Delta Air Lines chief Richard Anderson recounts building the world's largest airline during the worst down cycle in living memory
We are sitting at Richard Anderson's dining room table. But we are not breaking bread in the Anderson household. The table resides in Anderson's office at Delta's corporate headquarters in Atlanta. He brought it in to double as a conference table when he returned to the industry to become Delta's chief executive in September 2007. Seven months after Anderson set up his office, table in tow, Delta embarked on a merger with Northwest Airlines. This merger created the world's largest carrier in terms of traffic, with more than 80,000 staff and a fleet exceeding 700 aircraft. Some would describe it as the most seamless airline tie-up to date, despite it occurring just as oil prices soared to record highs and demand vaporised with the onset of the unprecedented global downturn.
All images © Christopher T Martin
Anderson, who was chief executive of Northwest from 2001 to 2004, describes these as "probably two of the most tumultuous years in modern business history". These external dire straits gave Delta a "certain urgency about getting the merger done, because we really did need to pull the combination off successfully to make the synergies work", he says. "When fuel is at these kinds of prices and your fuel bill has gone up a couple of billion dollars, you need to have a couple of billion dollars in synergies to make sure your business plan is going to be viable in any environment."
Delta was not spared from the massive financial bleeding all carriers endured in 2009, posting a $1.2 billion loss as the top 150 global carriers haemorrhaged roughly $7.8 billion. But Delta continues to march towards its goal of achieving $2 billion in synergies from the merger in 2011, projecting $1.5 billion in annual merger synergies by the end of 2010.
Anderson spent 17 years in the airline industry before leaving in 2004 to take an executive position at United HealthGroup. But he returned just three years later after being lured back by what he describes as "just a fascinating businessthere's a certain attractiveness and appeal to the 24/7 worldwide nature of this business". His decision to return was not based on financial prospects. Laughing, he says: "If I were in it for the money I wouldn't have left my last job. I had a great career at United HealthGroup."
Anderson says spending a lot of time engaged in mergers at United HealthGroup, which has done a number of mergers similar in size, was also useful in crafting the architecture of merging Northwest and Delta.
Asked if he plans to stick around in the airline business, Anderson definitely says: "Oh yeah. I'm 55. I was CEO of Northwest when I was 45 and COO when I was younger than that, so I got a pretty good jump on things."
Anderson's well-known attention to detail permeated through the integration process and contributed to Delta exceeding those targets. He lights up when discussing the minutiae of combining two large international airlines. Roughly 26 teams had specific deliverables with their own timelines, capital request and operating expenses. "You had to understand way down in the weeds of the business what each team was doing and what their strategy was," says Anderson. "This was not a top-down strategy. This was really a bottom-up integration process, where you let the real experts have their way with the decision making process and we drove the process on a daily, hourly basis, just about."
Managing the merger from the ground up helped Delta avoid the tricky technological challenges that plagued US Airways and America West in March 2007. Their reservations system migration resulted in several hundred delayed flights and long lines of frustrated passengers queuing up to check-in.
"The biggest challenge in any merger of this size is technology," Anderson explains. Legacy airlines in particular have less flexible mainframe applications and data integration is key. Delta deliberately tested the technology and related business processes, says Anderson. "We had no [meltdowns], and we planned to have no massive meltdowns."
Anderson believes Delta was successful in dissolving any competitive concerns about the merger, saying those worries "have wholly failed to materialise". But consolidation alone cannot fix the industry's chronic revenue degradation. Shortly after Anderson took the helm at Delta, he offered a frank assessment of the industry to a local newspaper. "We have to be able to look back and say we solved the business-model problem."
Delta and virtually all the US majors now, more than ever, appear to be zeroing in on the balance sheet degradation that has plagued the industry for about three decades, says Massachusetts Institute of Technology airline analyst William Swelbar. A recurring theme expressed by Anderson and other members of Delta's management is de-levering its balance sheet, with the carrier's stated goal of reducing its net debt from current levels of roughly $15.6 billion to $10 billion by 2012.
Anderson stresses the importance of creating a viable business model that serves employees, communities and investors. "Our equity shareholders deserve the kind of returns on capital that a highly capital intensive business requires," he says. One issue he feels strongly about is eliminating export credit subsidies which support aircraft financing. Anderson believes the market has been distorted through "overcapacity as a result of the US government providing billions and billions of dollars of below-market financing for Boeing airplanes". He says this means home airlines suffer. "I believe the airline business provides far more jobs and economic activity than the four principal aircraft manufacturers."
