This week, Delta accomplished something incredibly rare… it came to a new tentative agreement with its pilots 6 months BEFORE the contract was amendable. How the heck did that happen? Both sides wanted something and there was time pressure for it come together. If the rank and file approve, Delta pilots will get big raises, but most importantly for travelers, the airline will shift to bigger jets with better passenger amenities.

Union contracts in the airline industry are different from most others in that they never expire. Instead, at a certain point they become amendable. This is supposed to avoid disruption in service, but in reality, it’s just an awful process that draws out contracts negotiations over several years. It’s only when the stars align that things get done in a timely manner. But a timely manner would be soon after the contract is amendable, not the 6 months beforehand that we see here. So what’s the story?

There was a unique opportunity on the table for Delta to get a hold of AirTran’s fleet of 717s that Southwest has decided it no longer wants as part of its acquisition. But for Delta to get those airplanes, it had to get the pilots to agree to fly them for a rate that would make this move a smart idea. So there was some urgency for Delta to come to an agreement sooner rather than later to make this work out. Sure enough, the pilots were interested and the deal came together. Let’s talk about what this means for everyone.

Delta Pilots Fly the 717
If this is ratified, Delta will take the 88 717s in the AirTran fleet today. I don’t know the terms, but you know that they’re getting a smoking deal on these aircraft. The Delta pilots will fly the 717s at the same rate they’re paid to fly the DC-9s today. In the last quarterly report, Delta still had 21 DC-9-50 aircraft in the fleet, but those are on their way out to be retired soon. The 717s, which are just a bit shorter, will take over for those DC-9-50s with 110 seats split between First, Economy Comfort, and coach.

50-Seat Regional Jets Slashed by 65 Percent
But that’s not a one for one replacement; there are still an extra 67 airplanes if we do the math. Delta says it wants to keep capacity flat, so what else will happen? The airline will slash and burn the 50 seat regionals. Here’s how Delta lines up with 50 seaters as of the last quarter:

That’s 353 of those 50-seaters buzzing around. And you know what the new contract would allow? No more than 125.

Holy cow, that’s a massive decrease. Delta is happy about this because with oil where it is, those 50-seaters are completely uneconomical. The pilots are happy because they get rid of a ton of outsourcing. But wait, we’re still out of balance. Let’s do some math. The DC-9s have 120 passengers, so multiplied by 21 airplanes and you have 2,520 seats. The 717s have 110 seats, so multiplied by 88 airplanes and that adds 9,680 seats. The RJs have 50 seats, so multiply that by 228 airplanes that are going away and you have 11,400. So right now, we’re removing 13,920 seats and adding back only 9,680. What about the rest?

70 More Big Regional Jets
It’s the bigger regional jets that balance this out. At last check, Delta had contracted for 102 aircraft in the 65 to 70 seat range. Those are a mix of CRJ-700s and Embraer 170s. In addition, Delta had contracted for 153 of the 76-seat jets, which are a mix of CRJ-900s and Embraer 175s. As part of this deal, the pilots will allow them to contract for up to 70 more of those 76-seat jets as long as Delta adds new mainline aircraft at a rate of 1.25 to 1. It’s pretty convenient that 1.25 times 70 is … 88 (if we round up), the number of 717s that the airline would acquire.

The Final Tally = Better Customer Experience
That means Delta adds another 5,320 seats, or about a total of 1,000 more seats than it will remove from the fleet. In the end, Delta gets rid of 228 money-losing 50-seaters and the terrible, cramped, single class experience that comes with them. It gains 158 bigger jets with First Class, wifi, and just a bigger more comfortable cabin. This will give Delta a more consistent offering for customers, and it’s going to come at a pretty nice price as well. I’m sure Delta is getting a great deal on the 717s, and all Southwest has to do is push them to the other side of the Atlanta airport.

The Losers
That’s great news for both sides. Who loses? Small cities may potentially lose out. The lucky ones will see fewer flights on bigger airplanes. The unlucky might lose out, but hopefully those 125 50-seaters that remain will be able to keep service to most of those cities, if not all. The other losers here are some of the regionals. I say “some” because some stand to gain 76-seat flying while others will lose. The biggest loser in my opinion is likely to be Delta’s wholly-owned subsidiary Comair. The airline has been shrinking for years, and now it will likely lose half its fleet. (It is the only operator of the older CRJ-100 so those are most likely going away.) This could be the end of that airline entirely, with the remaining big airplanes merged into Pinnacle?

