WHINE AND CHEEZ
by Sean Mendis
Delta's new Low Cost Carrier
11 November 2002
So Delta finally launched their low cost carrier. Whoopdie doo. The press conference was probably one of the most anticlimatic events of the year, ranking right up there with the "Guess the Bankruptcy Date" pools for UAL.
A quick summary for those of you who blinked and missed the whole thing.
* Will launch in 2003
This operation is gonna be headed by John Selvaggio, most famous for his exploits at the original Midway airlines (now thats a success story to aspire to) and most recently head of ACS at Delta. Joanne Smith, the lady in charge of customer service for the carrier comes to Delta from DHL where I'm sure all the packages they transported were very pleased by the inflight service they received.
So what does this mean. Depends whose perspective you are examining it from.
If you are a consumer in one of these markets, this means good things in the short term. Even though Delta already matches the LCC low fares in these markets, they do so with mainline cost structures meaning that yield management tightly controls the amount of inventory available at these fares. With the lower cost structures of the dedicated LCC, there will be significant increases in the quantity of seats sold at the low fares and that translates to an overall perception of low fares.
If you are a consumer in another Delta market, there is a significant possibility that you will see a loss of 757 service as these 36 planes are "reassigned" to the DAL-LCC markets. But don't fear, these will be replaced by the coveted 20 year old 737-200s. Bet ya never thought a Regional Jet would look attractive. Fares will likely remain the same, unless you live in one of the three cities that have been designated as pilot markets for a separate simplified fare structure initiative (offhand these are CAE, TRI and some other obscure place).
If you are an employee of Delta (other than a pilot), be vewwy vewwy worried. This is what you guys get for not taking the many chances you had to unionize over the years. Now you are gonna watch yourself furloughed from mainline and then picked up to do the same job and more at a lower scale for the DAL-LCC. Some payback. There is also talk of "streamlining traditional processes through automation" which is a fancy term for kicking your ass out onto the street and getting a machine to do your job. If you survive this round of furloughs, keep in mind that your luck wont hold out indefinitely and act accordingly when the AFL-CIO next comes calling.
If you are a LCC such as Southwest or JetBlue, I'd definitely be watching developments with concern. Selvaggio speaks of reducing CASM on the DAL-LCC routes to 20% below mainline costs, but without reducing pilot compensation. Most of these reductions will be operational streamlining, which means that these will be SUSTAINABLE savings and will not be significantly affected by labor rates. JetBlue especially needs to be worried because their primary advantage right now comes from lower labor costs and high fleet utilization, advantages that will be lost as the workforce develops seniority and as growth occurs and the fleet matures. Southwest will be disadvantaged by the fact that the DAL-LCC can essentially offer nonstops on 757s for the same price as their 737 scenic routes via everywhere but grandma's house.
Other initiatives on the cost side for the DAL-LCC include 50 minute turns. This won't be particularly hard above the wing because catering will be minimal, but an addendum to that observation was a comment that they are looking into Fully Automated Baggage Handling Systems. This points to some sort of containerization of the 757, which would be interesting to say the least. Staffing would be reduced to a flat 4 FAs in the cabin. Reservations will be transitioned to a Voice Activated Transaction System eliminating more costs (and more jobs) there. And of course, a 13.2 hour target daily fleet utilization which is very ambitious. Selvaggio said that the target CASM was proprietary, but (and wait for this) it begins with a 7. I dunno about you, but asking Delta employees to cut CASM to any number that begins with 7 is like asking the CAL ALPA chapter to elect Frank Lorenzo as MEC Chair. Hey, what's Ron Allen upto nowadays anyway?
On the revenue side, the thrust is to simplify fare structures. That means a standardized pricing scale ranging from the cheapos offered to match the LCCs to a walkup that they promise will be capped at $299. Sounds good in theory, but of course the voodoo science of yield management will determine whether this idea takes off or falls flat on its face. Either way, we are looking at diluted yields compared to mainline operations, mitigated by the reduced cost structure and hopefully producing a positive RASM/CASM spread.
Oh, I almost forgot. I don't know why some folks have the idea that there will be PTVs offering DirecTV aboard these 757s. Whoever came up with that rumor has gotta have been smoking something funny. There is a $75m budget for all costs associated with the fleet transition and somehow I doubt that this includes an enhanced IFE system. Fred Reid did admit that they are looking at "alternate IFE technologies" but no comment on specifics as yet.
Also, mileage junkies will be glad to note that there will definitely be a link to the Skymiles program. Exactly what this link will be is not decided yet. However, Skymiles is a huge marketing tool that Delta has at its disposal and they would be fools not to leverage it as much as possible to incentivize traffic away from the LCCs.
And finally, onto branding. Its pretty obvious that this is not gonna be called DeltaLite or DeltaFlot or any other concoction formed by adding some cutesy suffix. In fact, its been made very clear that "Delta" will not feature prominently in the new carrier's name. We'll have to sit tight until February to find out what exactly the name will be. The official line is that "Delta plans to announce the new unit's name, product and service elements prior to the launch of service in 2003". Hello Captain Obvious! Have you ever heard of any new business announcing its name AFTER launching service?
Well, thats about all I have on this immensely underwhelming inaugural column. Au revoir and safe flying till next time.
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