Anderson also believes part of the onus for sustainable industry profitability lies with the manufacturers. In a stern tone, he says airframers "have got to produce airplanes that have demonstrable returns" over the long cycle. If they fail to deliver aircraft meeting those expectations, the chief of the world's largest carrier warns: "We're not going to buy them."
Delta needs to revamp its narrowbody fleet before turning to widebody replacements. "We really need clear guidance from the manufacturers about what their intentions are in terms of innovation," Anderson says. He sees opportunities for both re-engined narrowbodies and a clean-sheet design. And while Anderson believes the "next-generation narrowbody needs to be developed", the only way to deliver 15-20% fuel efficiency improvements during the next five years is via re-engining.
The US carrier is also monitoring development of Bombardier's CSeries. Anderson says the airframer is "pretty far down the road in their new narrowbody platform, which once again shows - at least from what we read - an airplane that has substantially better fuel efficiency than the existing single-aisle airplanes in service today".
Delta inherited an order for 18 Boeing 787s through the Northwest merger, although it is yet to fix its delivery schedule. But Anderson is complimentary about the twinjet and believes technological know-how is transferable to future designs. "I think Boeing has actually done a pretty remarkable job on the 787. When you look at what that airplane was originally designed to do, it is a real step change," he says. Combining the aircraft's composite fuselage with more efficient engine, Anderson believes "the technology is a solved problem, actually, for a next-generation narrowbody".
Despite this praise, Anderson is not concerned about his competitors, Continental and American, introducing the 787 before Delta. Explaining Delta's widebody strategy, he stresses the carrier has 167 transoceanic aircraft with an average age of 11 years, including 10 777-200LRs with more range than the 787. Overall Delta has about 50 aircraft capable of operating 12 hours or longer and, citing Delta's $1 billion investment into its widebody fleet to overhaul the interiors with lie-flat seats, in-seat power and individual in-flight entertainment, Anderson simply says: "We're making the right investments. We have the right fleet."
Turning to network, now that Delta's combination is essentially complete, Anderson does not necessarily see gaps, but instead stresses the importance of strengthening its SkyTeam alliance ties. Delta already has substantial oceanic reach through its joint venture with partners Air France-KLM and Alitalia and anti-trust immunity with Korean Air.
NO NORTHWEST SENTIMENT
Delta's chief participated in a merger with the carrier where he spent the bulk of his airline career. When asked if he feels sentimental about the Northwest brand disappearing, without the slightest bit of hesitation he gives a definitive "no. Not at all."
He explains: "It was very much a business decision. It needed to happen, and it needed to happen quickly because that was in the best interest of everyone involved. Some people may not have seen it that way because they have an emotional tie to it, but it needed to go as part of the merger."
Prior to Anderson's arrival at Delta the carrier had warded off a takeover by US Airways. He explains that at the outset of the merger with Northwest, keeping the Delta brand was one of the commitments the carrier's management made to employees in Atlanta. "We said the airline would be headquartered in Atlanta, Georgia and it would be called Delta Air Lines," says Anderson.
Another pledge which he made to Delta employees was that the Delta culture would be ascendant. "The culture here at Delta is a very important part of what Delta is. And that is one of the reasons why the airline has been so successful," he explains.
Regardless of the outcome of the upcoming union elections, which threaten Delta's status as the only predominantly non-union US major, Anderson vows: "We won't allow whatever happens to change the way we treat our people. It won't slow down our pace and it won't slow down our focus on doing what is right for our employees".
He seems unconcerned about American, British Airways
receiving their long-awaited transatlantic joint venture approval. "You'll essentially have three alliances across the Atlantic and those alliances will compete robustly. They'll be operated by capable airlines that have been in the marketplace a long time, and the markets will be very contested." Delta is contributing to that fierce competition by attempting to seize London Heathrow
slots that the oneworld carriers were required to relinquish. It has proposed year-round daily flights from Boston
to put a dent in oneworld's Heathrow edge.
