Demand among passengers for new routes is matched by their demand for low prices, leaving airlines to expand their networks on tight margins. How do they balance their efforts to keep up with demand against their need for profitability?
Much can be learned from Delta Air Lines, which has rapidly grown its network through clear strategic planning, focused investment, and a willingness throughout the company to change its business culture. It is now adding international flights faster than any other major US airline.
“In the last few years we have seen unparalleled expansion in our international network, with a strong emphasis on transatlantic growth. This has been a big change for Delta, which was primarily focused on the US domestic market,” says Matteo Curcio, general manager for transatlantic network planning at the airline.
“This year we will have added almost 100 new international routes since 2005,” notes Glen Hauenstein, Delta’s executive vice-president of network and revenue management. “What started with a single flight across the Atlantic eventually put Delta, our hometown of Atlanta and its airport on an unstoppable path towards globalisation.'”
Change has come quickly and, in two years, Delta’s network transformation has seen 40% of its capacity move to international flights. There will soon be an even split between domestic and international capacity.
“We realised that the competitive and economic outlook was far more favourable internationally than domestically,” notes Curcio. “We had international capable aircraft on domestic routes, which we could redeploy in more promising transatlantic markets, where we had a much stronger competitive advantage.”
Expansion is ongoing and constantly targets new markets.
“Traffic between the United States and the Middle East is one of the fastest growing sectors in aviation,” adds Hauenstein.
In fact, Delta has become the largest US carrier to Europe, Africa and the Middle East, all while maintaining a strong domestic position. Its success is a dramatic reversal of fortune for an airline that has had to come back from bankruptcy.
The airline is constantly looking at new candidates for future routes, and has its eye on destinations throughout Africa, Asia and the Middle East.
Some of the key criteria it takes into account include market size, premium traffic mix and, most importantly, market growth potential, which is by far stronger in these regions than other mature markets around the world such as US domestic or US-Western Europe. Another key step will be the pending merger with Northwest Airlines. Northwest has hubs in Detroit, Minneapolis-St Paul, Memphis, Amsterdam and, crucially, Tokyo.
“Our route networks are complementary. Northwest is a very big carrier in Asia, where we have a relatively small presence, so it is an opportunity to develop that market and become an even bigger international player,” says Curcio.
Handle with care
The key to overcoming the challenges of rapid expansion in new markets is to ensure that the right processes, resources and long-term strategy are in place to manage change effectively.
Decisive and timely action must be backed up with investment, and decisions over new routes must balance the need for quick decisions and rigorous analysis of the economics. Furthermore, Delta Air Lines has shown that a willingness to reorganise and refocus internally is equally important.
“You need to have co-operation from all parts of the organisation if you want to successfully manage the kind of expansion Delta has undertaken. With a history as an organisation focused on the domestic market, we needed to do a lot of work to develop an international culture,” remarks Curcio.
In choosing a new route Delta looks at all the most relevant marketing information, including market size, growth rate, business / leisure mix, seasonality as well as the competitive environment, in terms of direct competition on the same route or indirect competition via competing hubs. The sum of all of these factors gives an indication of whether a new route can be economically viable.
“If the economics are promising, we still need assurance that safety and operational reliability can still be achieved. Many of Delta’s new destinations are in developing regions of the world such as Africa, Eastern Europe or the Middle East and often become challenging from this perspective,” notes Curcio.
The pressure on such decisions is greater than in the past, as the criteria for route planning have changed in recent years.
“The industry is changing so much that a few years ago you would give a new route plenty of time to see if it could become economically sustainable, but now that timeframe is shortening,” observes Curcio. “The entire network is under pressure from high fuel prices exceeding $130 a barrel, so we can’t afford to waste money watching a new route develop.
“In normal times you would have given a new market 18 to 24 months to achieve profitability as it takes time to establish a new product. Now we have to ask if we can make money right from the start.
“We’re taking a much more flexible approach to all of our new route decisions. We have to be much quicker in addressing cancellations, when the economics become difficult.”
It was partly rising fuel costs that contributed to its financial problems, but now Delta has focused on controlling costs through domestic capacity reductions, revenue initiatives and an aggressive $1bn hedging portfolio.
“Despite record-high fuel prices, the international marketplace remains strong for Delta,” believes Hauenstein. “Delta is an undisputed global leader with an unmatched domestic network and the best-positioned hubs. With that, we are able to offer the best travel options for international passengers.”
Delta has a right to be optimistic about future expansion plans, but Curcio and Hauenstein both acknowledge that it has to be balanced with cost control, commitment and strategic planning.