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Old 05-31-2005, 09:35 PM   #1  
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Default DALs 1 Bright Spot

EXCLUSIVE REPORTS

From the May 27, 2005 print edition

Delta's one bright spot
International routes may break $3 billion mark in 2005

Mary Jane Credeur
Staff Writer

International travel remains one of the brightest jewels in Delta Air Lines Inc.'s operations, and new routes to places such as Moscow, Berlin, Rio de Janiero and Chennai, India, are expected to push the carrier's international revenue even higher.

Delta's international flying brought in a record $2.6 billion last year, representing 17 percent of its total revenue and making international traffic Delta's most consistently profitable business segment. Several new and expanded international routes being added this year likely will help Delta break the $3 billion mark for international travel in 2005 if recent trends hold.

Delta's international business grew 21 percent in the first quarter to $619 million, a remarkable figure given that January to March is traditionally the slowest travel season of the year.

Delta's Latin American routes led those first-quarter international gains, with a 45 percent increase fueled by new or expanded routes between Delta's Atlanta hub and Latin hotspots such as Buenos Aires, Belize City, São Paulo, Cozumel, St. Lucia, and San José, Costa Rica.

This summer, much of Delta's international growth is happening in Europe, where the carrier is adding new service from Atlanta to Moscow and from New York's JFK airport to both Berlin and Chennai, India.

Delta also is adding international service from its other hubs, such as new flights from Cincinnati to Cancún and Montego Bay and a route from Salt Lake City to Cabos San Lucas, Mexico.

"International [flying] is an integral part of Delta's transformation plan, and we are looking for sustainable growth," said Jorge Fernández, vice president of international and alliances at Delta.

Delta and other "legacy" carriers are putting more muscle behind their international offerings because it remains one of the few areas where low-cost carriers such as AirTran Airways and JetBlue Airways Corp. don't yet operate.

That means legacy carriers can often charge much higher ticket prices on international routes, said Tom Parsons, who runs fare-tracking Web site Bestfares.com.

For example, Delta sells round-trip tickets from New York's JFK airport to Los Angeles International (5,000 air miles round-trip) for as little as $300, while a round-trip ticket from Atlanta to Paris's Charles de Gualle airport (which covers 8,800 air miles) is $1,300 right now -- more than four times more expensive for less than double the distance.

"If the legacy airlines could completely cease domestic operations today and fly just from their gateway cities to Europe and Asia and Latin America, they'd make money," Parsons said.

International traffic for Delta and other legacy carriers dipped significantly right after the 9/11 attacks as travelers delayed trips abroad, and the build up to the war in Iraq further depressed international travel. Delta's international revenue fell from a peak of $2.5 billion in 2000 to a low of $2.2 billion in 2003.

However, last year brought major gains in international travel as the global economy got stronger.

European traffic bound for the United States has played a key role in Delta's recent gains, partly because the euro and the pound have favorable exchange rates against the U.S. dollar right now. (One euro is worth $1.25, and one pound is worth $1.83.)

Outbound traffic to Latin America also has been strong because the U.S. dollar is trading favorably there right now, with one dollar converting to 11 Mexican pesos or 2.88 Argentine pesos or 2.42 Brazil reals.

"[Latin America] has been very well received and has been a very strong market," Delta CEO Jerry Grinstein said during the company's May 19 annual meeting in Atlanta.

Delta's international operations are "the one bright spot" for the carrier as it tries to fix its unprofitable domestic operations and fend off further competition from low-cost carriers, said Darryl Jenkins, a visiting professor at Embry-Riddle Aeronautical University.

"It's the only thing I've seen Delta do in a very long time that I've been complimentary of," Jenkins said. "Domestic is a mess for them, and for everybody else, but they have more control with international. Right now, this is the best play for them, and they should wring [profits] out as much as they can."

But there still are improvements that can be made on the international side, said Parsons of Bestfares.com.

International tickets tend to have more price volatility based on seasonal travel patterns, which can turn these operations into money pits during the slow months of January to April.

Tickets from Atlanta to Milan that cost $1,100 in the summer can easily fall below $500, for example, and tickets to London or Paris also can fall to $400 or $500 from their summer peaks of $1,200 or more.

"Europe is still this funny animal with huge fluctuations in price and big seasonality changes," Parsons said. "The mentality has been to charge three or four times more in the high season [of summer] and then take a whipping in the low season and try to make it up when the next high season rolls around."

Many international markets also are tightly controlled by complex bilateral agreements.

This past winter, Delta's bid for direct service to China from its Atlanta hub was rejected when federal transportation officials instead gave the routes to American Airlines Inc. and Continental Airlines Inc. (Atlanta package delivery giant United Parcel Service Inc. did win some China routes for cargo-only flights).

Delta had estimated that direct service from Atlanta to Beijing would have an impact of $400 million on the economies of Georgia and other Southeastern states, and Delta now is the only major airline in the country without direct service to China. Atlantans who want to fly to China must connect through Chicago or New York. Delta officials plan to apply for China service again when more routes come available in 2008, but being shut out of the Chinese market was a deep blow to Delta, Parsons said.

"Every major airline needs routes in Asia because those markets are hot and they're locked up [through regulation], and the airlines know that when they get a route there, it's cash in the bank," Parsons said.

For markets Delta can't serve with its own planes, the carrier often relies on its SkyTeam Alliance partners such as Aeromexico, AirFrance, KLM, Alitalia, Czech Airlines, Korean Air, Northwest Airlines Inc. and Continental.

Delta can sell tickets to China's Hong Kong airport, but those tickets are actually code-sharing deals with its SkyTeam partner Korean Air. Korean operates the flights with its own planes and must route China-bound traffic through its hub in Seoul. Delta and Korean split the revenue from tickets according to pre-set ratios.

The SkyTeam Alliance represents a tremendous boost to Delta's bottom line each year, generating about $600 million in annual revenue -- triple the revenue it generated for Delta just five years ago.

Delta's Fernández notes that the carrier's future growth in Europe, Latin America and the Caribbean will be limited only by Delta's own resources and government regulations.

Delta is putting several of its most expensive Boeing 767-300 wide-body planes on the new routes to Latin America and Europe, something Fernández said illustrates Delta's commitment to those regions.

"These are important markets to us, and we are doing everything we can to take advantage of it," Fernández said.
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