'This is a very strange industry,' remarked Delta Air Lines' new president and chief executive officer at a Senate hearing in Washington DC. But if he harbours any misgivings about joining the airline business, Leo Mullin is not letting on. His enthusiasm for what he has seen in his first few months at Delta is unbridled.
Some second thoughts would be understandable. On Mullin's first day at Delta - on 1 September last year - he was greeted by a line-up of pilots conducting an informational picket, even though their union struck a four-year agreement with the company less than 18 months before. Then came the moment when Mullin believed he was on the verge of announcing a merger with Continental Airlines, only to discover he had been jilted in favour of Northwest Airlines. In Cincinnati he playfully admitted that the airline pricing system was a mystery to him - a comment which resulted in a local newspaper headline declaring: 'Delta chief doesn't understand prices either'. And at a Senate hearing to address the antitrust implications of global alliances, Mullin was railroaded by a senator about why it costs more to fly the 295 miles from Milwaukee to Minneapolis than it does the 1,846 miles from Milwaukee to San Francisco - even though the airline concerned was not Delta.
But Mullin is far from disheartened. 'Delta has some great people. There is a terrific service ethic here. In other companies you have to create that. Here, it just needed to be released,' he says. 'I very rapidly found that all of the funds were in good shape here and anything that wasn't is completely fixable very swiftly.'
Getting to know the company and the industry clearly have been priorities for Mullin. But he has had to be a quick learner - issues have been pressing for his attention from day one. Internally, there has been the question of low morale and the need to improve customer service as well as boosting revenue further. Externally, Delta is under pressure to define both its domestic and international longterm strategies.
No-one underestimates the strength of Delta's home hub in Atlanta, which has been identified by Lehman Brothers as one of the most profitable in the US. But the failed Continental merger has analysts asking what move can Delta make next.
Just a few short months ago Delta seemed to be ahead of the global alliance game with partners positioned around the world. But airlines like Varig, Virgin Atlantic and Singapore Airlines have since untangled themselves from Delta, and in November last year the Global Excellence alliance with Singapore Airlines and Swissair was abruptly cancelled. The question now is how the remaining Atlantic alliance with Swissair, Sabena and Austrian Airlines will stack up against United Airlines' Star, newly bolstered Northwest/KLM, and the proposed American Airlines/British Airways deal. At the end of March Delta's European partners extended their alliance, naming it the Qualiflyer Group and bringing TAP, Turkish Airlines and AOM of France into the arrangement.
Mullin is already coming up with some answers. The company, while not admitting to any shortcomings in its transatlantic partnerships, seems to be pinning its hopes on bringing Air France into the fold as soon as a US-France bilateral is sealed. But while Delta seems fairly confident of success, Air France also has a codeshare with Continental and has not yet revealed its intentions.
In the meantime, though perhaps not by choice, Asia is fading into the background as Mullin pursues a different goal - Latin America.
An outsider to the airline industry, Mullin has made short work of the US corporate ladder in recent years, holding executive positions at First Chicago Bank, American National Bank and Consolidated Rail before being appointed vice chairman in 1995 at Unicom - an electric power provider headquartered in Chicago.
With Harvard degrees in engineering and applied physics and mathematics, as well as a Harvard Business School MBA, he has a reputation on Wall Street for delivering the numbers. He believes, however, that strong revenues should be achieved without tearing the heart from a company - an accusation that was levelled at his predecessor, Ron Allen, after the Leadership 7.5 programme slashed costs to 8.78 cents per ASM, the lowest of the USmajors after Southwest Airlines, but cut deeply into staff morale.
Mullin acknowledges that 7.5 has poured emotional carnage on a company which once boasted such a strong family atmosphere that its employees bought it a Boeing 767 which was christened Spirit of Delta. 'The covenant was broken here, so morale was quite poor as I came through the door,' says Mullin. 'However, I came to emphasise customer satisfaction as being what we were about. That message took immediately. It's consummate with the spiritual value of the place. As soon as we entered discussion about improving the service there was a tremendous buy-in. It was something people really wanted to do.'
Mullin's reasons for wanting to address employee morale and customer service early on are not based on sentiment. 'I am very pleased with the relationship I have built with Wall Street,' he says. 'I have worked hard at that. I am a financially orientated person. I am orientated to shareholder value. But I see it this way: you build a great business and you get great shareholder value.'
