Week of October 13, 2003
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by RON STARNER, Director of Publications, Site Selection and Conway Data, Inc.
CINCINNATI The U.S. airline industry operates too many hub airports and must take action over the next five years to reduce this number, Delta Airlines (www.delta.com) Chairman and CEO Leo Mullin told economic developers at a recent convention.
"The hub system is changing," Mullin told a gathering of about 1,000 economic developers at the annual convention of the International Economic Development Council (www.iedconline.com) in downtown Cincinnati. "The hub-and-spoke system will continue, but it will not remain the same. We have too many hubs in this country, especially in the Midwest."
Over the next three to five years, said Mullin, "a number of hubs will become spokes."
While Mullin did not identify which hub airports were in danger of being downsized to spokes, he made it clear that Atlanta-based Delta's cost structure could not continue to support the level of air service it is providing in the Midwest.
"Delta has a much higher-priced work force than our competitors, particularly Southwest and AirTran," Mullin said. "The labor costs at Southwest and AirTran are only 40 to 50 percent of Delta's."
Expansion in Regional Jet MarketRather than continue to maintain the high costs associated with operating hubs, Delta will expand its regional jet market, the CEO said. "We continue to buy regional jets and will continue to do so for the next two to three years. By 2005 and 2006, we should return to ordering the big jets from Boeing."
Delta has delayed several pending orders from Boeing due to huge financial losses incurred by the airline since Sept. 11, 2001. Since that date, Mullin said, Delta has experienced fiscal losses of US$7.7 billion in 2001, $11.3 billion in 2002 and a projected $6 billion in 2003.
Passenger traffic today is still 10 percent below 2000 levels, and revenues are down 24 percent, Mullin said. "What must happen to turn this around is threefold. One, airlines must fundamentally restructure and eliminate costs. We have already begun this process by eliminating 100,000 jobs since Sept. 11, 2001.
"Two, the federal government must make permanent the federal responsibility of air security. Right now, the ongoing economic impact to Delta of the tighter federal security requirements is $500 million a year. And three, the federal government must enable appropriate industry restructuring to take place."
Feds Should Allow Mergers, ConsolidationsMullin said that the federal government blocks needed restructuring by forbidding certain mergers and consolidations to take place. In this type of environment, he said, the only airlines making money are AirTran, Southwest and Jet Blue.
"AirTran ordered 100 planes from Boeing four months ago," he said. "But these purchases were financed by Boeing. We should have had some mergers before now, but the federal government won't allow it."
Despite the problems, Mullin said the airline industry remains a vital part of the U.S. and global economy. Some 10 million American jobs depend on the industry, which generates an $800-billion-a-year economic impact in the U.S.
In Atlanta, where Delta is based, Hartsfield Airport generates an annual economic impact of $34 billion.
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