By James Pilcher
The Cincinnati Enquirer

Delta mechanic Steve McAfee works on an engine of a Delta 737 jet. (Michael E. Keating photo) | ZOOM |

HEBRON - Ray Valeika, one of the highest-ranking executives at Delta Air Lines, grinned and showed off both cheeks after a recent meeting with front-line mechanics, a notoriously rough bunch.

"See? No bruises," he said gleefully.

The reason? Valeika said that while he painted a fairly gloomy picture of the industry overall, when it comes to his technical operations division, there might be a glimmer of hope.

The airline is looking for ways to expand its "insourcing" business, or working on planes belonging to other carriers. Delta has already doubled its revenue from the venture in each of the last three years - up to $160 million last year.

And Valeika, the airline's senior vice president for technical operations, said the global "insourcing" market, which includes doing everything from overhauling engines to replacing electronics to even replacing insulation and wiring, is worth more than $40 billion annually.

He also pointed out that almost 7,000 of the jets operating worldwide are operated by carriers that have 20 or more planes. The other 11,000 or so planes are operated by smaller carriers, which might not be able to afford to have their own staffs do major maintenance work.

"We have an incredible market opportunity here, one that has not been tapped," Valeika said. "I told the workers that while the state of the industry is pitiful, that the opportunity in maintenance is pretty good - even while everyone else is shrinking - and that we can be like them or that we can win by changing."

Any new revenue is welcome to the cash-starved carrier, which operates its second-largest hub at the Cincinnati/Northern Kentucky International Airport.

Delta employs about 10,000 mechanics systemwide, including 200 local workers. That's down from about 11,500 before the Sept. 11 attacks, which caused many carriers, including Delta, to pare down employee ranks.

But Valeika said the reductions at Delta pale in comparison to those at other carriers, and that the carrier's efficiency is another reason why it can take on extra work.

On Thursday, Delta reported a $184 million profit for the second quarter, but without the sale of its share of a computer reservations firm and financial assistance from the government, the company would have lost $237 million.

And Delta already expects to realize $110 million in cost savings this year from the maintenance department through streamlining the inspection process and speeding up how long it takes to overhaul engines, for example. In addition, Valeika said Delta's existing insourcing work is profitable, although he did not share specifics.

The company wants to expand to do more work from outside, especially because the only other major player among airlines in the field is German airline Lufthansa, which did more than 2.5 billion euros ($2.8 billion), in insourcing sales last year.

Valeika and other Delta executives say their airline is uniquely positioned to handle extra work and become a major domestic player in the insourcing market. They say that's primarily because its maintenance shops are non-union and because of Delta's strong maintenance reputation - the airline is routinely awarded the Federal Aviation Administration's five-diamond award for maintenance excellence.

"We've got employees who can learn faster and are willing to change," Valeika says. "We have a unique culture here, and we need to take advantage of that."

Analysts agree, including Ray Neidl of the Wall Street firm Blaylock & Partners.

"They have a lot more flexibility to handle something like this, especially by being non-union, and I think it's viable because while there are fixed costs there, they could price it right," Blaylock said. "Given their good service reputation, a lot of people may want to use them."

One such maintenance opportunity actually has local roots. Earlier this year, Delta announced that its Atlanta engine shop would take over major overhauls for the General Electric CF-34 engine, which powers the regional jets flown by Comair.

The cost savings of doing the work in house versus contracting General Electric Aircraft Engines is estimated at $1 billion in the next 10 years, and the actual overhauls should begin sometime this quarter.

And once Delta proves it can handle its own planes, Valeika said he expects the engine to be the single highest-growth opportunity for outside business.

In addition, the company is looking to its overseas SkyTeam partners to collaborate on plane types.

"This just makes sense, especially since we already have the infrastructure in place," Valeika said. "So let's offset some of these cost issues with a certain amount of possible stability from outside sources."

E-mail jpilcher@enquirer.com