So far, he seems to be taking the employees with him on that building programme. An initiative to improve on-time performance has seen the airline move from 10th and last place in 1997 in the US Department of Transportation rankings to an anticipated fourth position for the first quarter of 1998. 'Mr. Mullin put out the challenge to fix it and fix it quickly,' says chief operating officer Maurice Worth. What seems to be going a long way with staff is that Mullin accepts that fixes come with costs. 'Whenever cost figures came up, everybody flinched,' remembers Worth. 'But with Leo on board there is a difference. There are no blank cheque books, but he tells you to go fix it while paying attention to the costs.'
As a result, aircraft are getting deep cleaned more regularly, tray tables and cabin lights are repaired promptly, and a long overdue aircraft refurbishment programme is two-thirds completed. Some $100 million will have been invested in beefing up onboard services between February and June this year. 'And we are budgeted for the year - we have shared that with Wall Street,' adds Worth, who has been with Delta since 1960 and was charged with implementing the 7.5 programme that reduced costs by more than $1 billion a year. 'We are not there yet. We still have work to do. But the attitude and morale out there is better than it has been for five or six years. People are really engaged and they are talking about the family spirit again.'
The local chapter of the Air Line Pilots Association is cautiously enthusiastic. 'The pilots are confident in Mr. Mullin's business acumen,' says spokesperson Karen McGuffey. 'We're undecided how he will use that acumen - I think the jury is still out - but there has been a very free exchange of information. Of course, the pilots remain frustrated that the spirit of their contract hasn't been met, so they would like to see actions rather than words. Still, it's great to have someone of his calibre at the helm.'
On the US domestic front, Robert Coggin, executive vice president of marketing, outlines the key areas of interest for the company, starting with filling any gaps at the Atlanta hub. By June the airline will be operating more than 620 daily flights out of Atlanta. Continued growth in Atlanta is an important part of supporting its planned transformation into a Latin American gateway, but remains something of a juggling act. Atlanta, with a fifth runway still a few years away, is congested to the point that the airline is considering the possibility of evening out schedules so there is a continuous flow of traffic throughout the day instead of the current system of 'banks'. With a hub-and-spoke system, that would be a challenge. Also, admits Coggin, there will be little extra capacity over the next few years as the airline's new all-Boeing fleet trickles in. In March, Delta was able to purchase two additional Boeing 777s - no longer required by an Asian carrier - but otherwise it must wait for the 106 new aircraft and 124 options that are scheduled for delivery by the end of 2006.
Delta's next largest hub - Cincinnati - is doing sufficiently well to need little more attention, having been brought up to some 230 daily flights over the last 12 months. Cincinnati-based regional partner Comair is adding many new markets with its regional jet, producing good feed, especially for Delta's European services, says Coggin.
In Salt Lake City, Coggin expects to see some realignments of schedules so that shorthaul services are mostly handed over to regional partner Skywest. 'We'll fill the gaps with longhaul services, such as Salt Lake City to Philadelphia. It should improve the financial performance of that hub,' he says.
Dallas-Fort Worth will remain an important part of Delta's network, although the company has shrunk its presence there. 'It's profitable and it is an important part of our east-west flow,' says Coggin. 'It's doing what it needs to do for us now and we don't plan to shrink it any more.' But there is less interest in Los Angeles where Delta has also lost market share. 'California is another issue altogether,' explains Coggin. 'That marketplace has changed so much with Shuttle by United and Southwest being there. We looked at what was most profitable for us and we could not afford to fly there. We shrunk LA by design and reallocated to markets which improve Delta's performance.'
Coggin admits that strategy has played a large part in Delta's inability to reach into the Asian market. 'The thinness of our system on the west coast has affected our ability to attract Asian codeshare partners,' he says. Earlier this year, All Nippon Airways ended a planned codeshare agreement with Delta to forge an alliance with United instead after the US finally signed a bilateral agreement with Japan. Delta is now planning an altogether less meaningful codeshare with Trans World Airlines for US-Japan routes and will boost services in Portland to support those.
But Asia has clearly been relegated to the bottom of Delta's international priorities for now. Says Mullin: 'I have spent a long time in strategy - seeking the sustained competitive advantage. For Delta, is it in Asia? The answer is "No, not from Atlanta." We do not have the structural advantage on the west coast and if you look at it as a business, it does not represent a business to us.'
