Delta Air Lines (DAL) CEO Richard Anderson leans back in his chair, smiles and explains why he’s so happy.
His airline cancels fewer flights than the competition, complaints are down and, most importantly, Delta is making record profits — despite a bad bet on oil prices.
In an industry that, until recently, was famous for its losses, it’s rare to hear a CEO speaking so optimistically about the future. But a wave of mergers has left four big U.S. airlines controlling the majority of flights and stopped the frequent fare wars that benefited fliers but devastated the airlines’ profitability.
With a healthy balance sheet, Anderson, who just turned 60, is now focusing on a fight with government-backed Middle East airlines, building long-term partnerships with other international carriers and improving the onboard experience for passengers. That starts with making sure flights get where they need to. Anderson boasts that last year, Delta saw 95 days without a single cancellation in its mainline fleet; other carriers only had a handful.
“We’re ready for the summer,” Anderson says. “Our reliability’s going to be off-the-charts good.”
In a wide-ranging interview with The Associated Press, Anderson spoke about Cuba, the best jets for his fleet and getting Delta out of its junk bond status. Here are the highlights:
Anderson is confident that lower oil prices are here to stay. He’s basing business decisions on oil costing $50 to $100 a barrel and a prediction that the U.S. will be able to supply all of its petroleum domestically by 2020 thanks to advances in drilling technology.
“It’s a huge surprise,” Anderson acknowledges. “But it’s a classic U.S. phenomenon. The U.S. innovates.”
The U.S. government isn’t as optimistic about energy independence. The Energy Department expects the country to rely on imports for 14 percent of its oil and petroleum fuel needs in 2020 and 17 percent in 2040. That’s still a far cry from the 60 percent imported in 2006, the high point before the U.S. oil boom.
Delta paid $2.29 a gallon during the first three months of this year, down from $3.06 during the same period last year. That 25-percent savings adds up fast; Delta burns through 3.9 billion gallons of fuel a year.
The carrier did forfeit some of those savings because of a financial bet, called hedging, that oil prices would go higher.
When fuel cost more, most airlines rushed to order new planes from Airbus and Boeing, aircraft that are more efficient but carry a larger price tag. Over time, the fuel savings offsets the higher upfront cost. But with fuel prices now 39 percent lower than just three years ago, the payback takes longer.
Delta took a different approach, refurbishing its aging fleet, buying some used jets and purchasing new planes to fill the gaps. Anderson has no plans to change that strategy. United Airlines recently followed, obtaining some used jets.
Anderson is eyeballing the 787-10, which isn’t yet in production. Delta is under contract for 18 Boeing 787-8s, the smallest Dreamliner variant, but Anderson prefers the stretched version. Granted, he isn’t willing to commit – at least publicly — just yet.
“As always, we would see what Airbus is offering, with the A350-10, but I do think (the 787-10) should be an airplane that is one day in the Delta fleet.”
Delta will fly to Cuba — someday.
“Everyone believes that Cuba is this panacea and I don’t see it,” Anderson says. “It’s the result of central planning gone awry. I mean, Cuba has no infrastructure. It doesn’t have a real economy. How do we think this suddenly is going to support dozens and dozens of non-stop flights a day?”
Additionally, Cuba will compete with Jamaica, the Cayman Islands, Mexico and dozens of other beach destinations.
“If I were them, I would do two things: I would quickly put together a legal and banking system that would respect private property and private capital. Number two: I would adopt the U.S. dollar as my currency.”
He also suggests incentives for firms to build the infrastructure needed for large-scale tourism.
Anderson is focused on other international markets, primarily Mexico. A liberalization of flight rules with the U.S. expected next year could help Delta expand in Mexico, which Anderson calls “a great trading partner.”
Anderson wants to expand Delta’s international reach but diversify routes to protect against regional economic difficulties. Today, the airline and its partner airlines have international hubs in Tokyo, Paris, London, Amsterdam and Rome. Within five years, he plans to build up operations in Shanghai, Mexico City and Sao Paulo.
As Anderson looks to Asia, he wants to expand Delta’s partnerships with China Southern in Beijing and “our real focus,” China Eastern in Shanghai. Delta is working with China Eastern on a joint airport lounge and an executive exchange program.
Anderson says he follows other airlines’ key Security and Exchange Commission filings, “but I don’t pay much attention to earnings calls. I don’t read analyst notes either.”
That’s a stark contrast to American Airlines President Scott Kirby who recently told a Phoenix aviation symposium that he makes his staff read earnings transcripts for even the smallest competitors.
Anderson doesn’t see Delta competing with other airlines.
“I don’t as much focus on the airline business as I focus on the high quality industrial transports like Burlington Northern, CSX, Norfolk Southern, UPS, Federal Express, J.B. Hunt,” he says.
Anderson says Delta’s balance sheet will be investment-grade by the end of the year; now he just needs to convince the bond-rating agencies to raise their appraisal of his airline.