Report by Karen Walker in San Antonio
How does it feel to be the head of a regional carrier that takes part in $10 billion deals? Ask Skip Barnette, president of Atlantic Southeast Airlines (ASA) and one of the key players in forging the biggest regional jet order in aviation history. A smiling and relaxed Barnette sums it up: "It's fun."
When Delta Connection - a subsidiary of Delta Air Lines - announced plans at the end of March for its ASA and Comair carriers to order 94 Bombardier CRJs, plus 406 options, the aviation world gasped. While the success of the regional jet is undisputed and orders for 100 or 200 aircraft at a time are no longer unusual, this deal for 500 aircraft stands alone. Steven Ridolfi, president of Bombardier Aerospace's Regional Aircraft division, is justified in his description of the massive sale: "Delta has rewritten aviation history with this order."
During the Farnborough air show in late July, the Delta Connection management team was expected to finalise its agreements with Canadian manufacturer Bombardier and engine supplier General Electric. The order will allow both ASA and Comair to fulfil their fleet growth plans over the next 10 years. ASA and Comair plan to buy 94 CRJs through to 2004, with options for up to 406 CRJs extending into 2010. The 94-jet order includes a mixture of 40-, 44- and 50-seat CRJ200s and 70-seat CRJ700s, with a value of $2 billion. Including options, the agreement is worth $10 billion.
"Delta's strategy is to develop regional jets as a component of the airline's efficient network and Delta intends to remain in a leadership position in this segment of air service," says Frederick Reid, Delta's executive vice-president and chief marketing officer, and chairman of Delta Connection. "Extending our network to smaller cities strengthens customer service by providing more service to more passengers and builds connecting opportunities through our mainline hubs, which in turn allows development of mainline expansion in domestic and international markets."
Now it is down to people like Barnette to turn this stunning order into an imposing network. And he is wasting no time. Delta Connection is already one of the world's largest operators of regional jets - more than 200 jets are in service across its partners - and ASA is running a close second to its Delta Connection partner Comair in the number of jets owned - 80-plus compared with Comair's 90-plus.
Since the new order was announced, Atlanta, Georgia-based ASA has also announced a string of new non-stop destinations, including new and more frequent services from Atlanta as well as an expansion from the carrier's Dallas-Fort Worth (DFW) hub.
From 1 July, for example, ASA inaugurated a non-stop regional jet service between DFW and Amarillo, Texas. On the same day, it also launched a non-stop jet service between DFW and Savannah, Georgia, and between Atlanta and Dallas Love Field, the airport located closer to downtown Dallas and famous as the home base of Southwest Airlines. Another new service has connected Atlanta with White Plains, New York, and ASA has moved into international services, beginning non-stop daily flights between Toronto and New York Kennedy and between Toronto and Atlanta.
It all adds up to a regional carrier with numbers that resemble those of a major: more than 600 daily flights to 75 airports in 22 US states as well as Canada. But Barnette is used to big figures. A veteran of Delta, he joined ASA after setting up and heading Delta's low-cost carrier, Delta Express. That experience paid off in the negotiations leading up to the Bombardier order.
"What we set out to do initially was to identify a replacement for our Brasilias," says Barnette. "But the whole scope of the project changed with Delta's growth plan for Delta Connection and with Comair coming onboard with the acquisition. The project got very big."
The regional carriers contracted Delta's mainline fleet acquisition people to guide the process along, but Barnette makes it clear that each order is "quite separate, with quite separate memoranda of understanding". Each carrier had its own growth plans to fulfil. ASA, for instance, was the driver behind the decision to include 40-seaters in the order. "The 50-seat CRJ is not an appropriate economic aircraft to replace the Brasilia one-for-one," says Barnette. "Comair didn't initially see the economics of a 40-seater, but as the project went on and they got to see what their network profile was going to look like four years out, then they also decided to buy a number of 40- and 44-seaters."
This part of the deal is likely to be unique between Delta Connection and Bombardier. The Canadian manufacturer has made it clear that it was the scale of the overall order that allowed a deal to be struck on 40-seaters, which will be the same as the 50-seaters, but with fewer seats. "It made it very attractive for us to purchase them one-for-one to replace the Brasilias," says Barnette.
But he adds that, as a regional feeder in the USA, there is more than the network profile to consider when buying new aircraft. The emotional issue of jets versus turboprops becomes a bottom-line issue is key markets. "The risk is that you are toast when your competition brings a jet in," he says.
ASA must still deal with the issue. Although it is retiring most of its Brasilias, some will be refurbished and maintained in markets where it makes sense. The carrier also has ATR 72s, refurbished in leather, which are useful to bring in extra capacity where needed. Barnette admits it is "very difficult" to manage the customer relationship once the expectations are for jet service, but he believes quality of service can help. "The ATRs are beautiful inside and we intend to offer a high level of service," he says.
Reliability goals
Hand-in-hand with its growth goals, Delta has also given ASA some "very aggressive" reliability goals. ASA's load factors are climbing - 71% in June compared with 62% the same month last year. Its number of passengers for the first half of this year was up 30% to almost 3 million from 2.25 million in 1999. But it has not always been easy to handle this growth.
Like many US carriers, ASA is struggling to keep up with its pilot requirements. While Barnette says the airline has a "good relationship" with its pilots - and a union contract that stretches out until 2002 - many regional jet pilots are using the opportunity to flow upstream to the mainline parent. At one point, ASA was losing between six and 10 pilots a month and did not have sufficient replacements.
When this was combined with a spell of unusually harsh weather in Atlanta in February, reliability times were hit hard. "The choice was to fly through it or reduce our schedule," says Barnette. "We made the decision to reduce the schedule, but could not do it until the next schedule change in April."
At that point, ASA took 14 flights a day out of the schedule. It was a hard decision, says Barnette, but it yielded the results he wanted - reliability is back up to 98% after falling to 95% in March. "We think we can reinstate the services in September, but we have extended until October to have more breathing room," he says.
What Barnette enjoys is the independence he has to make such decisions. Although the "big brothers" at Delta lay down clear and tough goals, Barnette says the airline is left to work out how to meet those goals. "Delta does not co-sign our loans," he says. "We have the full responsibility as well as the freedom. We have some routes that on a direct basis are less than positive to us, but they make sense to the Delta network."
But Delta chairman Leo Mullins expects ASA to make money and the regional is always required "to remember the bottom line".
"Leo was very smart in letting it be that way. He could have said 'just be efficient', but it's fun to be responsible for the bottom line and to be able to put together deals like the CRJ one."
ASA, for example, has its own small purchasing company. Delta is given the first opportunity to bid for ASA contracts and to respond if a cheaper price comes from outside the group. But Delta does not have to match external quotes and ASA can buy elsewhere.
That freedom has fostered a team spirit at ASA, says Barnette. Recalling the entrepreneurship he saw evolve out of the Delta Express team, he senses the same thing happening at ASA. "Leo bough ASA and Comair because they were valuable to Deltas. But after 30 years in the 'big' business, this is fun."
Source: Airline Business