However Mullin says he has identified potential for sustained competitive advantage in Latin America. 'Atlanta is uniquely positioned geographically to draw traffic from all of the US and to be a jumping off point,' he says. Coggin paints a more vivid picture. 'We are going to be a major player in Latin America - that's a commitment,' he says. 'We think of Atlanta in terms of being a funnel feeding into that region.'
Neither Mullin nor Coggin expects American Airlines or Miami Airport to let this plan fall into place without a fight. But they claim certain advantages. At any given departure bank, points out Coggin, Delta can feed up to 70 destinations compared with American's 20 at Miami. Passengers will have more destination choices and are unlikely to have to wait as long if they miss a connection. The computer reservation systems should work to Delta's advantage when searching for the most direct flights. The biggest problem, they admit, will be overcoming the strength of American's frequent flyer programme. 'We will have to work very hard for that ticket,' Coggin says. But he adds that the airline's success on its daily Atlanta to Brazil service, profitable from the first month last October, proves it can compete.
The airline has now set its sights on increasing frequency to Brazil and either has sought or intends to seek authority to serve Argentina, Bélize, Bolivia, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay. It plans to do most of the international flying itself and to build a feeder network via relationships with local carriers, such as the one with AeroPeru announced in March.
Susan Donofrio, airline analyst at BT Alex Brown in New York, agrees that Latin America makes more sense for Delta than Asia and believes that the new determination provided by Mullin to break into that market will lend the airline the focus it needs.With Atlanta's high percentage of connecting traffic - around 65 per cent - and more convenient geographical position, Donofrio sees no reason why it cannot be used as a channel into Latin America.
But some remain sceptical. Another New York analyst believes the Latin American policy is 'flawed' because it results from a '. . . scramble to find an international strategy now that it has one of the weakest alliances in Europe.' Donofrio disagrees, saying Delta's transatlantic alliance 'stacks up with the rest of them.' Not surprisingly, Coggin and Mullin also come to the defence of their European partnerships. 'We have some very fine partners,' says Mullin. 'The Atlantic Excellence has performed very well for us and is working.' He adds that he expects the proposed partnership with Air France to '. . . move to a new platform' if an open skies agreement is sealed, which he hopes for in April so that a deal can be implemented in June.
Coggin provides more detail on where the company sees itself against its transatlantic alliance competitors. He believes the Northwest/ KLM/Continental alliance will have a 'minimum' effect, arguing that Delta's numerous nonstop services to cities across Europe give it the competitive advantage over both that and United's Star alliance. 'Multiple nonstop destinations give us a huge amount of leverage in our corporate negotiations,' he says. 'Fortune 500 companies don't just go to Amsterdam or Frankfurt. We can serve them nonstop.'
Delta plans to build on that through a '. . . very aggressive growth plan' for the North Atlantic over the next three years, increasing frequencies to existing European destinations as well adding new cities. Also, a second bank of connecting flights has been added to the airline's hub at New York/JFK. 'We let the numbers speak for themselves,' says Coggin. 'Our operating margin was up 35 per cent year on year. Revenue in our business class cabin was up 20 per cent. We have a very healthy base.'
Still, Mullin indicates that continued growth will require new partners. 'It's our aim to do better than just grow with the economy and you do that through codeshares, partners and alliances,' he says. 'We will be looking at alliances, domestic and international. Some will be small and some large, but we anticipate the alliance pursuit will continue.'
Mullin seems more worried about the potential for new regulation in the US. With a Department of Transportation policy document on anticompetitive behaviour imminent and senators calling hearings and threatening new legislation, Mullin seems genuinely outraged at the idea that the industry could be accused of not being competitive. 'At the end of the day, this is a business where the anecdotes can kill you,' he says, referring to the senator's obsession with the seemingly inexplicable fare structure at Milwaukee.
Mullin proffers explanations, but he concludes: 'They don't choose to get it.' Mullin feels strongly that the time has come to make them listen. 'This industry is about as competitive as it gets. All people can talk about is prices, but we have become a business that is tremendously receptive to the customer. It makes no sense whatsoever to begin to reregulate this industry.' Where there are instances of bad behaviour, he says, there should be action, but new rules cannot be justified.
However, he does believe that rules should be brandished in the case of the proposed AA/BA alliance. 'It absolutely flunks the competitiveness test. It is massively destructive of competition,' says Mullin. 'I truly do believe that in this case the authorities should step up to the mark and turn this one down.'
Which makes Mullin already sound like a seasoned airline CEO. In another six months, it may not even seem like a strange industry any more.
Source: Airline Business
