Aviation Q&A: Richard Anderson By Arnie Weissmann / January 09, 2013 Share 1 -- Richard Anderson, CEO of Delta Airlines, the largest airline in the world, spoke with Travel Weekly Editor in Chief Arnie Weissmann last month for the "Executive View" article in our Preview 2013 issue. Due to the format of that article, only a small portion of what the two discussed could be reported. What follows is the balance of the conversation with Anderson, including his thoughts about industry consolidation, Delta's 49% investment in Virgin Atlantic, its ability to be the first airline to make New York a hub, Delta's relationship with travel agents and the decision to move MLT Vacations from Minneapolis to Atlanta. The previously published portion focused primarily on the financial environment Anderson expects to operate in this year. Regarding that, Anderson was generally optimistic, saying that, fiscal cliff issues aside, "2013 is shaping up to be a good year from Delta's perspective." He cited solid macroeconomic fundamentals in most areas of the world, lower oil prices, strong bookings and yields and high liquidity. We rejoin the conversation from there. Travel Weekly: Do you think that all U.S. legacy carriers would share your optimism?Richard Anderson: I think that overall, yes, based upon what I read from the sell-side analysts that publish pieces on Wall Street and from the investor presentations that are in the public marketplace. Because if you think about how the industry in the U.S. is positioned today, it's a much more financially stable industry. Consolidation has helped build a more stable industry. Airline networks have restructured to be certain they can manage through the volatility of the economy. Industry margins are approaching historically high levels when adjusted for fuel prices. And airline [capital expenditures] is fairly disciplined. So when you take all those factors together and you look at where the industry is today vs. where it was in 2008, it's much stronger and much more mature. Travel Weekly: On the topic of fuel, you bought a refinery. Does that allow you to sleep any easier at night?Anderson: Well, yeah, it does. The refinery is really about making sure that we don't treat any part of our enterprise as uncontrollable. The most important part of fuel for the airline industry is fuel has to be part of the price of the ticket. So think of other energy-intensive industries. How about public utility companies? They get something called a fuel-cost adjustment every month on their bill. They're actually more cost-sensitive from a product-production standpoint than airlines, because if you run a major public utility, you have all the costs associated with natural gas or coal or wind or solar. And that industry, or the railroad industry, the trucking industry, the UPS and FedEx business models, are just as dependent upon diesel or carbon fuels. But those industries [adjust] regularly through the cycle. So what this industry has to do is do the same thing, so that we can continue to invest and buy airplanes and provide the levels of service that fuel our economy. And so the refinery is an important part of that for Delta, but overall for the industry, investing in fuel-efficient airplanes, managing capacity to match demand, and having a business model that properly captures the cost of goods sold is ultimately the key to success. Travel Weekly: What does your investment in Virgin Atlantic mean for Delta? And will you see any of the benefits you would expect in 2013?Anderson: Well, we're really going through much of the regulatory process in 2013, so we wouldn't expect, until [we've finished that process, that we're going to do] anything that is not otherwise allowed today, given the current circumstances between the two parties. There are some basic codesharing, frequent-flyer exchanges and the like that we can do that are tested and true, but we're going to assiduously follow the rules to be certain that we get the approvals in advance of any sort of activities that require antitrust immunity. That said, there will be some limited ability in 2013 to capture some of the opportunity, but the real opportunity will come once we have full approval. What each of these mean, as we think about how the industry is evolving around the world, [is that] the industry around the world continues to consolidate, and Delta continues to participate in that consolidation. And, really, our investments in Virgin Atlantic, Gol, Aeromexico, the slot swap between Delta and US Air, are really all about building a sustainable network and in an environment of domestic and international consolidation. So those are really important, important steps for us because we grow both organically and inorganically as an enterprise. Travel Weekly: Many of these potential benefits -- codeshares, frequent-flyer exchanges, feed traffic, schedule coordination -- can be obtained with alliances and joint ventures. Why go the equity route?Anderson: The equity route in the case of Virgin Atlantic was to really buy out another partner and take a major ownership role in the company and a governance role subject to British law that would allow us to have very deep, immunized cooperation with Virgin. In the case of Gol and Aeromexico, you're