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Saturday, July 27, 2002

Delta studies low-cost rivals


Consultants report on ways to combat growing competition

By James Pilcher, jpilcher@enquirer.com
The Cincinnati Enquirer

        Delta Air Lines has finished a study on its low-cost competition and could be looking at ways to combat the likes of Southwest, AirTran, JetBlue and ATA.

        Officials with the nation's third-largest airline confirmed Friday that the recently completed study, conducted by outside consultants, was presented to the Delta board of directors earlier this week, but they would not comment on what, if any, actions are being considered.

        “Every airline studies its competition,” said Delta spokeswoman Kristi Tucker, who said the study was “not for public consumption,” so she would not offer details.

        So it remains to be seen what, if any, impact potential changes would have on local travelers.

        Cincinnati/Northern Kentucky International Airport does not have any low-cost competition for Delta, which operates its second-largest hub locally and dominates the local market. The Department of Transportation has reported that Cincinnati has the second-highest average airfares in the country.

        Still, any changes could directly affect surrounding airports such as Louisville, Lexington, Dayton, Columbus and Indianapolis, all of which have low-cost carriers.

        Wall Street airline analyst Jim Higgins said about 65 percent to 75 percent of Delta's system is overlapped by a low-cost carrier and that he was encouraged that Delta was looking to fight back against the likes of Southwest, which Delta chairman and chief executive officer Leo Mullin has deemed the airline's top competitor.

        “I'm a little puzzled at how they would actually do it, though,” Mr. Higgins of Credit Suisse First Boston said.

        The last time Delta took on such competitors, it created Delta Express in 1996. The unit, which offers lower fares and flew only to Florida leisure destinations, proved somewhat effective initially.

        But Mr. Higgins said the unit's costs increased after last year's new pilot contract, which raised pay for Express pilots.

        “Labor costs are such a big part of this, and the current contract with the pilots has nowhere near the productivity, much less the pay rates of the low-cost guys,” Mr. Higgins said. “That makes a big question mark about how Delta is going to pull this off.”

        Delta Express never has served the local airport and currently flies out of Indianapolis and Columbus. It pulled out of Louisville, served by Southwest, Sept. 1, 2001, because of “poor economic performance in the market,” Ms. Tucker said.

        “Low-cost airlines are not the only reason for the inability to bring in higher revenues, but they aren't helping the majors, that's for sure,” Mr. Higgins said. “They are growing while everyone else is retrenching, so it makes sense to see what can be done against them.”

       



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