The Rest
So is that everything here? Not quite. The pilots are also getting big pay raises out of this. Over the three-year term, rates will increase by 20 percent, sometime more depending upon the aircraft. Is Delta insane? How the heck is going to pay for that?

Well, buried in the contract somewhere are productivity gains. I don’t know the details on exactly what Delta gets, because those rules are pretty tough to get through. But Delta is going to get better production out of its pilots, and that will help to offset the hourly rate increase. Another offset is a reduction in profit-sharing. As we’ve seen many times before, variable compensation starts to shrink as unions fight for more in base pay.

Wrap Up
In the end, I like this deal as a passenger because the customer experience will dramatically improve. And I like this as someone who watches the industry as well. While I start to hyperventilate when I see such big pay increases, Delta is really getting a lot out of this deal in return. It helps when both sides have goals that align and are motivated to strike a deal. It sure paints a stark contrast to what’s been happening over at United lately. Now, we just have to wait to see if the pilots vote to take it or not.

[If you'd like to read the entire mind-numbing 400+ pages of the agreement, I've got it right here thanks to Holly Hegeman over at PlaneBusiness.]

Everyone makes mistakes, but some mistakes are worse than others. Delta had one fall into the “pretty bad” category recently when it decided to try out some new search functionality on its website. In some cases, those who were logged in ended up getting different prices than those who weren’t. That’s not good. Fortunately, it’s been fixed.

The story seems to have been uncovered when a couple of business partners tried to book side by side. They each got different prices despite doing the same search. So what happened?

According to Delta spokesperson Paul Skrbec, the airline “updated our search function as part of a phased approach to improve the site.” The people who were logged in were using the glitchy new search function whereas those who weren’t logged in used the old one. That meant that you would get conflicting results depending upon whether you were logged in or not.

Despite press reports that those who were logged in were charged more than those who weren’t, Delta told me that sometimes the fares were lower, if they were different at all. This went on for somewhere between one and three weeks before Delta reverted to the old technology throughout the site. (It’s unclear to me how long Delta knew there was a problem.)

It’s not necessarily a big problem if Delta wants to try and charge different prices to different people (though charging elites more is pretty stupid because that will encourage elites to not log in when they buy). We can have that conversation another time, because I’m sure a lot of you disagree with me. The big problem in my mind here is if the airline does it without telling people it’s going to happen.

Why is that an issue? Because people aren’t stupid, and it’s way too easy to see through something like that. People would catch on when they compare using different sites or when they book side by side with someone. Long time readers will remember the first and only fire-red-with-anger Cranky Jackass award that I gave US Airways for quietly slipping in booking fees on its own website. That practice is long gone, but it was sneaky because the airlines have spent years drilling into people that they will get the lowest fare on airline websites. If that quietly changes without any sort of notice, then I consider that deceptive.

Fortunately, that’s not what we’re seeing here with Delta. We’re just seeing yet another problem with the Delta website. People already lack trust in the website’s terrible SkyMiles redemption capabilities and this could shake faith in the paid booking process as well, depending upon how big this story gets.

This is definitely a black eye for Delta since a lot of the media reports make it seem like Delta is deliberately trying to charge its frequent fliers more. What does that mean for Delta? It means people will be more likely to search other sites to verify the pricing seen on Delta.com. It also means people may try to book without logging in. Delta shouldn’t like that because it’s always better to be able to tie behavior to a specific user if you can. It helps a smart business better serve that person.

Possibly the most frustrating piece of this whole thing is that some people likely were overcharged and they really wouldn’t have any way to know it. If you do know that you were overcharged for one reason or another, Delta told me that the best way to deal with it is to contact Customer Care. But how would you even know? You probably wouldn’t.

So, conspiracy-theorists, was this really some super-secret attempt to test price discrimination across customer types? I don’t think so. I think it was just a mistake.

That being said, I won’t be surprised if we see an airline try that kind of pricing at some point in the future, but I’m hopeful that when it happens, that airline will be completely up front about it.