solidifying long-term, exclusive relationships. Given where foreign ownership laws are and the nationality clauses and the various bilateral agreements, the effective vehicle may sometimes be a pure joint venture with antitrust immunity, as we have with Air France-KLM. So we have a lot of experience with these sorts of relationships. And they evolve all the way to the kind of relationship that we have with Aeromexico, which is very successful and is a long-term commitment between the two firms to grow business between the U.S., Mexico and points beyond, in a way that we wouldn't have otherwise been able to do without an investment, a board seat and incredibly close cooperation. (Click here or on the image, right, for a view of the overall on-time arrivals for U.S. domestic airlines for the 12 months ending October 2012.) Travel Weekly: It seems that if you have one geographic area that seems a bit weak in terms of coverage, it might be the South Pacific, and that appears to be true of SkyTeam in general, to some extent. Do you feel you are doing enough to improve your strategic position there, and if not, what might we see going forward?Anderson: You know, as a general rule, we're probably not going to talk about future potential commercial moves, but we have antitrust immunity with Virgin Australia, and that has proven to be a good relationship for us. And we have [Indonesian airline] Garuda coming in to SkyTeam. And of course, we serve Thailand, Singapore, and Australia directly by Delta. So when we look at the networks where we have positioned ourselves, it is perfect for the business markets that we serve. Suffice it to say that we continue to be opportunistic with strategic investments and opportunities around the globe. Travel Weekly: You've increased your presence in New York greatly. Is that paying off for you, and what do you expect it to mean in the future?Anderson: Yes, it is. And 2013 will be a very big year for us because we complete our construction of the LaGuardia expansion. That means Terminal C and D are connected and we've completed all of the renovations of the facility: jet bridges, bag systems, the connector, everything from new P.A. systems to security systems, backbone and infrastructure for technology, expanded security checkpoints, expanded and renovated clubs with a total freshening and cleanup of the facility with our partners at OTG [an airport restaurant operator]. So that will all get done at LaGuardia, and we've had amazing success with the increase in capacity at LaGuardia. We haven't seen any diminution in our revenue per available seat mile, so it will continue to be successful because it uniquely provides convenient access to the U.S. for businesses in Manhattan. And as such, as the largest aviation market in the world, the positioning there is quite good. It's the first time a carrier has been able to put together a hub position in LaGuardia. So consolidation has really helped the consumer in New York by offering many more seats, much more competition and tremendous convenience. That's important. The second piece is our new terminal facility in JFK, which will open in May. We are getting very close to being able to consolidate all of our international operations at JFK on Terminal 4 with KLM and Virgin. So it's going to be a good time for Delta in 2013 because many of the investments that we've undertaken over time, and the work we've done over several years to build the franchise, will come to fruition. Travel Weekly: Generally speaking, carriers are trying to reverse the trend of commoditization through marketing and technology solutions that might differentiate their brands. Can you highlight some of the things that you've been doing in this area?Anderson: Well, I think the first thing that we've done is, we've run an incredibly reliable operation. If you look at the performance metrics at Delta around the world, whether it's Pacific, Atlantic, Latin, U.S. domestic, the combination of all of that -- DOT complaints, denied boardings, disability complaints, on-time performance in the Pacific, lost bags -- all of that, Delta is head and shoulders above the worldwide industry on just the pure numbers across all those enterprises. The amalgamation of those metrics is stellar. And when you look at our completion factor year to date, I don't think a mainline airline has ever had a 99.5% annual completion rate in the history of the DOT rules. So the point of it, first and foremost, is to run a stellar operation. We've invested quite a lot in making sure that happens. Second, significant technology investments: full lie-flat beds; essentially three-class seating across the mainline in our larger regional jets, with Economy Comfort, Business Elite and our new Slimline seating in economy; improved in-flight entertainment systems; WiFi, [with] international WiFi being installed as we speak on our first international wide-body airplane; and a massive amount of technology for the consumer. You know, our iPhone app is one of the featured apps by Apple. We recently won airline-technology awards for empowering our customers with really good mobile technology and airport technology. And we're going to continue to make those investments. We built a new international