Delta's Big Bet on Foreign Flying

The reorganized airline hopes to boost revenues by serving a bevy of second-tier international destinations. It's a strategy with many questions

by Dean Foust

With cowbells and confetti, Delta Air Lines (DAL) executives and employees celebrated their comeback as a publicly traded company after 19 months in bankruptcy. It had been difficult work: a near-fatal liquidity crunch, a hostile takeover bid by US Airways Group (LCC), and thousands of jettisoned jobs and other cuts to win creditors' approval for the reorganization.

Immediately after the May 4 celebration, the Atlanta-based airline's top brass hopped a flight to New York to ring the closing bell at the New York Stock Exchange (NYX). "Welcome to independence day," Chief Financial Officer Ed Bastian said, beaming.

But Delta's future performance may not hinge on domestic routes like that Atlanta-to-New York trek, which it flies 31 times a day. Instead, whether Delta meets its lofty revenue and income goals—which would likely enable it to be an acquirer, and not the target, in any future airline consolidation—will hinge on its success in such far-flung destinations as Accra, Düsseldorf, Vienna, and Mumbai. That's because with lower-cost rivals such as AirTran Airways (AAI), JetBlue (JBLU), Southwest (LUV), and even US Airways providing fierce competition in Delta's domestic network, the carrier needs to generate more of its revenue stream from international routes where the discounters don't fly.

The Italian Connection

For much of its history, Delta lagged far behind most legacy rivals such as AMR Corp.'s (AMR) American Airlines, Continental Airlines (CAL), and Northwest Airlines (NWACQ) when it came to overseas markets. Whereas those other carriers derive 40% to 60% of their revenues from higher-margin international routes, Delta's share was in the teens as recently as the 1980s and never rose above 20% even after its 1991 acquisition of Pan Am's international routes. Sensing the need to change that, Delta Chief Executive Gerald Grinstein set out in 2005 to find a new network chief who could help the carrier plant its flag—profitably—in more overseas markets.

In an interview, Grinstein recalled one day reading an article in an industry newsletter on Alitalia, the Italian state-owned carrier, that extensively quoted a top executive named Glen Hauenstein. "I thought, 'That's the damnedest Italian name I've ever heard,'" Grinstein recalls. "I thought, 'This guy must be good if he can rise to the top of an airline [partly] owned by the Italian government.'"

Grinstein picked up the phone and called an old friend, ex-Continental CEO Gordon Bethune, for whom Hauenstein had previously worked during a stint at Continental. "I told Jerry that Glen was as good as they came," Bethune recalls. "Jerry said, 'We're in bankruptcy. I don't think I can afford to hire him.' I said, 'Jerry, you can't afford not to hire him. He'll make you $30 million in his first 30 days. He's worth whatever you pay him.'" Grinstein ponied up the cash. "This is the last great airline turnaround left," says Hauenstein, who started in mid-2005. "I wanted to be part of that."