[Original photo via Flickr user Hugo90/CC 2.0]

It’s earnings season, and that means it’s time for a slew of long analyst calls to talk about the events of the last quarter. I don’t listen to them myself, because I’d never get any work done if I did. Instead, I just read PlaneBusiness to get the details on what happened. This quarter, a couple of things on JetBlue’s call jumped out at me, and it got me thinking. It looks like JetBlue might have the tools to bring not only its own flights, but also those of partners under its own roof. That would be huge. Take a look at this quote from the earnings call:

And then if you go over to JFK, just a little update. Of course, terminal five, we’re close to celebrating four years of really just optimum performance through that facility. We’re very close with the Port Authority of extending terminal five. We call it T5 International internally. It’s on the footprint of the former terminal six. Terminal six is — was not landmarked. It was obviously, as you know, originally there to support National Airlines decades ago. It is now a tarmac, and we are very hopeful that we will be breaking ground on an international arrival facility similar to what you see happening over at terminal four. There’s a lot of growth happening at Kennedy. We believe that having all of our operation under one roof — and again we will have Hawaiian Airlines in here very shortly — is really exciting.

This might not be breaking news, but it’s the first time I’ve really thought about this. An international facility at Terminal 5 would do wonders, wouldn’t it? Of course, it would allow JetBlue’s own international arrivals to land at Terminal 5 instead of running a split operation today, but it can do much more than that.

JetBlue has already announced that its partner Hawaiian will begin flying out of T5 when it comes to JFK. Hawaiian, however, is the only partner that can do that right now. American is certainly too large and it has its own new facility there anyway. Cape Air, the only other domestic partner, doesn’t fly to JFK. All the other partners are international, though I do wonder if Aer Lingus could move today because of its pre-clearance. I’m not sure. But, if JetBlue builds a new international wing on the footprint of the old Terminal 6, that opens a whole new opportunity, and it comes at a good time. Here’s JetBlue’s corner of JFK:

Remember that Delta is actively working to take over a huge chunk of Terminal 4 as a replacement for Terminal 3. With that, all existing airlines in Terminal 4 will be pushed to the eastern concourse, I believe. And you know which airlines are included there?

Aer Lingus, El Al, Emirates, LOT, Singapore, South African, TAM, and Virgin Atlantic are all both partners with JetBlue and tenants in Terminal 4. Given the opportunity to make connections simple and move to a brand new facility, you would think that many of these would jump at the chance. Sure that might not include airlines like Virgin Atlantic, which have invested a significant amount of money in facilities, but others don’t quite have those deep ties.

That would create a monster of an opportunity. Keeping all those flights in the same terminal reduces minimum connecting times and allows airlines to schedule tighter connections. For an airline like El Al, it could help make connections more competitive by reducing total transit time. The shorter the travel time, the higher those flights show up in reservation system displays. That could be a big deal for some of these airlines, which might be at a disadvantage versus other airlines that can connect within the US on their own flights.

I haven’t seen a ton of information on this Terminal 5 expansion yet, but it seems like a great plan for both JetBlue and its partners.

When I posted my trip report last week and mentioned that Delta damaged our stroller, a commenter requested that I report back. Well, we received notification from Delta on Wednesday that a check was in the mail to cover the stroller. While we did have to submit all the receipts and do all that work, it was a pretty painless process. Anyone else had experience with Delta lately with mishandled bags? No need to stop at Delta – how has everyone else been doing?

With fuel being an airline’s biggest expense, we all know that the airline and oil industries are tied together. But that tie got even closer this week when Delta announced that it would buy an oil refinery to start making its own fuel, or at least some of it. Now, I don’t understand the oil industry very well, but I’ve learned a lot more over the last couple of days. What I know now is that this move is brilliant . . . or completely insane. In other words, I really don’t know at all but it sure is interesting.

I’ve spent time on the phone with people at Delta, I’ve read investor presentations, and I’ve even had beers with a couple of folks who work for big oil companies. In other words, I tried to really get my head around what this all means. Here’s how I understand it.

How This Works
Delta has set up a subsidiary to buy the Phillips 66 refinery in Trainer, Pennsylvania which is in the southeast corner of the state on the Delaware River right near the Delaware border, for $180 million. The actual outlay is only $150 million because the state chips in $30 million for a variety of reasons. This is really cheap.

The subsidiary, which is awesomely named Monroe Energy LLC after, I assume, Delta’s original hometown of Monroe, Louisiana, will then invest $100 million to convert the refinery so that it can make as much jet fuel as possible. From here on, I’ll just refer to the subsidiary as Delta to make things easier.

