Delta Air Lines (NYSE: DAL) is making quick progress toward recovery from the COVID pandemic as the U.S. vaccination program unleashes pent-up demand for travel. The company is better positioned than many international carriers, from a liquidity and debt standpoint, for sustainable growth.
Passenger load factors are in the mid-80s and demand in May and June was better than expected. The company recently upgraded its second-quarter guidance for revenue to be about 50% of the 2019 level, or about $6 billion — double that of the first quarter. Digital booking volumes are more than 100% recovered from 2019, suggesting demand will grow in the coming months, and yields are also improving. Most of the bounce is from the leisure sector, with business travel only 30% recovered and international business still low due to travel restrictions around the world.
Officials forecast a $1 billion pretax loss for the current quarter, but say they expect a solid operating profit for the month of June and in the second half of the year.
Stabilizing the airline after the travel business evaporated last year required management to raise money in debt and capital markets, slash payrolls, and reduce expenses to the bare minimum. One of the decisions was to retire some older aircraft, including the fleet of large Boeing 777s, and put the 767-300 on an accelerated retirement plan through 2025.
Taking their place the next four years will be 37 Airbus A330 and 35 A350 large passenger aircraft that Delta ordered from Airbus, with the first A350s scheduled for delivery in 2022.
Behind the scenes, Delta’s cargo division has played a critical role bolstering the bottom line and operations until better times. The Atlanta-based carrier was slower to capitalize on high pandemic-induced cargo demand and yields resulting from overall reductions in freight capacity. It has nearly 2,600 cargo-only flights — thousands fewer than competitors such as United (NASDAQ: UAL) and American Airlines (NASDAQ: AAL) — but that doesn’t tell the full story about the growing value of cargo to the enterprise.
In the first quarter, Delta generated $215 million in cargo revenue, up 12% from the 2019 baseline.
On Dec. 1, Delta promoted Robert Walpole to vice president of cargo and placed the cargo division under the Commercial organization to ensure greater market integration. It previously sat within Operations. In January, the carrier brought in a commercial cargo director with extensive experience in the all-cargo and freight forwarding sectors.
Walpole joined Delta Cargo in August 2019 to lead its global operations and logistics organization after a long career in the third-party logistics sector. He previously served less than a year as senior vice president of global logistics for container terminal operator DP World. Before that, Walpole spent eight years — the last two as CEO — at Schenker Inc., the Miami-based U.S. arm of global logistics giant DB Schenker. Walpole joined DB Schenker from BAX Global and helped with the integration of the two companies in 2006 as head of logistics in the Asia-Pacific.
Air Cargo Editor Eric Kulisch recently spoke with Walpole about Delta’s new focus on cargo, how cargo-only flights are defined a bit differently at Delta and cargo’s role within Delta’s management structure. The interview has been edited for brevity and clarity.
FREIGHTWAVES: How would you characterize the agenda you’ve been able to implement since taking over the cargo function at Delta?
WALPOLE: “We’re making some pretty significant progress in the last few months in some of the tweaks in the organization and preparing ourselves to make sure we can optimize the benefits we’ll get out of the fleet that we will see coming back into the organization over the next three to four years.”
FREIGHTWAVES: Can you go into more detail about those plans you’re making and the new planes you’re transitioning to?
WALPOLE: “That replenishment of the fleet [with widebody Airbus planes] will really be the backbone of our cargo business as we build it out.
“If you annualize first-quarter cargo revenue over current market conditions, we’re in the $800 million to $900 million range, we think. So how do we make sure within the organization that we’re optimizing what we’re buying not only for passengers, but also for cargo? That is not a link that has been used in our fleet acquisition strategy before. So we work with our fleet supply chain people on optimizing what we buy, not only in terms of fit out, but in how we weigh and balance the plane.
“What are you doing with your roller racks and locks in the storage compartments, the weight of the racks, what are you doing with doors, where are you placing the crew rests? All of those sorts of things impact the capacity you can carry. If it’s a couple of tons different on a plane, over a 25-year life that’s a lot of dollars.
“Some of our 767s, for example, historically were not configured for cargo because the door size is not right, so we can’t get full-size pallets inside some of those planes. It’s more just making sure that we’re optimized on the procurement side.”
FREIGHTWAVES: I’m curious why, with the move to cargo-only flights, Delta went ahead and retired the 777s so quickly and didn’t continue them for cargo-only, at least temporarily, because they are such good cargo workhorses?
WALPOLE: “The principle behind that was really around how do we best optimize our business across the whole organization, not just for cargo. And to simplify our fleet from pilots, maintenance and so on, for the future years as we [turn to] the Airbus fleet. We simplify and modernize our fleet significantly through the changes that we make.