terminal in Atlanta. We're opening a new terminal, T4, in JFK. We have a significant refurbishment project completed in L.A. We're building a new lobby in Seattle. Salt Lake City is getting a new terminal. Minneapolis is going to get a dramatically expanded and improved international arrivals facility. We have a hundred 737-900ERs coming. And most importantly, we're moving the 50-seat jet out. And the 50-seat jet now will only be in markets that are logical for 50-seat jets. They won't be going from Atlanta to Buffalo, N.Y. They'll be going from Atlanta to Albany, Ga., and we'll be flying big, mainline airplanes in a logical way in the eyes of the passenger to all of the longer-haul markets. I think that's going to be very big because we'll have three classes, either large regional jets or our large mainline airplanes, on everything but the small regional cities within a few hundred miles of our hubs. Travel Weekly: What do you think the likelihood is that American will merge with US Airways, and do you think that might help either of them?Anderson: Well, I think there's a certain logic to it, and when we read the newspapers every morning from around the country and the analysts' reports from the sell-side analysts, there seems to be an inevitability to it, and I think it will be good for the industry because to have American in bankruptcy points to the instability of the organizational construct. And so if you just read the sell-side analysts and everything coming out of American and US Air, it seems inevitable, and I think, overall, it will be good for the industry. Travel Weekly: Delta is remembered by a lot of travel agents as the airline that began the commission caps and cuts. So how do you view your relationship now with the agency community, and how do you see it developing going forward?Anderson: I think the agency community plays an incredibly important role for Delta and continues to play an important role for Delta. The large travel management companies (TMCs) provide an essential role in the management of the travel ribbon for businesses around the country. And in that regard, they have an important and unique role that we can't replicate: To be able to manage all of the T&E expense, manage sales conferences, other sorts of conventions, and provide security services, concierge services and the like for their corporate customers. So that's a very important relationship, because when you think about corporate travel and business travel in the U.S., there's the airline, the providers, the TMC and the client. We're always working in a symbiotic way with the TMC and the customer. And that will continue because they play a very important role in how the travel ribbon is managed in a large corporation or any other good business customer that has an agency relationship. (Click here or on the image, right, for a larger view of a chart depicting consumer complaints: Delta compared to the industry as a whole.) Travel Weekly: How about with leisure agents?Anderson: We still have a massive leisure business with agents in the U.S. and particularly overseas. And that's important. There's the cruise traffic. We're still a very big cruise provider. And in the specialty business and a lot of the ethnic markets, we continue to have long and deep relationships, particularly in Asia, particularly in Asia point-of-sale. So it's still a very important part. Obviously, the piece that's changed in part is the advent of the Internet travel sites, and we continue to have good relationships with the key Internet travel sites. And we have made a very significant investment in Delta.com. It's been replatformed now, an investment of over $100 million to provide a world-class booking experience, not just for airline travel but also for hotels and rent-a-cars. It now represents about 40% of our tickets. So for the leisure traveler, there's still the great service from Delta reservation sales and a great website, but we also have good partnerships with the online travel agencies and a handful of some of the megasearch agencies. What we want to do is give our leisure customers choice of where they want to book and how they want to book, and we support that with some good relationships, healthy relationships with the online travel agencies. [And] also giving a good, flexible channel with a lot of good travel management tools on Delta.com. Travel Weekly: What was your thinking in moving MLT Vacations from Minneapolis to Atlanta?Anderson: Well, one, there are synergies that come from that sort of consolidation, which are important overhead considerations, and second, we want to make sure that MLT is well-integrated into Delta.com. MLT is a great package-tour operator. It's one of the largest purchasers of hotel rooms in the U.S., and they have a lot of deep knowledge and know-how on how to work in the package tour business and to work closely with agencies. It's not just a retail chain, it's a wholesale chain. You know, MLT still has a traditional model on the bricks-and-mortar side to support package tours, and we're going to continue that business. But we also wanted to make sure we were integrating it well into Delta and integrating it well into Delta.com. Email Arnie Weissmann at email@example.com and follow him on Twitter.