I guess you know all about this one, hey?
Delta faces textbook challenge with Song
By RUSSELL GRANTHAM
The Atlanta Journal-Constitution
It sounds almost like one of those nightmares you have during finals week.
You're handed this problem: Your employer is losing billions. Once minor rivals now control more of a key market than your company does.
You must start a new subsidiary to take back that market. Give it a hip name, you're told, without detracting from the parent's brand.
And oh, by the way, you must keep paying your key talent more than the competition.
That's the brain twister handed last summer to John Selvaggio, president of Delta Air Lines' new discount subsidiary.
Last week, he revealed his solution: a low-fare carrier named Song. It will use big, colorfully painted jets that look nothing like Delta's planes, with live television and cheap fares. Its goal is to blunt the assault of discount rivals, particularly 3-year-old JetBlue, based in New York.
Song is scheduled to lift off April 15 with a flight from Kennedy International Airport -- JetBlue's base -- to West Palm Beach, Fla.
Delta hopes Song will be a more successful encore to Delta Express, the Atlanta airline's 6-year-old initial effort at taking on low-cost competitors in Florida markets.
So far, Song's first few bars are getting some good reviews.
"We're impressed. Song is the name; Blue-bashing is the game," JP Morgan analyst Jamie Baker said in a note last week to investors. "Unexpectedly, Song appears to have matched, if not slightly exceeded, JetBlue's primary in-flight attribute: live television."
Song also will use bigger planes than Delta Express has, in a bid to create a more favorable cost-revenue equation.
Baker expects that Delta's new unit is likely to cause "modest customer defection" from JetBlue. He doesn't think Song will be profitable but will encourage JetBlue to expand in other places than the Northeast-to-Florida run, a critical part of Delta's business.
Cost-effectiveness
Selvaggio said Song's task is to help Delta as a whole.
According to his accounting, Song's unit operating costs will be below 8 cents per available seat mile -- on par with Southwest and other discount carriers -- because it makes use of big-airline advantages that discount carriers don't have.
They include not only bigger jets but also better technology, along with some of Delta's underutilized airport gates, employees and other resources.
Song's 199-seat Boeing 757s will cost 30 percent more to operate than Delta Express' 119-seat Boeing 737s, he said, but when they are full, the bigger planes will generate almost 70 percent more revenue.
JetBlue flies Airbus A320s with 162 seats. "If I think the traffic is out there, why not put a bigger airplane in where I can get a lower unit cost?" Selvaggio asked.
Another example, he said, is how Song will use Delta's gates and employees at New York's JFK airport, JetBlue's base. They serve Delta's international operations and are busy mostly in the evening.
"Almost all day long those gates are free," he said, but now will be used.
Delta said more than 2,000 employees have applied for about 800 non-pilot jobs at Song, even though they will typically have to work about 12 percent more hours to make the same pay as their Delta jobs.
"We're actually having people audition for these roles," said Selvaggio. "We're calling them 'talent,' by the way."
Selvaggio, 56, came to Delta in 1998 after working at US Airways and as chief executive of a smaller carrier.
He was senior vice president for airport customer service last summer when Delta Chairman Leo Mullin and President Fred Reid asked him if he thought he could come up with a new airline to replace Delta Express.
Reid said Selvaggio was picked to create the new airline because he's a relative outsider who has worked at both big and small airlines, including a stint as head of low-cost carrier Midway Airlines.
"John is the best of both worlds," Reid said.
Delta Express effort
Delta Express, launched in 1996 to serve leisure markets in Florida, fared better than most major airlines' efforts to run low-cost units. Continental, United and US Airways all tried but later dropped the ventures.
Delta Express fared well initially because its Boeing 737s had been freshly overhauled and pilots agreed to be paid 30 percent less than mainline pilots.
"It really made serious money for the first three years," said Reid. But Delta's top executives concluded almost two years ago that Delta Express needed to be scrapped, he said. It will be phased out as Song expands to 36 aircraft by October.
Maintenance costs had risen as the 737s aged, to an average 17.8 years. Delta Express had strayed into markets that were too small, added Reid.
It also didn't help that the gap between Express and regular Delta pilot pay shrank to about 10 percent under the latest labor contract, signed in 2001.
At Song, the pilot pay gap shrinks even more -- to zero. The new airline will use mainline pilots under their normal pay scale.
But Reid said the new airline's team has come up with numerous improvements over Delta Express.
They include targeting big, stable markets and offering an advanced live TV and entertainment system to trump one of JetBlue's key product advantages.
The systems won't be in operation before October.
"He really has picked up this ball. He's creating very innovative [human resources] models, product models, operational models, and it's very, very exciting," Reid said of Selvaggio. "He's putting a lot of pressure on all of us, and we're enjoying it. |