“We could have used the 777s for cargo-only longer through the pandemic period, but from a cash-optimization perspective overall, we made the decision that we were better off because we have pilots that were either furloughed, or needed to be retrained on the new fleet, and be ready to ramp more quickly, and also get our maintenance systems set up.”
FREIGHTWAVES: Back in Q4, cargo revenue was higher than in previous quarters even though Delta seemed to fly fewer cargo-only flights. Was that just because rates were better? What explains that?
WALPOLE: “What we were doing with our wide-body fleet internationally was using what we call a cargo-led strategy, where cargo is the primary revenue generator. There were a number of markets in the world where we were flying cargo-only or predominantly cargo and if a few passengers happened to get on board that was nice into markets that we were foreseeing flying to in the future from a passenger perspective: Rome, Milan, Nagoya and others. They were basically cargo flights; there might have been a few passengers on board, but they weren’t labeled as cargo-only flights.
“We started in Q4. We really ramped that strategy in Q1 this year. In terms of the formal labeling of is it a cargo-only flight or not, it’s not, but from a cargo capacity compared to a cargo-only flight there’s no difference. So we continue to use the cargo-led strategy as we work with our network teams [to identify] where there is overlap between passenger network interest and cargo-attractive markets for us. Those are the markets we’re really focused on from a cargo perspective.
“A lot more flights are driven by cargo but might not be tagged as cargo. [As of June 21, Delta has placed most of its twin-aisle jets back into passenger service and is only running about five to 10 passenger-freighters per week on a selective basis, a Delta spokesperson said.]
“From an overall cash position relative to our U.S. competitors, we’ve performed better in terms of getting back to zero and that strategy has been a key part of it.”
FREIGHTWAVES: What will cargo’s role be in the organization going forward, given the reliance on cargo in the past year, and what value does upper management place on it?
WALPOLE: “I think across the industry cargo will take a much bigger stake. For Delta, which has maybe been accused in the past of not paying enough attention to cargo historically, the execs in the organization are very focused on how do we leverage this business to maximize value for the whole entity.
“So, my generic answer is, highly focused. We now have some runway to build out the strategy and really take advantage of the opportunity with some of the changes we’re making in the fleet and business strategy. We’ve got a great opportunity in front of us and a lot of support from the executives to execute on that.”
FREIGHTWAVES: Does that mean more input on destination choices?
WALPOLE: “Yes. Heavier input on network design, for sure. As passenger loads rebuild, particularly internationally, then that dynamic will shift a little bit, but the thing that’s changed that won’t change back is the input and the valuation of the economics around the cargo business, and how that drives network decisions for us. Far more balanced, a bigger seat at the table in that decision-making process than maybe pre-pandemic.
“We’ve made some changes in our organization to enable that a little bit. We’ve set up a network leadership role within the cargo business that didn’t exist before, and that channel really connects the economics of the cargo business into our network decision-making process.”
FREIGHTWAVES: When you decide on a cargo-only flight, is it a requirement that it be profitable?
WALPOLE: “Yes. I’d be extremely surprised if our competitors don’t do the same thing. Obviously, they fly a much heavier cargo-only network than we do, so I don’t know the details, if all those flights are cash-positive.
“Our balance here is on what are our customers’ needs, and how we can be competitive in the network solutions we offer, and how we contribute cash. There may be exceptions where we’d fly flights that are not cash-positive.”
FREIGHTWAVES: Can you talk about some of the staff changes in cargo? You’ve had some departures due to the downsizing forced by the pandemic. How does that affect the division?
WALPOLE: “Last year in the third quarter, there were 20,000 people that took voluntary departure packages throughout the company. The cargo business also scaled down by about 20%. But we’re rebuilding now.
“We’ve brought in a new sales leader. We made some internal moves to put someone in that new network role. And we are also in the process of making some changes on the revenue management side. We have some very aggressive goals for the cargo business so we need the right leadership to be able to drive that. It’s a combination of bringing in some more cargo DNA and also having people within the organization that can provide the right connectivity into the network so we can get things done quickly and are not an island within Delta.”
FREIGHTWAVES: What’s your volume of COVID vaccine carriage now, and do you expect that to ramp up as developed countries like the U.S. begin to export more as their own vaccination programs reach maturity?
WALPOLE: “Our strategy early on was supporting our express carrier partners, providing network capability to support distribution domestically. We always foresaw that as the distribution in the U.S. was more satisfied, the focus would move internationally, and that’s exactly what’s happening. And for the second and third quarter the volume ramp of vaccine export will be significant. An example is Latin America, where we expect to be pretty heavy in terms of supporting the distribution into markets there.”
Click here for more FreightWaves/American Shipper stories by Eric Kulisch.
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