Delta’s CEO On The Perfect Airplane for Los Angeles, A Vision for the Pacific, and More (Across the Aisle)

Let’s call this “Delta week,” because you’re going to be getting a lot of CEO Ed Bastian here. When he was in Los Angeles a couple weeks ago for an employee event, I sat with him to do an Across the Aisle interview. He certainly didn’t pull punches, and I think you’ll agree there are some gems in here. But at more than 6,000 words, I had to break it up. So, here’s part one of what will be a three-part interview.

Today we start off with Los Angeles and the airline’s plans there as it gets ready to move into its new terminals this month. You’ll also find a lot of discussion about the airline’s Asian strategy, including the upcoming joint venture with Korean and where China Eastern fits in. In part two, we talk about bigger picture things. How does he keep Delta from getting too cocky? How should Delta react in the world of social media and video when something goes wrong? Then we’ll close it out with a discussion about the Middle East carriers in part three.

Brett Snyder, Cranky Flier: I guess we’re in LA so why don’t we start in LA, shall we? You have a lot of changes coming here very shortly. New terminal, a lot more gates… in theory… eventually. So what is the LA plan? Where is this going to go once you’ve got your facility?

Ed Bastian, CEO, Delta Air Lines: First of all, we are out of space at LAX. We have grown substantially over the last 5 years here, but we are at the point where there’s no longer any room for growth. We turn our gates 10 times a day here which is by far the most of anywhere in our system, and it’s unsustainable. We don’t have the ability to work efficiently with our international partners because we don’t connect to [the Bradley International Terminal] with so many of our partners such as Air France or Korean or KLM or the Chinese airlines. There’s a lot of traffic they bring to LA for LA but also a lot that could be distributed throughout the domestic system that we don’t carry or that gets picked off along the way, because people have to leave the airport or wind up getting lost. We know the quality of the connection is not competitive with other hubs.

Cranky: There’s the quality, but is it also things like you just can’t do it fast enough [because of high minimum connect times]?

Ed: Yep, that’s part of the quality. It’s the timing and the experience itself. It’s the duration of the connection, and we had an opportunity to move to the other side of the airport. It’ll allow us to take a lot of the congestion off the gate area because we’ll be able to bring the 10 [flights per gate per day] down to something more rational like 7 or 8 turns a day. It’ll still be high but nowhere near what we’re carrying today. It’s incredibly congested over on the south side, and we’re having big hold-out delays, everyone is on that side. We’ll be able to eliminate a fair bit of that over on the north side and bring a lot more efficiency to the operation which will be a good customer and employee benefit as well. And it’ll be a platform to grow into the future.

For example, Mexico. We just closed last month on the Aeromexico transaction. We are now the largest owner of Aeromexico at 49 percent. Los Angeles is the number one market that Mexicans travel to; 6 million Mexican-Americans live here. It’s the largest ethnic base of Mexicans in the US. And with open skies now finally in place between our two countries and our Aeromexico JV [joint venture] that we’re getting ready to launch, we need to be able to bring a significant amount of service between Mexico and LA that we couldn’t accommodate in the existing facility, just as an illustration. Plus Aeromexico was already in Terminal 2, so you can talk about that. You can talk about Virgin Atlantic over in Terminal 2 that we don’t connect to today. You’ve got Korean, the MOU that we signed, the JV we’re going to create… so a lot of international opportunities that we’re going to create to surface here with our existing partners as well as growth opportunities. And secondly it’ll allow us to bring in larger gauge aircraft in greater volumes in this market which has done well for us.

Cranky: Some of this is about connections, right? But a lot of this is about how do you serve LA best, the people in LA or the people coming to LA. Mexico is one area you want to see more, but are there things today that you feel like the airline isn’t adequately serving? Forget about the physical facility issue, but in terms of destinations, not necessarily specifics, but are there things that are lacking in your ability to serve the market?

Ed: Yeah, we have about 175 flights a day so it’s a respectable number, and we’ve doubled our footprint in the last 5 years, so we’ve had a lot of growth. But we’re at a point where we can’t grow any further. I think we serve 22 of the top 25 markets, so there’s more we can do. There’s larger aircraft that we want to bring in, because we still have a lot of the services on regionals. We need to be bringing more of that up to the mainline. The C-Series we’re launching next year, the North American launch customer, we’re very excited about that. It would be a perfect airplane for LA in terms of getting rid of the regionals and going with a higher gauge. In order to do that, you have greater volumes that you’re bringing through, the infrastructure and the systems and the ability of the new terminal to manage that better.

Cranky: It’s going to be awhile before you’ve got this where you want it to be. You’re not going to be connecting to Bradley with a walking bridge.

Ed: No, but we’ll be adjacent, which will be an improvement.

Cranky: Do you think you’re going to get most of the benefit right away from this move?

Ed: No, it’s going to take a number of years. This move is unlike most airport moves or construction or creating a new terminal in that we can’t start building until we get in. We have to take possession first. That’s when the real work starts. All the work we’ve been doing is just planning for the move, which is historic. No move has been done of this size before, but then once we’re in, then the work’s gotta be done to renovate that facility and grow it and bring it up to the Delta style and standard. Not just for today but for the future as well. We’ll be using technology and a lot of other opportunities that we’ve got planned. Security for example needs to be enhanced. Premium check in… there’s many many things we can do.

