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Delta’s rising CEO inherits big profits, big issues

Ed Bastian will move into the top job at Delta Air Lines amid favorable tailwinds. Fuel is cheap, operations are generally smooth and employees are sharing in record profits.

But the airline industry can be humbling in a heartbeat, and Bastian and his newly promoted lieutenants face a host of potential pitfalls ranging from pilot labor pains to Japan air treaty talks. Not to mention a wobbly global economy.

Delta last week named Bastian, currently the Atlanta giant’s president and No. 2 executive, to succeed CEO Richard Anderson when the latter retires on May 2. It was not a surprise choice; Bastian was considered the heir apparent, having played a key role in Delta’s resurgence since a trip through bankruptcy a decade ago.

The airline also said veteran executive Glen Hauenstein, who has headed route and pricing strategies, will ascend into Bastian’s current post.

As good as recent times have been, Bastian, 58, said more opportunities lie ahead, with room to improve performance. “We’ve got more chapters in this story to write,” he said.

Among the challenges Bastian’s team will inherit:

International turmoil

“The biggest challenge we have right now is the choppiness on the international side of our business,” Bastian said in a brief interview last week.

Low fuel prices have helped to make up for the weaker revenues so far, he said.

The culprit, he said, is the strong U.S. dollar, which is weakening the purchasing power of foreign travelers to the United States.

When those markets rebound, he said, “we’re going to be well-positioned.”

But for now, Bastian said, “Our revenues internationally are down across the board — they’ve been down for the better part of the last year and they may stay down” for some time.

Fuel price volatility

Fuel costs will not likely stay low forever, and the roller coaster of oil prices have in the past proven to have very mixed effects for airlines.

Delta management has sought to build a business that can ride through the peaks and troughs. That means holding back from free-wheeling expansion and airplane buying sprees during the good times.

Lower fuel costs can enable more investment in technology and amenities to maintain a strong market position amid stiff global competition for high-spending business travelers.

“We’re investing $3 -$3.5 billion in product every year and the cumulative effect of that over time is phenomenal,” Bastian said. The fruits include improvements in in-flight wi-fi, food and drinks, Sky Clubs and lie-flat seats.

“You’re going to see the product continue to improve,” Bastian said.

Bastian’s task will be to balance the spending with cost-control through the ups and downs of fuel prices, the economy and competitive pressures.

Domestic competition

Big mergers have cut the roster of big players, but the airline industry has a history of spawning new entrants and growth spurts among upstarts. Lately, declining fuel prices have opened the door for low-cost carriers including Spirit Airlines and Frontier Airlines to offer cheap flights in more markets.

Both had added flights to Atlanta, where Delta has its citadel hub.

Discounter growth can drive down fares across the industry, pressuring bigger rivals with higher cost structures.

To combat new competition, Delta has rolled out “basic economy” fares, which do not allow advance seat reservations, upgrades or flight changes. Regular economy fares are priced higher.

Other countermeasures have a checkered history: Anyone remember Delta’s SimpliFares or its Song subsidiary? Both are defunct.

“As an airline manager, you have to compete with every low-fare carrier. The art is in how you mitigate the damage of doing that,” said Port Washington, NY-based airline consultant Robert W. Mann. “Delta has experimented over a very long period of time over how to do that most constructively.”

Pilot contract talks

Last year, a rush effort to negotiate a new contract with Delta’s pilot union ended with a resounding thud as pilots voted down a tentative deal. That sent both sides back to the drawing board, and the union, citing Delta’s profitability, now says it wants a nearly 40 percent compounded pay hike over three years.

Securing a deal is important to avoid customer and shareholder nervousness about labor peace with a key employee group.

Anderson came close to settling the matter before leaving, and it’s possible he will remain involved in his role as executive chairman after retiring.

But barring a surprise breakthrough in the next couple of months, the drama will play out on Bastian’s watch.

“Ed has also had a long-standing historic relationship with the pilots’ union and will continue to be instrumental in the process of a new pilot agreement,” Raymond James analyst Savanthi Syth wrote in a note to investors.

Trouble in Brazil

Some of Delta’s key international markets have particular issues — most notably Brazil.

Delta tried to gain a strong presence in Brazil when its economy was booming, adding flights to Sao Paulo and Brasilia.

In 2011 it struck a deal to buy a $100 million stake in Brazilian carrier Gol, with the idea of “becoming the U.S. carrier of choice in Latin America.”

Since then, the tide has turned in Brazil.

“We’re in a very difficult economic, political crisis” in Brazil, Bastian said. “You’ve got commodities at an all-time low, and you’ve got currencies that are very weak,” with Brazil facing its worst recession since 1901.

“We’ve scaled back some of our Brazil presence,” Bastian said. “It may be years before we see a full rebound.”

Asia challenges

Delta is in a fight over landing rights as part of U.S.-Japan air treaty negotiations, and it says the outcome will affect its Tokyo hub, Asia network and competitive stance with rivals United and American.

Nonstops between Atlanta and Tokyo also are at stake, Delta says.

Delta fears the talks will produce an expansion of flying at Tokyo’s close-in Haneda airport that could give United and American a greater share of traffic because of their alliances with Japanese carriers. Delta says if that happens its hub at the more remote Tokyo Narita airport would be at a competitive disadvantage.

“We’ve made our concerns known in Washington,” Bastian said, but it’s unclear how much leverage Delta can exert. The next round of talks starts this week.

Meanwhile, Bastian said Delta will continue to focus on opportunities in China, where it has partnered with China Eastern.

“That partnership is going to take time to mature and develop over time,” Bastian said.

Seattle battle

One of the key domestic battlegrounds for Delta is Seattle, where a dogfight has erupted between Delta and Seattle-based Alaska Airlines.

Delta is intent on expanding in Seattle and establishing a hub that will serve as its gateway to Asia. Alaska is determined to defend its turf. The two carriers have been marketing partners but are now frenemies.

Delta faces an uphill battle against Seattle’s hometown carrier but has invested $15 million in facilities at Sea-Tac and continues to expand, with plans to operate more than 150 daily departures from the airport this summer. By comparison, Delta’s primary western hub, in Salt Lake City, has about 260.

“Seattle will play a bigger and bigger role for us,” said Hauenstein, the airline’s incoming president. “We’re continuing to grow.”

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