June 10 (Bloomberg) -- Delta Air Lines Inc. may change the way it uses small jets under Chief Executive Officer Gerald Grinstein, who in the past said he doesn't like the planes for longer flights and is reviewing all operations to stem losses.
Grinstein, 71, who took over at Atlanta-based Delta this year and said the airline may seek bankruptcy protection, expects to finish a review of operations in the third quarter. He is seeking to cut costs after $3.6 billion in losses since 2000 at Delta, the biggest user of the smaller jets.
The 50-seat jets, which have higher unit costs than larger planes, have become less economical to operate amid competition in more markets from carriers with lower costs. Delta, the third- biggest U.S. airline, is likely to follow rivals in curtailing use of the jets, JP Morgan analyst Jamie Baker said.
``Delta is revisiting its commitment to 50-seaters and in our opinion would probably like fewer than are currently on order,'' said Baker, who met with company officials in the past month.
Delta owns or leases 264 so-called regional jets, or RJs, including 49 with 40 seats, 180 with 50 seats and 35 with 70 seats, all made by Montreal-based Bombardier Inc. The airline's jets, along with 136 flown by Delta's partners, operate as Delta Connection. Delta is receiving 23 of the 70-seat jets this year and placed an order in February for 32 of the 50-seat jets to be delivered next year.
``Our plans, currently, are unchanged as it applies to `04 and `05 growth,'' Fred Buttrell, chief executive of the Delta Connection unit, said in an interview. ``Beyond that, we will be subject to some degree to the strategic review.''
`Largest Operator'
Former Delta President Frederick Reid helped expand Delta's fleet of small jets, saying last August that the company was ``the largest operator of regional jets in the world.'' Reid resigned in March after CEO Leo Mullin quit.
Grinstein ``hinted at what would be a more comprehensive review of the RJs in the network,'' said Chris Renkel, a spokesman for the Delta Air Line Pilots Association in Atlanta. Grinstein got ``rousing applause'' from pilots at meetings in April when he criticized previous management's use of the regional jet, saying it was an inferior product on longer routes, Renkel said.
``From Jerry's perspective, you fly more than 2.5 hours on an RJ and it's a cramped ride,'' Buttrell said. About 210, or 7 percent, of Delta Connection flights exceed 2 1/2 hours, he said.
Delta may also scale back flights from its Salt Lake City hub, reducing the need to use 50-seat jets, Baker said. The Utah city is a Delta hub for funneling flights in the western U.S. The smaller Delta Connection jets provide similar service at Delta hubs in Atlanta and Dallas.
Higher Costs
``The industry is migrating toward bigger planes and fewer hubs,'' Baker said.
With business travelers reluctant to pay higher fares, the higher unit cost of flying the 50-seat jets is a less profitable proposition, said Mike Boyd, a consultant with the Evergreen, Colorado-based Boyd Group.
The cost for flying each seat a mile is between 25 cents and 30 cents on routes 200 miles or less and falls to 12 cents on routes longer 900 miles, where comfort becomes an issue, Boyd said. By comparison, East Coast rival JetBlue's unit cost was 6 cents for the first quarter.
Delta's contract with the pilots has limited the use of small jets to prevent the airline from moving pilots from higher- paying jobs at the main airline to lower-paid work at the Delta Connection carriers. For example, Delta can only fly 57 of its 70- seat jets.
Bargaining Chip
Additional restrictions on regional jets at Delta Connection may become an issue with pilots as the airline seeks concessions of $800 million, Baker said.
In 1992, 20 small jets operated in the U.S. and most carriers used turboprop planes on shorter routes, according to the Regional Air Service Initiative. Now, U.S. airlines fly 1,368 regional jets, the manufacturers' group said.
Passengers initially welcomed the new small jets because they offered more comfort, speed and perceived safety than the turboprop planes they were replacing on shorter routes. After the Sept. 11 attacks reduced demand, airlines introduced the smaller jets on longer routes, replacing larger planes.
America West Holdings Corp., parent of America West Airlines, phased out 12 regional jets last year as it cut flights at its Columbus, Ohio, airport hub. US Airways Group Inc. said in May that it would reduce flights at Pittsburgh, the base for its MidAtlantic Airways regional-jet operation.