Cranky: When you think about Seattle and Los Angeles, your two West Coast hubs, how do you see them working together? It sounds like you want more connections through LA to allow you to upgauge, use bigger aircraft. But you also have that going through Seattle too, so how do you view those together?

Ed: Well, LA is the largest [origin and destination] market in the country. A fair bit of it is still LA origin as opposed to a hub orientation. Seattle is restricted in size. We’re out of space there as well. We’re at 150 flights a day. Going to have the new international terminal, they’re putting shovel in the ground, that’ll be open in the next several years. We think they’ll complement each other. We’ve also got a new airport going into Salt Lake City. You think about our region, we have a three-hub strategy between Salt Lake, Seattle, and LA. It’s where we see a sizable, outsize amount of growth in our industry, in the western region. And we’re putting the facilities in place to accommodate that.

Cranky: Let’s keep going around the Pacific. I want to talk a little about Korean and China Eastern as well. How are you viewing the Asian strategy now, because there’s been a lot of speculation about what does it mean for Tokyo with the partnership with Korean? What are you hoping to get with your Asian strategy with the partners you’ve put forward as most important?

Ed: Well, our long term hub in North Asia was [Tokyo] Narita. Once Haneda had been opened and liberalized and turned into a hub with American and United working with their partners JAL and ANA, it’s put us at a pretty significant competitive disadvantage given the preference for Haneda for the local traveler. So it’s put a lot of traffic pressure on our ability tothink as a hub, its days are probably limited out into the future. But we’ll see. Right now, we need to plan to have a better North Asian solution.

The good news is that we look at Korean and we look at our partnership there, which has been an interesting relationship and Delta has a long, very, very good relationship with Korean that dates back 20 years. Once Delta merged with Northwest we went from overnight being they were our Pacific gateway because we didn’t fly to Asia, maybe 1 flight a day to Tokyo, to overnight being a big competitor of theirs at Narita vs. Incheon, so it changed the dynamic of the relationship substantially. So we went through some relationship issues as happens when the rules of engagement get moved around. And we’ve been able to work our way back and we’re now good partners. And we’re looking at a future where they will be our most important partner in Asia at Incheon.

First of all, they have a good product. Incheon’s a great hub. We’re moving into a new terminal that’s being built. It opens in the fall in advance of the Winter Olympics, and only Delta, Air France, KLM, an Korean will occupy the terminal. I was over there a few weeks ago. It’s going to be the best terminal in all of Asia, maybe in the world. And we look at our ability now to serve all parts of Asia through Incheon versus very, very limited abilities at Narita on our own. And it’s substantial benefit to our customers and for the market. I look at China alone. China will be carved out because we do not have open skies. China will not be part of it.

Cranky: Which is too bad because Korean is a great way to get into China.

Ed: Well, it is because they have 30 destinations they serve. Customers can still do that.

Cranky: Yeah, codeshare and all that.

Ed: But it won’t be through a JV. But there are many markets across all of Asia that will be part of it. Our goal is to turn the Delta/Korean JV across the Pacific into very similar to what we have today with AF/KL across the Transatlantic except China will be carved out.

Cranky: In the last year the tone with Korean shifted dramatically since you’ve taken over, which by the way, congratulations on your one year anniversary. What happened in the last year that the relationship was able to thaw to the point where you’re now really moving forward with this greater cooperation?

Ed: Well I’ve always had a good relationship with [Korean] Chairman Cho, even during the difficult days I still maintained that. This has taken me many years personally, many trips to Seoul, to get this back on the map. So I don’t attribute it to myself personally. What I attribute it to is our business model in Japan has changed a lot. And so we need them and, by the way, they’re concerned, rightfully so with the growth of the Chinese carriers and their direct service into the US. They have that big Chinese business that the Chinese carriers are looking to take away, and they’re going to continue to do that as they get bigger and better and become a real competitor of theirs. So they see our model with what they look at in Europe, and they say, if we can get Delta/Korean as tightly integrated as Delta/Air France is, we have a much stronger chance for success. We both saw a lot of value in a relationship that has 20 years of history. To me it’s, you talk about trying to find arrangements in business where 1+1=3, that’s this situation.

Cranky: Presumably China Eastern fits in as that carve-out in a similar way to how Virgin Atlantic does in London vs AF/KL?

Ed: Well, it’s different. With Virgin, we can do something with AF/KL and we may because we have [anti-trust immunity] across the Transatlantic. That could change going forward, I don’t know if it will but it could. [In] China we don’t have open skies, but long term in an environment where you have open skies, I think you look at a situation where you very much want to bring China Eastern together with Korean together with Delta, and I think it’s an extraordinary powerful combo at that point. But right now, we don’t know when or if that’ll ever happen so we deal with what we’ve got.

Cranky: I was going to say, do you have any feeling on whether that’s ever going to be a possibility?

Ed: I believe it will happen some day, but I have no idea when.

Cranky: Talking about Tokyo again just briefly. I know it’ll be an important destination and that’s about it. How do you view things like the beach markets? Is that something that it’s worth to continue trying to do that? I assume it’s more about the local market.

Ed: Yeah. Ninety-five percent of the traffic is the local market. We’ve got longstanding relationships in the local market. Delta’s well known within the trade on those trades. Historically they’ve been the most profitable part of the Narita operation, the beaches, and I think they will continue to be a sought after destination.

Hopefully you enjoyed part one, but we’re just warming up. Get ready for part two tomorrow where we get all philosophical. Then in part three later this week, it’s Middle East-carrier time.