Airline Strategy Awards Honor Delta CEO for Successful Merger

Jul 19, 2010

LONDON, July 19 /PRNewswire-FirstCall/ -- Delta Air Lines' (NYSE: DAL) Chief Executive Officer Richard Anderson has been recognized by industry trade magazine "Airline Business" and global executive search firm Spencer Stuart with the 2010 Airline Strategy Award for Executive Leadership for his efforts to successfully merge Delta and Northwest Airlines.  

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"The scale of the merger and skill required for this merger has been incomparable," said Mark Pilling, editor of Airline Business. "Delta has so far executed a near-textbook merger that included getting labor buy-in from the start – that was a massively significant step."

"Delta's swift and smooth merger integration took a great deal of hard work, planning and focus," said Anderson in a recorded acceptance played last night at a gala dinner in London.  "We couldn't have succeeded if not for Delta people. I'm honored tonight to accept the Executive Leadership Award on behalf of the more than 70,000 Delta people around the globe who made our merger a success."

Four Delta employees, along with Perry Cantarutti, Delta's senior vice president of Europe, Middle East and Africa, were at the event to accept the award. Representing Delta employees worldwide were Jill Gosling, an Airport Customer Service agent, Flight Attendant Julie Alexander-Nixon, Flight Attendant Lisa Cohen and First Officer Jerrad Boren. With the company's financial results announcement scheduled in Atlanta today, Anderson was unable to accept the award in person.  

Airline Strategy Award winners are chosen by an independent panel of industry experts chaired by the Airline Business Editor and facilitated by Spencer Stuart. Judges include Sir Rod Eddington, non-executive chairman for Australia and New Zealand at JP Morgan and former CEO of British Airways; Jeffrey Katz, former president and chief executive of Swissair and founding chairman and chief executive of Orbitz; Professor Rigas Doganis, author of several books on air transport; Peter Harbison, managing director of the Centre for Asia Pacific Aviation; Joe Leonard, former chairman and chief executive officer of AirTran airways; and Chris Tarry, one of the most highly rated aviation analysts in the London market.

Delta closed its merger with Northwest Airlines in October 2008. Within 18 months the airline introduced a combined frequent flyer program, created consistent branding at airports worldwide, issued Delta uniforms to all customer-facing employees and integrated reservations systems, making every flight a Delta flight and every customer a Delta customer.  The airline achieved its single operating certificate in December 2009.

Delta Air Lines serves more than 160 million customers each year. With its unsurpassed global network, Delta and the Delta Connection carriers offer service to 369 destinations in 67 countries on six continents. Headquartered in Atlanta, Delta employs more than 70,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. A founding member of the SkyTeam global alliance, Delta participates in the industry's leading trans-Atlantic joint venture with Air France KLM and Alitalia. Including its worldwide alliance partners, Delta offers customers more than 13,000 daily flights, with hubs in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. The airline's service includes the SkyMiles frequent flier program, the world's largest airline loyalty program; the award-winning BusinessElite service; and more than 45 Delta Sky Clubs in airports worldwide. Customers can check in for flights, print boarding passes, check bags and review flight status at delta.com.

SOURCE Delta Air Lines

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The Biggest Growth Opportunity in the Airline Industry Just Arrived

Recently, Spirit Airlines (NASDAQ: SAVE  ) has been one of the most popular airlines among investors. Spirit is an "ultra-low-cost carrier" that aims to use low fares to stimulate demand for air travel among customers who might not otherwise fly. Through low costs and high fees for optional services, Spirit has made this business model exceptionally profitable. Strong demand has allowed it to grow revenue at a nearly 30% annual clip over the last three years.

Spirit Airlines stock has soared in 2013. Photo: Spirit Airlines.