Even as Delta tries to expand its Heathrow access, Anderson remains bullish about the "first mover" advantage Delta, Air France-KLM and now Alitalia have over Star and oneworld. It has already established a transatlantic joint venture with annual revenues projected to surpass $10 billion. "We really operate it as a single airline and I think that model has proven itself. If you look at alliances around the world, it probably is the only really true alliance that has created significant value as a result of the alliance combination." Touting the strength of the joint venture's Amsterdam, Atlanta, New York, Paris and Rome hubs, he says "we're well positioned in the transatlantic to compete with any of these alliances".
Describing execution of the Northwest merger, Anderson talks about taking decisions "early, quickly and definitively". It appears the same philosophy applied to Delta's swift attempt to woo Japan Airlines away from oneworld in late 2009 and early 2010. Attempting to seize Heathrow slots relinquished by oneworld and Delta's efforts to lure JAL away "are not your father's Delta", says Swelbar. Those calculated moves speak of a direct and aggressive style that Anderson has no fear of displaying to keep Delta competitive.
Now JAL has opted to remain with oneworld and is seeking approval for Pacific anti-trust, Anderson seems unfazed, and prefers to talk about SkyTeam's Pacific strategy going forward. A key win for the alliance was securing a commitment from China Eastern to join the group after an intense competition by all three alliances to court the carrier into their respective folds. Anderson believes SkyTeam's transpacific position has been strengthened by the addition of China Eastern and Vietnam Airlines into SkyTeam, the alliance's growing ties with Garuda Indonesia and Malaysia, Delta's anti-trust with Korean Air and growing relationship with V Australia.
Building on Delta's strength in Tokyo and Korean's hub in Seoul, Anderson foresees expanding that power to China Eastern's Shanghai hub and China Southern's hub in Guangzhou. "China is still the real burgeoning and developing market for us, and our relationships with China Eastern and China Southern are really important," says Anderson. He also believes anti-trust with Korean Air can evolve even further, "along the lines that we've done across the Atlantic".
Yet Tokyo remains the mainstay of Delta's Pacific network through Northwest's entrenched ties at Narita airport. But oneworld partners American and JAL and Star carriers All Nippon Airways, United and Continental have applied for transpacific anti-trust as part of a stipulation of the US-Japan Open Skies accord reached in late 2009. Those carriers have key footholds at Tokyo Haneda airport, which is 35km (22 miles) closer to the city centre than Narita, making it more attractive to lucrative business travellers. And, after a fourth runway opens at Haneda in October, the mostly domestic airport will begin handling scheduled international flights.
Delta has received two of four daily slots allotted to US carriers under the Japan-US Open Skies accord to serve Haneda and plans to start flights from Los Angeles and Detroit to the airport in January.
While some would criticise the Japan-USA Open Skies pact as sub-par in terms of truly open access, Anderson commends the US government for "cracking the barrier there. We were in favour of it [Open Skies] provided we got real access [to Haneda]". But he believes progress needs to continue: "We need to be able to put a dozen flights into Haneda and run our hub out of Haneda, not out of Narita. We need the ability to buy and sell [slots] with all of our alliance partners, so there is just a whole series of those kinds of free market evolutions that need to take place."
Anderson's focus on strengthening Delta's global network through SkyTeam is balanced by an impending historical union election after the government altered 85-year-old representation guidelines. Now unions can get representation by winning the majority of votes cast, rather than endorsement from the majority of employees in a specific work group. More than 21,000 Delta flight attendants and roughly 30,000 ground workers are voting or preparing to vote for union representation. If the unions prevail, Delta's status as the only US major carrier that is predominantly non-union could be drastically altered.
Like other carriers, Delta sued to block implementation of the new rules, but ultimately failed to keep the old procedures in place. Delta will now "respect the process", but Anderson highlights the partisan framework that governed the rule change and warns it sets a precedent that "the rules can change at the whim of whoever is in office. I think that when the Republican party gets back into power things are going to change again."
He also believes "we'll win the elections", stressing the carrier has delivered on every pledge to employees the company laid out at the beginning of the merger process. Those commitments included an equity stake, industry standard pay by the end of 2010, fair and equitable seniority integration and no involuntary frontline employee layoffs.
Now that the bulk of the integration of Northwest is complete, is Delta finished for the time being in participating in industry consolidation? Delta's chief offers a smile and says: "I wouldn't comment on that."