Grinstein, 71, who took over at Atlanta-based Delta this year and said the airline may seek bankruptcy protection, expects to finish a review of operations in the third quarter. He is seeking to cut costs after $3.6 billion in losses since 2000 at Delta, the biggest user of the smaller jets.
The 50-seat jets, which have higher unit costs than larger planes, have become less economical to operate amid competition in more markets from carriers with lower costs. Delta, the third- biggest U.S. airline, is likely to follow rivals in curtailing use of the jets, JP Morgan analyst Jamie Baker said.
``Delta is revisiting its commitment to 50-seaters and in our opinion would probably like fewer than are currently on order,'' said Baker, who met with company officials in the past month.
Delta owns or leases 264 so-called regional jets, or RJs, including 49 with 40 seats, 180 with 50 seats and 35 with 70 seats, all made by Montreal-based Bombardier Inc. The airline's jets, along with 136 flown by Delta's partners, operate as Delta Connection. Delta is receiving 23 of the 70-seat jets this year and placed an order in February for 32 of the 50-seat jets to be delivered next year.
``Our plans, currently, are unchanged as it applies to `04 and `05 growth,'' Fred Buttrell, chief executive of the Delta Connection unit, said in an interview. ``Beyond that, we will be subject to some degree to the strategic review.''
`Largest Operator'
Former Delta President Frederick Reid helped expand Delta's fleet of small jets, saying last August that the company was ``the largest operator of regional jets in the world.'' Reid resigned in March after CEO Leo Mullin quit.
Grinstein ``hinted at what would be a more comprehensive review of the RJs in the network,'' said Chris Renkel, a spokesman for the Delta Air Line Pilots Association in Atlanta. Grinstein got ``rousing applause'' from pilots at meetings in April when he criticized previous management's use of the regional jet, saying it was an inferior product on longer routes, Renkel said.
``From Jerry's perspective, you fly more than 2.5 hours on an RJ and it's a cramped ride,'' Buttrell said. About 210, or 7 percent, of Delta Connection flights exceed 2 1/2 hours, he said.
Delta may also scale back flights from its Salt Lake City hub, reducing the need to use 50-seat jets, Baker said. The Utah city is a Delta hub for funneling flights in the western U.S. The smaller Delta Connection jets provide similar service at Delta hubs in Atlanta and Dallas.
Higher Costs
``The industry is migrating toward bigger planes and fewer hubs,'' Baker said.
With business travelers reluctant to pay higher fares, the higher unit cost of flying the 50-seat jets is a less profitable proposition, said Mike Boyd, a consultant with the Evergreen, Colorado-based Boyd Group.
The cost for flying each seat a mile is between 25 cents and 30 cents on routes 200 miles or less and falls to 12 cents on routes longer 900 miles, where comfort becomes an issue, Boyd said. By comparison, East Coast rival JetBlue's unit cost was 6 cents for the first quarter.
Delta's contract with the pilots has limited the use of small jets to prevent the airline from moving pilots from higher- paying jobs at the main airline to lower-paid work at the Delta Connection carriers. For example, Delta can only fly 57 of its 70- seat jets.
Bargaining Chip
Additional restrictions on regional jets at Delta Connection may become an issue with pilots as the airline seeks concessions of $800 million, Baker said.
In 1992, 20 small jets operated in the U.S. and most carriers used turboprop planes on shorter routes, according to the Regional Air Service Initiative. Now, U.S. airlines fly 1,368 regional jets, the manufacturers' group said.
Passengers initially welcomed the new small jets because they offered more comfort, speed and perceived safety than the turboprop planes they were replacing on shorter routes. After the Sept. 11 attacks reduced demand, airlines introduced the smaller jets on longer routes, replacing larger planes.
America West Holdings Corp., parent of America West Airlines, phased out 12 regional jets last year as it cut flights at its Columbus, Ohio, airport hub. US Airways Group Inc. said in May that it would reduce flights at Pittsburgh, the base for its MidAtlantic Airways regional-jet operation.
