Delta Air Lines is struggling to reach a deal with its pilots over the launch of a low-cost B737 operation to go head to head with ValuJet, as the no-frills Atlanta-based carrier turns up the heat by launching into USAir's heartland.

Delta management, which is seeking $340 million in annual concessions from the pilots, still has a large gap to close with its pilots after Alpa rebuffed new contract proposals in mid-January and notified its members of a strike ballot 'in the very near future.'

Although the two sides had previously reached a tentative agreement on domestic scope and job protection issues and the B737 operation, at presstime they still were divided over pay (management wants a 7 per cent wage cut, Alpa offered none); a board seat and common stock for the pilots (both opposed by management); benefits; and scope issues for international operations.

Management now intends to seek help 'at the highest level of the National Mediation Board' to break the deadlock, pointing out that expansion plans by Delta's low-cost competitors 'threaten more than 22 per cent of total revenue.' The use of mediation must raise doubts about the carrier reaching a deal with the pilots by March - the target date investors were given in the third quarter of 1995.

Meanwhile, ValuJet has shifted its sights on to USAir, without taking its eye off Delta. From March the carrier will launch services from Atlanta to both Pittsburgh and Charlotte, USAir's two prime hubs, which are also served by Delta. ValuJet officials say they fully expect an 'aggressive competitor' like USAir to match the deeply discounted fares on the new routes.

Although ValuJet continues to post gains in both yields and load factors (the latter were up 4.9 percentage points to 68.8 per cent in 1995, against a 45 per cent break even), USAir's 'aggression' and a somewhat more offensive pricing posture by Delta are beginning to take a toll on its otherwise stellar track record.

Research by financiers PaineWebber shows that in markets where ValuJet faced no real price competition, its average load factor was 59.6 per cent in September, against 49.5 per cent in more contested markets - a gap of 10.1 percentage points.

In October - the first month in which Delta adopted a more aggressive pricing strategy against ValuJet - this gap increased to 12 points. At present, Delta matches ValuJet's prices in 19 out of 24 nonstop markets in which the two compete. A response from Delta in the other five could pose an even more serious challenge.

Brian Harris, an analyst for S G Warburg in New York, suggests ValuJet's ambitious expansion programme could falter if and when Delta's low-cost B737 operation ever gets off the ground. He points to ValuJet's operating margins out of Washington/Dulles, where it competes with USAir, which have been in the high teens, compared to 40 per cent out of Delta's Atlanta hub. He warns that as ValuJet grows it 'will hit tougher and tougher competition that could impact its margins.'

A re-energised Delta would not signal the beginning of the end for ValuJet, argues PaineWebber's Sam Buttrick, but rather 'the end of the competitive honeymoon. At the end of the day, ValuJet's margins won't stay at 30 per cent, but they'll normalise over time in the 15 to 20 per cent range, which is hardly a devastating outcome.'

Jane Levere

Source: Airline Business