Delta has set up an agreement with BP to provide the crude oil to the refinery and then Delta will refine it, so the airline doesn’t have to source its crude needs. As part of this deal, Delta is going to own a pipeline that sends the oil up near New York City to a deepwater port. Delta can then use its existing fuel network to transport fuel to its New York hubs and via ship and truck elsewhere around the Northeast.

The problem with jet fuel, however, is that you can’t just turn crude oil into it and nothing else. The process ends up with a lot of byproducts in the form of things like gasoline, diesel, etc. In fact, after optimizing the refinery to produce as much jet fuel as possible, Delta will still only see a third of the total output come in that form. So what Delta has done is agreed with both Phillips 66 and BP to have them take all the non-jet fuel product and exchange it for jet fuel. BP and Phillips 66 will sell the gasoline, diesel, etc through their channels and then they will provide Delta with jet fuel at locations around the US for Delta’s other operations outside the northeast.

By the time everything is up and running, Delta thinks it will be able to provide 80 percent of its domestic jet fuel needs from this project. This year alone, Delta expects to save $100 million in fuel costs and that should increase to around $300 million at today’s prices.

Sounds great, right? Well sure. But where I’m still fuzzy is on how the savings will actually occur.

The Dreaded Crack Spread
Last year, Delta paid around $12 billion for fuel, so that $300 million savings is around 2.5 percent of the total. That’s not bad. Of that $12 billion, $2 billion came from the crack spread.

The refining process is known as “cracking.” And the crack spread is the cost of the refining process that gets baked into the price of jet fuel. (It’s not really the cost but rather market driven.) So as you can see above from this, ahem, slightly-modified Bloomberg chart, that cost can swing pretty insanely from down around $5 a barrel at its low to almost $40 a barrel. That’s big money. Last year, Delta paid just over 15 percent of its total fuel bill to pay for the cracking process. Put another way, the crack spread accounts for about ten percent of the airline’s total unit costs so it’s a massive expense.

Of course, Delta still has to operate a refinery, so it’s not like it can completely save the cost of the crack spread. But it’s brought in an industry veteran and has come to a tentative agreement with the refinery workers to put it back into production. Delta thinks this works well no matter what happens.

How This Doesn’t Work Well
To me, the obvious downside is if the crack spread on jet fuel in the market drops. What if it goes down to $5? Wouldn’t Delta lose a bunch of money because it could just get fuel cheaper elsewhere? It certainly seems that way to me, but the crack spread seems to travel with the price of oil, at least over the last few years. So if the crack spread drops a lot, that means oil dropped a lot as well. That’s why over the last five years this would have been a money-losing proposition only at the end of 2008, when fuel prices crashed. Every other year, it would have saved the airline money.

If that kind of crash happens again, Delta will end up paying more for fuel than it would if it bought it on the market, but jet fuel will have dropped so much that the impact will be acceptable in theory. Does this sound familiar? That’s because it’s really just another type of fuel hedge. You may lose money if fuel price drops but you win if it doesn’t.

Dwindling Supply
Part of this isn’t about price at all but rather about supply. Apparently, about half of the jet fuel refining capacity has been shuttered in the northeast over the last few years. With this, Delta can guarantee its supply. Delta shows that the Trainer refinery makes money, so why would it have been idled by its previous owner?

I have to assume that it wasn’t making money, especially on the gasoline by-product which has slim to no margins. We do know that the price of refining in the northeast is more expensive than in the south, and for some types of gas, it’s even cheaper to just buy it from Europe or Asia. So is Delta going to be paying a premium to refine in this area? Maybe.

But there is a big benefit to being in the northeast, because Delta has a lot of thirsty airplanes in the region. Some of the higher costs are offset by lower transportation costs since this is right near Delta’s New York operation. That direct pipeline that goes near the New York airports is one reason that Delta thinks this is a unique opportunity. Having that network significantly lowers transportation costs, and it dumps the fuel out right near two of Delta’s hubs.

I suppose we’ll look back on this in a few years one of two ways; it’s either an incredible move or it’s colossally stupid. Delta seems to have thought through all the different scenarios, so on paper it makes sense. But will it be the same in practice? This one is definitely way outside my knowledge, but it kind of sounds like it might be a great move. Then again, what do I know?

[Original photos via Flickr users Simon_sees, pedrosimoes7, and Wikimedia Commons user Walter Siegmund/CC 2.0]