cincinnati has virtually no
discount service." 

Another airline that has been courted by local officials is
Orlando-based AirTran, which competes against Delta in Atlanta and
entered Philadelphia before Southwest. 

AirTran vice president of planning and sales Kevin Healy won't comment
on future markets. But he said the airline is expanding flights and
destinations from Dayton, which already pulls fliers away from the
Cincinnati airport. 

Independence Air, the new low-cost carrier based in Virginia, also could
be a possibility. But the airline is planning to begin service to
Dayton, Columbus and Indianapolis later this month, apparently freezing
out Cincinnati. 

Even if most experts think discount carriers will not try here, at least
one refuses to shut the door. 

"Delta will hysterically defend its turf in ways that appear to make no
economic sense, but under bankruptcy, that could be a little more
difficult for them," said Darryl Jenkins, professor at Embry-Riddle
Aeronautical University. "Delta could be vulnerable. But the only way to
find out is to wait and see if someone tries and makes it work." 

In the meantime, Delta's talks with its pilots over wage concessions
have not resumed and the clock is ticking toward the airline's announced
hope of having a plan of restructuring to cut its costs by the end of
August.


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