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"D/FW braces for Delta restructuring"


 
Tuesday, August 17, 2004

Dallas airport braces for Delta restructuring
The Dallas (TX) Morning News


For the second time in 15 months, Dallas/Fort Worth International
Airport officials are assessing the potential damage of a major airline
bankruptcy.

This time it's not the airport's No. 1 tenant, Fort Worth-based American
Airlines Inc., which teetered on the brink in April 2003.

Instead, it's Atlanta-based Delta Air Lines Inc., which says it needs to
radically lower costs to survive. In a filing last week with federal
regulators, Delta said it is plowing through cash faster than
anticipated and could be forced into bankruptcy.

Some industry experts say that as Delta's fourth-largest base, D/FW
operations are likely to be shrunk from a full-fledged "hub" into a
second-tier "focus" city for the airline.

That prospect wasn't at stake when American flirted with bankruptcy last
year. American wasn't about to change its largest and most profitable
hub. 

But a massive restructuring of Delta - in or out of bankruptcy - could
drastically change airport operations, not to mention airfares and how
North Texans fly.

It could also mean layoffs and the elimination of more flight crew bases
here. Delta has more than 4,000 employees in North Texas, down from
6,400 a decade ago.

Delta's restructuring plan will be presented Wednesday to its board of
directors. The carrier isn't commenting further, said Peggy Estes, an
airline spokeswoman.

Business travelers are watching for Delta's next move.

Despite its smaller presence at D/FW, Delta offers direct flights to
many destinations at competitive prices to market dominator American.

If that were to change, there's only one thing Tom Niesen could do. "I
will switch to American," said the owner of Dallas-based Acuity Training
Systems Inc., who flies almost every week.

Mr. Niesen prefers Delta's customer service. But he has already started
booking American more frequently in the last year as Delta replaced many
large planes with smaller regional jets.

Others won't make the switch so readily.

Fran Bartlett, who travels every week in her role as owner of
Dallas-based Federal Liaison Services Inc., said she'd base more of her
flying out of Tampa, Fla., where she has a second home, to stay with
Delta.

"They're just much better than everyone else for customer service," Ms.
Bartlett said.

Chuck Bauer, a Carrollton-based public speaking and training consultant,
worries that prices on some routes would climb significantly if Delta
stopped competing directly with American.

"If Delta went away, I'd start looking at Southwest for more flights
because of their pricing," Mr. Bauer said.

Delta would probably continue to serve numerous destinations, said
Robert W. Mann, an airline consultant who watches D/FW closely. He said
if Delta keeps at least four to six flights a day on key routes, it
could maintain enough of a network at D/FW to keep its most loyal
fliers.

"There's just too much money on the table for Delta at D/FW to walk away
from," Mr. Mann said. He expects Delta to trim its hub here to look a
lot like American in St. Louis.

Last November, American cut its money-losing St. Louis schedule in half,
substituted regional jets for larger "mainline" aircraft and changed the
schedule to target local traffic instead of connecting passengers. The
carrier has been pleased with the results, which have turned the hub
profitable.

The fact that Delta isn't the largest carrier at D/FW could also offer
the carrier an opportunity to "live under American's fare umbrella" for
travelers who want options.

In just about every market, the top carrier "is absolutely reviled by
some people," Mr. Mann said.

Less of a presence Delta's presence at D/FW has steadily declined from
13 years ago, when it flew nearly 35 percent of all airplane seats.
Today, its share has been halved and continues to drop as American
expands and low-fare AirTran Airways and others add service here.

Most traditional carriers are retrenching to their strongest hubs, Mr.

Mann said, by using more of their larger jets to fight low-fare
competitors. Delta may shift large jets from D/FW to the East Coast,
leaving D/FW customers to be served by Delta Connection partners.

Delta has already fiddled with its D/FW schedule. In January 2003, it
reconfigured the hub to have far more regional jets and increased daily
flights on several routes. The results improved D/FW's financial
performance, though airline officials have recently said that "more
work" has to be done here.

"It's difficult to say if they'll ever make money there in the long
run," said Jon Ash of Global Aviation Associates in Washington, D.C. In
the late 1990s, his firm helped Delta design a strategy to use more
small jets at D/FW.

Unless Delta can lower what it pays to its regional jet partners for the
flying they do at D/FW, the hub may never become profitable, Mr. Ash
said. 

The key is luring more local travelers instead of depending on folks
making connections here, he said. Airlines want more local traffic
because it's more profitable. About one-third of Delta's D/FW passengers
begin or end their trip here.

Some industry consultants think Delta will fly more point-to-point
routes - much like low-cost Southwest Airlines Co. - and focus less on
connecting passengers.

D/FW Airport board chairman Max Wells is among those worried about
Delta's future here. The carrier is D/FW's second largest, but it
operates a larger hub in Salt Lake City in addition to its main hubs in
Atlanta and Cincinnati.

"Delta is Salt Lake's only hub airline, so what wouldn't they do to keep
them?" Mr. Wells said, adding that D/FW may not have the same kind of
flexibility because of its commitments to its No. 1 carrier, American.

And airport officials recognize that under bankruptcy, the Atlanta
carrier's options would be severe. "They're going to cut with an ax, not
a knife," Mr. Wells said.

Working together Delta's move could affect D/FW's huge bond portfolio,
though it is unsure how much. Airport officials, who last month secured
the last portion of financing needed to complete the airport's $2.71
billion expansion, have hired consultants to help analyze what the
airport can do as Delta considers restructuring plans. That includes
emphasizing D/FW's local market (which is on pace to supply a record 23
million passengers this year) and suggesting routes that might offer
attractive passenger demand and airfares.

"We're trying to make sure we can do anything in our power to continue
to assist them," said Kevin Cox, the airport's chief operating officer.

"We're confident that Delta Air Lines can be a profitable airline at
D/FW."

Delta could abandon scores of gates that the airport could be
hard-pressed to fill, given the industrywide turmoil.

The airline operates 28 gates at D/FW, comprising most of Terminal E and
a satellite operation. Those gates are under "exclusive use" leases,
meaning the airport couldn't shift another airline into the space unless
Delta agrees. Bankruptcy proceedings could prolong that process.

D/FW has been attempting to cut operating costs and to maximize
non-aviation revenue to offset the impact of the airlines' woes.

"That's not to say there wouldn't be negative impact, but it would
mostly fall on American's shoulders," said Kurt Forsgren, an airports
analyst with Standard & Poor's.

D/FW officials are not alone. Their counterparts at Delta's No. 3 hub -
Salt Lake City International Airport - are also on "bankruptcy watch."

Still, officials there don't expect to see any major changes from their
largest carrier. About 47 percent of the Delta's Salt Lake City
passengers at the airport are local.

The carrier already reduced its service in February, replacing several
large "mainline" planes with smaller regional jets to focus on that
local traffic.

If Delta were to eliminate Salt Lake City as a hub, officials said they
would consider consolidating operations and mothballing unused concourse
space while they worked to attract new air service. Unlike D/FW, Salt
Lake City is a "compensatory" airport, meaning its tenants are charged
fees for use, but the airport is responsible for making sure those fees
cover its costs. (At D/FW, the major airline tenants hold that
responsibility.) 

Even if Delta drastically reduced service, the airport is financially
well positioned with only $65 million in debt and a cost per enplaned
passenger of less than $3, said Tim Campbell, the airport's executive
director. He also pointed to growth among low-cost carriers, especially
its No. 2 carrier, Dallas-based Southwest.

"We're a big enough market that we think we'll still have a good service
pattern," Mr. Campbell said.


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