Delta Air Lines Goes for a Latin Flair

Ten years ago the dominant airline at what was then the world's second-busiest airport offered just 14 international flights, including only three to Latin America and the Caribbean.

For Delta Air Lines (DALRQ:OTC BB), that historical lack of international flying means there's plenty of opportunity to expand from Atlanta's Hartsfield-Jackson International Airport, now the planet's busiest.

Delta is moving fast. The third-largest carrier wants international flights to account for 35% of its systemwide revenue by the end of this year, up from about 20% in June 2005. This summer, Delta will offer more than 1,000 daily departures from Atlanta to nearly 230 destinations, 67 of them international. Of those, 42 are in Latin America and the Caribbean, as Delta bids to become the No. 2 U.S. carrier in the region.

Delta hasn't failed to notice that many in the airline business question its rapid buildup. During a conference call last week, for instance, Continental Airlines (CAL:NYSE) President Jeff Smisek said that "unlike some of our Johnny-come-lately competitors and imitators, we've been committed to international expansion for a decade."

A company representative says Smisek was referring to "all of the carriers who have recently jumped on the international expansion bandwagon." Spirit CEO Ben Baldanza said in a recent interview that Delta knows it can no longer rely on its domestic service. "And if the devil you know doesn't work, then try the devil you don't know," he said.

"The markets are out there," says James Sarvis, Delta's director for Latin America and the Caribbean. "The opportunities are out there. Some will stick, and some will not. Of course, the good thing about being an airline is you can move your resources."   Like Newark

Among routes that have stuck, Sarvis cites Atlanta to Managua, which Delta started flying in December. "It's a new market in a new country where Delta never flew before, [and] we're very encouraged by the results," he says. Sarvis wouldn't say whether the flight is profitable, but he noted that load factor and revenue are better than expected.

Similarly, he says, Delta began service to Liberia, Costa Rica, in 2002 with three flights a week, and now flies nine a week during the peak winter season. "Before, nobody could tell you where Liberia was," he says. "Now, Liberia has exploded."

Delta knows that much of Continental's recent success has resulted from building international capacity at its hub at Newark Liberty International Airport, like Hartsfield a major airport that once failed to capitalize on its international potential.

Last August, Delta hired Glen Hauenstein, an architect of Continental's expansion, as an executive vice president. Continental is currently the No. 2 U.S. carrier to Latin America and the Caribbean, with service to 77 destinations in 23 countries.

Delta has looked south before. Fifteen years ago, the carrier made a tentative deal to become a 45% partner in a revived Pan American World Airways, which would serve Latin America from a Miami hub. The deal collapsed when Delta pulled out at the last minute, citing higher-than-anticipated costs.

The world today is a different place. In particular, Sarvis cited two changes. First, Atlanta's Hispanic population has skyrocketed in recent years, creating strong demand for nonstop travel to Latin America. At the same time, Delta's decision to phase out low-fare subsidiary Song has freed up jets for international service. Some of Song's 48 Boeing 757s will be used on short-haul routes to markets including Bogota, Columbia; Quito and Guayaquil in Ecuador, if approved; and Liberia.   Could Make Sense

AMR (AMR:NYSE) unit American Airlines dominates Latin America from its Miami hub, long a crossroads for connecting passengers between Europe and Latin America. Miami's strengths include not only a broad array of international connections, but also plenty of local traffic to and from Latin America.

"We are a very formidable competitor in Latin America," American CEO Gerard Arpey said during a conference call last week. "Miami, both [for] its geography and community of interest in south Florida, positions us much more strongly than any other U.S. carrier." But Miami can't match Atlanta's domestic connections. From Miami, American offers 253 daily departures to 97 destinations, most of them international.

Fort Lauderdale, Houston and Charlotte also compete with Atlanta for international traffic. In Fort Lauderdale, privately held Spirit is the largest international carrier, with nonstop flights to a dozen Caribbean destinations. "On a 100-seat airplane to the Caribbean, we can fill 50 or 60 seats with local traffic, while Delta has to fill 80 with connecting traffic, which is always very competitive and very price-sensitive," Baldanza said.

From Houston, Continental has 779 daily departures and serves nearly 60 destinations in Latin America and the Caribbean, including 30 in Mexico. "We think Houston is extremely well positioned," Continental CEO Larry Kellner said during a conference call. Charlotte, meanwhile, has been a successful Caribbean hub for US Airways' (LCC:NYSE) unit of the same name.

Baldanza, a former US Airways executive, said Delta's buildup could hurt Charlotte. "Every person who flies to the Caribbean on Delta through Atlanta, there's a better than average chance they would have connected in Charlotte."

Consultant Mike Miller of the Velocity Group says Atlanta faces tough competition as a European hub. For European traffic, he says, northern hubs such as Chicago, Newark and Philadelphia can offer more direct routing. "From a lot of places, it does not make sense to go to Europe over Atlanta," he says. "But it does make sense to go to over Atlanta to the Caribbean and South America."

Sarvis says it is often suggested that he start flights to Latin America or the Caribbean from the two south Florida airports. But in Fort Lauderdale, he said, connections are limited, even though Delta is the airport's leading carrier, while in Miami, airport costs are high, about $30 per passenger vs. $3 in Atlanta.

"We have been asked often to expand into Fort Lauderdale, but every time I do the stats -- I look at the options, the connections, the cargo -- and I put flights into Atlanta instead," he says. "And I am asked every day, why do I not put flights into Miami? But when I compare Miami to Atlanta, it's just not worth it."

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