From the Atlanta Journal-Constitution: http://www.ajc.com/business/content/business/delta/stories/2006/10/14/1015sbizdelta.html?cxntnid=biz101606e Delta's planners take on world Restructuring airline not afraid of exotic locales By RUSSELL GRANTHAM The Atlanta Journal-Constitution Published on: 10/15/06 Not long ago, proposing a nonstop route between Atlanta and Dubai, the United Arab Emirates city known for its sculptural skyscrapers, might have gotten you laughed out of Delta Air Lines' executive offices. Not these days, according to the route planners who are leading the Atlanta-based airline's second year of wholesale expansion overseas. "It's not so outlandish anymore" to suggest exotic locales, said Robert Cortelyou, Delta's vice president of network planning. "We have a track record." So when route planners presented their latest picks ? including a Dubai route announced last week ? to CEO Gerald Grinstein and other top executives for final approval, it was "really just a formality," added Glen Hauenstein, Delta's executive vice president for network and revenue management. "I think the beauty of this management team is we have a lot of trust in each other," said Hauenstein, hired 18 months ago from rival Continental Airlines. That trust is being put to a test as Delta counts on new overseas routes to help power its recovery effort. It has added or announced more than 50 new international routes in the year since filing for bankruptcy court protection. The goal is to catch up with rivals that get about 40 percent of their revenue from overseas. Delta, whose percentage was half that a year ago, expects to hit 35 percent this fall. Next spring, Delta rolls out several new Atlanta routes, including Dubai; Prague, Czech Republic; Seoul, South Korea; and Vienna, Austria. The airline will also add flights from New York's Kennedy airport to Bucharest, Romania, and to the northern Italy cities of Florence and Pisa. While most of the new markets are conventional picks, one of the challenges is to select those that aren't too heavily covered by competitors. So many of Delta's new routes are to destinations where no other U.S. carrier flies nonstop, including most of its recent trans-Atlantic additions. Like "value" investors who hope to unearth gold in overlooked stocks, Delta is targeting destinations in emerging economies such as Bucharest and Dubai because they are fast-growing and potentially lucrative. Dubai is the second-largest Middle East destination, after Tel Aviv, Israel, according to Delta, but Emirates Air is the only carrier that offers nonstop service, to New York. Bucharest ranks only 37th among trans-Atlantic destinations in terms of passengers, but Delta said it is the largest market that has neither a flag carrier nor nonstop service to the United States. "We think the first one there gets it," said Hauenstein. So far this year, Delta has opened 11 new trans-Atlantic routes and dozens more to Latin America. They included second-tier destinations such as the Ukrainian capital, Kiev, and Dusseldorf, a German industrial city. Later this fall, Delta is venturing into Africa with flights to Johannesburg, South Africa; Dakar, Senegal; and Accra, Ghana. It's also seeking rights to fly to China. Andreas Renner, who runs Delta's eight-person department in charge of coming up with international route ideas and plans, said the carrier's success with its Atlanta-Moscow route launched last year emboldened the team to look at other emerging markets. Within a few months, the jets to Moscow were flying 80 percent full even in winter, he said. The team began scouring traffic data for destinations that draw heavy traffic by charter airlines and business jets, but have little or no nonstop service by commercial airlines. Delta is still expanding on more traditional routes as well, he said. For example, Delta is beefing up its service to London's Gatwick Airport, the fourth-largest trans-Atlantic market in terms of passengers, with a daily flight from New York next month and a second flight in April. The addition complements London service Delta already has from its Atlanta and Cincinnati hubs. Renner said Delta is also watching for markets where it can jump in if a competitor falters. When Mexican regional carrier Aerocalifornia was grounded for months by maintenance problems earlier this year, Delta announced 21 new routes out of Los Angeles. Service will begin this winter to cities in Mexico, Central America and the United States. "For every new market, we have at least one backup," said Renner. "We look at a lot of markets." Stuart Klaskin, partner at KKC Aviation Consulting in Miami, praised Delta's new route-picking strategy as a smart way to capitalize on the traffic-gathering ability of its Atlanta and New York hubs and use its jets more profitably than flying to Florida or Paris. "I think maybe they're maturing," he said of Delta, which for decades has been known mostly as a domestic carrier. "Ten years ago, I never would have thought Delta would have put its brand into a small market like Accra," he said. The New York-Accra route, which launches in December, will quickly yield "a very good premium," he predicted. "They will essentially own that market very quickly." Delta hopes to get more than $1 billion of annual cost savings and new revenue ? more than a third of its overall turnaround target ? from the network overhaul. The airline is shrinking its domestic operations by 20 percent and boosting international operations by 25 percent by grounding aircraft and shifting long-range jets to international routes. Several U.S. carriers have ramped up their growth overseas, where fares are typically more lucrative, discount competition is sparse and foreign carriers often have higher costs. Delta and Continental, in particular, have been racing to open foreign routes over the past year. The jury's still out on how Delta's expansion is going. Delta says nine out of the recently opened 11 trans-Atlantic routes are ahead of its projections, but it hasn't disclosed financial results. "I think it exceeded our own expectations," said Hauenstein. The move overseas also helps Delta thin out its domestic network, which in turn makes it easier to boost fares because the seat supply is smaller. In the second quarter, international passenger yields were up 4 percent. But the measure of passenger revenue from each ticket sold was up 21 percent for domestic flights. Delta's unit revenues have long lagged the rest of the industry because of its historic emphasis on flying vacationers to Florida, for instance. But the past year's shift overseas has helped raise Delta's unit revenue to 92 percent of the industry average, from 86 percent a year ago, Hauenstein said in a memo to employees late last week. Klaskin cautioned that Delta won't know whether its route picks are a success until they are in operation for a full year. He said Delta needs to be disciplined about pruning routes that are still weak after a year. "They're not all going to be successful. That's how it works," he said. Hauenstein said Delta has worked to improve its odds by negotiating with most of the overseas cities for revenue guarantees, marketing help or other subsidies to help offset its start-up costs. "Without some of those subsidies, I think we would have had a different list," he said. Delta hasn't released figures on how specific routes are doing. But Hauenstein said the airline's 5-month-old service between New York and Budapest, Hungary, is profitable. Delta executives also described Moscow and Dusseldorf as successful. But Delta is struggling with its New York-Kiev route, said Hauenstein, partly because the airline is still working to win over New York travel agents and customers ? many of them Ukrainian immigrants ? who still gravitate toward Ukrainian flag carrier Aerosvit Airlines. Pam Elledge, Delta's vice president of sales and distribution, says she's convinced Delta can win over customers and cash in on the route to Kiev, whose skyline is filling with construction cranes. "When you're over there you can just feel there is growth that is about to happen, but it could be two years," said Elledge. Even if the Kiev route hasn't been a resounding success yet, added Bobby Spann, Delta's director of international sales development, "the aircraft is doing better than it would have been doing flying domestically." Meanwhile, Delta's route planners are poring over traffic data for more international routes, because the carrier still has dozens of jets that it can point overseas. "We are the only network carrier still flying long-range planes on domestic routes, and there are a lot of them," said Hauenstein. "We have no shortage of long-range-capable planes as far as the eye can see." Find this article at: http://www.ajc.com/business/content/business/delta/stories/2006/10/14/1015sbizdelta.html