Sun, Feb 09, 2003 page12

• Delta offers free accoutrements on cheap flights

  With a new domestic subsidiary called Song, the airline is seeking ways to trim costs without appearing excessively frugal

  • By Doron Levin / BLOOMBERG
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  Delta Air Lines' new low-fare airline won't reduce costs by leasing storage space in overhead bins, nor will it rent them pillows and exit maps.

  Editorial cartoonists and stand-up comics have been having a grand time satirizing low-fare, low-cost airlines. The high-fare network carriers aren't laughing; they are copying the upstarts with deadly seriousness.

  "Song," Delta's new domestic subsidiary announced Jan. 29, will charge for in-flight meals, snacks and movies. All tickets will be one-way and cost from US$79 to US$299.

  Song also hopes to minimize distribution costs by selling as much as 70 percent of its tickets through its Web site and agents, though it will pay commissions to independent travel agents.

  "I can't be building an airline based on a cost structure that's unsustainable," explained John Selvaggio, president of Song. He had been Delta's senior vice president of customer service.

  Hats off to Delta for effort, though I wouldn't bet my 401(K) on the airline's chances of creating a self-sustaining, low-cost airline inside a high-cost one.

  To cite one potential landmine, pilots' wage rates at Song will be similar -- that is, too high, in terms of market competition -- compared with pilots at low-cost competitors. While pilots will be getting relatively high rates of pay, they'll also be flying more hours on average than Delta colleagues.

  General Motors Corp tried a similar fight-fire-with-fire ploy against Japanese automakers Honda Motor Co and Toyota Motor Corp when it created its Saturn unit in 1985. Saturn was supposed to be more streamlined, efficient and lower cost -- featuring a special labor agreement with the United Auto Workers union. Today Saturn has evolved into another GM vehicle brand, with roughly the same costs and culture as Buick or Chevrolet.

  Fight for life

  Like other major air carriers, Delta is being eaten alive -- slowly but steadily -- by smaller, lower cost companies such as Southwest Airlines Co, JetBlue Airways Corp and AirTran Holdings Inc. In 2002 Delta posted a net loss of US$1.27 billion; Southwest, whose net sales are less than half of Delta's, earned US$240.9 million.

  Song is Delta's second stab at creating a low-cost alternative. Its cut-rate Delta Express unit, opened in 1996, closed last August because, Selvaggio said, it couldn't keep costs low.

  The brand-confused public, moreover, saw the Delta name with Express and didn't always understand that they were getting lower fares in return for fewer frills. That's why the name Song has no connection to Delta.

  Delta Express's cancellation shocked no one, since other network carriers in the US and Europe have been trying to operate low-cost subsidiaries and failing. Two exceptions, says aviation consultant David Treitel, may be Tango and Jazz, low-cost units belonging to Air Canada: "They seem to be working pretty well." Unless network carriers discover how to compete against the low-cost world, many if not most could be out of business. United Airlines parent UAL Corp and US Airways Group Inc, both operating under chapter 11 bankruptcy protection, are in imminent danger unless they can restructure with lower costs.

  If at first...

  Hence, United Airlines said it would try once more to operate a low-fare unit, having failed once with Shuttle by United. Last week KLM Royal Dutch Airline NV -- which lost 156 million euros (US$168 million) in 2002 -- sold its Buzz low-cost unit to Dublin-based, low-cost Ryanair Holdings Plc for US$25.7 million.

  Ryanair has emerged as the Continent's largest airline in terms of market value. Its success has been great news for Boeing Co. Last week Ryanair said it would increase orders for Boeing 737-800s to 125 from 103.

  John Walsh, an aviation and aerospace consultant based in Annapolis, Maryland, described the trend to create low-cost subsidiaries as "monkey-see, monkey do." "I'm struggling with it," he said. "My sense is these tactics are purely defensive, but they haven't said that." Song spokeswoman Stacy Geagan countered: "We think of Song as an offensive strategy."

  Song will initially have four flights and build to 144 by October 2003. It will fly along the East Coast between Boston, New York City, Washington, and Florida locations such as Tampa and West Palm Beach, quite dense routes in terms of air traffic.

  Taking a page from playbooks of JetBlue and Southwest, the seats will be upholstered in leather and each will be equipped with satellite TV and digital audio. "Eventually we'll have online shopping," Geagan said.

  "Delta Express used inefficient 737-200s," said Song's Selvaggio. "What Delta Express did well was to drive additional passenger traffic. If you believe you can do that with a low-cost carrier, why not optimize rather than dabble?" Selvaggio might start praying that his low-cost gospel will spread quickly throughout Delta. Otherwise, Song likely will be too little and too late to be more than a Band-Aid over a gaping wound.
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