There’s nothing like a global recession to make the best-laid plans go awry.
A little over a year ago, Atlanta-based Delta Air Lines was on an international growth streak started in 2005, rapidly expanding with more flights to Africa, Europe and elsewhere around the world.
Executives had their eyes on an even bigger prize: their merger with Northwest Airlines, whose expansive Asia network, including a Tokyo hub, would fill in an area where Delta was lacking. Delta looked forward to being the No. 1 carrier to Asia and touting itself as a “truly global airline.”
Fast-forward to today. International travel is slumping — far more than domestic travel. Asia is one of the hardest hit regions. Delta is now cutting international capacity by 15 percent.
International flights have long been cash cows, but some have become burdens to be unloaded as quickly as possible as business travelers cut back, taking with them the high-end fares that subsidize tourist-friendly discounts.
In good economic times, international markets have higher operating margins than domestic markets where airlines like Delta face heavy competition from low-cost carriers, said airline consultant Robert Mann. Now, those international margins are shrinking.
Some of the highest-profile international route cuts Delta is making are in Asia — including a much-ballyhooed Atlanta-Shanghai route, which will be discontinued this fall. Delta is also axing service between Atlanta and Seoul; Mumbai; and Cape Town, South Africa.
“Customer demand for international travel has fallen significantly,” Chief Executive Richard Anderson and President Ed Bastian said in a joint memo to employees last month. The capacity cuts target “routes that have experienced losses in the current economic climate and with higher fuel prices.”
Other international routes being cut include Cincinnati to Frankfurt and London-Gatwick; and New York’s John F. Kennedy International to Edinburgh, Scotland.
“Business travel in general is slowing and all international destinations are just much more difficult,” said Avondale Partners analyst Bob McAdoo. “Delta and every other carrier who flies internationally is having to look at how much capacity to actually offer this year.”
Anderson and Bastian aren’t admitting defeat in their international offensive.
“In keeping with our long-term business plan, we continue to grow the global footprint that is a cornerstone of our successful strategy,” Bastian and Anderson wrote.
Though Delta is cutting international capacity and eliminating routes, it is adding some new routes in other areas.
“Having this globally-balanced international network is what gives you a hedge to economic conditions around the world,” said Delta spokesman Kent Landers.
But even if Delta is still moving forward, the strategy’s execution has involved a running series of revisions. Last October, Delta said it was continuing to expand international capacity but would trim growth plans by about 2 percentage points from its previous plan for 15 percent international growth in the fourth quarter of 2008.
By December 2008, as the economy worsened, Delta’s forecast for 2009 was for an international capacity cut of 3 percent to 5 percent. In March, the outlook worsened to a 10 percent international capacity cut for this fall. And in June, Delta revised its plans again to a 15 percent slash of international capacity.
McAdoo said he doesn’t expect Delta to abandon its international push, which was born of concern that peers such as American, United and Continental were pulling bigger shares of the high-margin international travel market.
Once the economy turns, “I imagine Delta will go back and rebuild and increase frequency in those markets where it cut capacity, and reinstate international service it had for a while before the economy fell apart,” he said.
Hartsfield-Jackson International Airport is inextricably tied with Delta and its international growth plans. Delta, which has its biggest hub at the airport, is in talks with the city over a new multiyear lease for its operations at the airport.
Hartsfield-Jackson is also building a new $1.35 billion international terminal to accommodate expected growth in international flights, particularly at Delta. The airport got city council approval this month for an $800 million bond deal to complete the terminal and plans to go into the market for financing in August.
International traffic at Hartsfield-Jackson is down about 5 percent this year.
“Taking the long view, we know this is a very good decision,” said Hartsfield-Jackson general manager Ben DeCosta. “We’re confident that the local economy will sustain and traffic will return.”
Delta said that though it is cutting back flights in some areas and downgauging to smaller aircraft in others, it is maintaining roughly the same level of about 1,000 daily departures from Hartsfield-Jackson it had a year ago. It’s unclear what effect Delta’s international slowdown could have on the plans for the international terminal.
“Maybe it’s delayed a year or two in terms of when it gets fully utilized,” McAdoo said.
Last month, as Delta executives made a presentation at an investor conference, Bastian said “we’re building a plan not anticipating any consequential recovery for the balance of this year.”
Along with the impact of the recession, Bastian said Delta also expects a $125 million to $150 million drop in revenues due to H1N1 flu concerns. “And we did see bookings in the month of May fall off in a very dramatic manner across Asia,” Bastian said.
Delta had underestimated how large the traffic drop in Asia would be. In June, Delta’s traffic in its Pacific region fell 17.3 percent — the largest drop among its regions — even though it had only cut flight capacity by 5.9 percent in the Pacific.
But Delta has not been alone in rushing to keep up with the fall in passenger traffic, according to the International Air Transport Association. Other airlines’ cuts have also trailed behind declines in traffic.
Benefits from lower fuel costs have been outweighed by drops in traffic and fares across the airline industry, according to the report. “The expectations reported for the next 12 months have dipped into pessimism once more,” according to IATA’s business confidence index.
Although analysts have speculated about the solvency of some airlines, Delta has been seen as stronger than some of its competitors.
That’s partly because of Delta’s moves to cut back flights amid slow demand.
“They have been far more proactive eliminating flights that are not paying for themselves,” McAdoo said.
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