However, an even bigger opportunity in the ultra-low-cost-carrier segment may lie south of the border. Volaris (NYSE: VLRS  ) is a Mexican ultra-low-cost carrier that recently executed an IPO that included U.S.-traded shares. Volaris is already the second-largest airline in Mexico and it has a huge opportunity to grow by stimulating demand for air travel in Mexico. As a result, Volaris looks like a compelling long-term-investing opportunity (albeit a risky one).

Changing the culture
Volaris' growth is powered by two factors. First, the company is not shy about challenging its competitors (most notably Aeromexico). In its prospectus, Volaris highlights its massive cost advantage relative to other major airlines in Latin America. It keeps costs low by using a single aircraft type (the Airbus A320), utilizing its aircraft heavily, and minimizing distribution costs.

As a result, Volaris has a cost per available seat mile, or CASM, of just $0.094. By contrast, CASM averages around $0.14 for its competitors. Aeromexico's CASM is even higher than the regional average, at $0.157. This gives Volaris a massive advantage on the routes where they compete. Volaris uses its cost advantage to offer lower fares and thereby grab market share.

Volaris has quickly grown to become the second-largest airline in Mexico. Photo: Volaris.

The second factor powering Volaris' growth is that air travel is still underutilized in Mexico. The company claims that even after adjusting for the disparity in household income, Americans fly several times more often than Mexicans.

That's not because Mexicans do not travel. Mexico has a thriving long-distance bus industry, which generated nearly 3 billion passenger segments in 2012. This includes an executive and luxury bus industry that accounted for 74.4 million passenger segments. Volaris' management believes that it can reduce airfares to a level that will convince many people to switch from these executive and luxury buses to air travel.

Early returns
Last week, Volaris reported its first quarterly results since going public. Revenue grew 11% due to capacity expansion, offset by lower unit revenue. Despite the unit revenue pressure, adjusted net income jumped 39% year over year to 319 million pesos (roughly $24 million). Net income was boosted by a 4.7% year-over-year reduction in CASM due to both fuel and non-fuel savings.

Recently, Volaris has had to offer even deeper discounts than it has historically due to a combination of slow economic growth in Mexico and more price competition from Aeromexico. While this has had a short-term impact on profitability, it is stimulating even more demand for air travel in Mexico, which is good for Volaris in the long run.

Moreover, Aeromexico cannot keep up its recent fare war. On the recent Volaris conference call, the company's management team pointed out that Aeromexico's domestic operating margin has plummeted from 16.1% in Q3 2011 to just 2.5% in Q3 2013. Clearly, Aeromexico is hurting much more than Volaris from the competitive environment.

Looking ahead
There are a few positive factors that should drive continued earnings growth for Volaris. First, the company has identified plenty of new markets that it can enter over time, and management is planning for a high-teens capacity growth rate.

Second, Volaris recently implemented a new reservations system that will reduce distribution costs by up to 50%. The new system has also enabled Volaris to start charging passengers for carry-on baggage. This practice was pioneered by Spirit in the U.S., and has since become a standard feature of U.S. ultra-low-cost carriers. This move will allow Volaris to make money with even lower base fares, helping it to continue to stimulate demand.

Foolish bottom line
Volaris is in a great position to dominate the Mexican air travel market over the long term. The ultra-low-cost-carrier model is already catching on, and as more Mexicans move into the middle class, demand for low-cost air travel is likely to skyrocket. Volaris already holds 23% of the domestic market, and that market share will continue to grow rapidly.

While I think Spirit Airlines is a great investment opportunity, too, Americans tend to have more disposable income and may be more likely to pay extra for an airline that offers more leg room, free carry-on baggage, etc. Despite all its growth, Spirit represents only 1% of the U.S. airline industry by revenue.

By contrast, Volaris has the opportunity to become a Ryanair of Mexico (or even, more broadly, Latin America). In a few decades, Volaris may be a ubiquitous presence in Latin America, due to its industry-leading, low-cost structure and position as the low-fare leader in a major developing economy. That's why Volaris may be the best airline out there for growth-oriented investors.

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