Delta CEO: SkyTeam Failed, Airline Will Create Their Own International Network of Carriers

Delta CEO Ed Bastian told Bloomberg that the SkyTeam, of which Delta is a part, hasn’t “brought a lot of great value to customers..[or] to member airlines” and so they’re trying to create their “own international network of carriers” with Delta “as the centerpiece.”

The Atlanta-based carriers is shifting away from an alliance focus and “taking a different approach” where they use local airline brands that can operate in local markets around the world and influence those airlines to be more efficient.

There’s no indication that Delta will leave SkyTeam and his notion that it hasn’t brought value to customers or airlines is likely overstated. However it’s been clear for some time that Delta was headed away from valuing alliance partnerships to focus on ownership or other airlines.

Even as United and American have focused on joint ventures with partners, other U.S. carriers have shied away from stakes in counterparts abroad though American has just over 2% of China Southern (they’ve already written down a quarter of that investment) and United exercises influence at Avianca through loan back by equity that was defaulted upon.

Back in 2013 they eliminated elite status earning for flying on SkyTeam partner Korean as they sought to push the Seoul-based airline into a joint venture. Now they not only have their joint venture but an ownership stake they plan to grow to 10%.

Here’s Bastian’s full statement on the matter.

One of the things that has not been successful in the airline world are the alliances. We, self-critical, SkyTeam alliance I don’t think we’ve brought a lot of great value to customers, I don’t think we’ve brought a lot of great value to our member airlines. And we’re going at this thing in a very different approach.

We’re going at it through Delta making bilateral investments in the most important partners. We own 49% of Virgin Atlantic, we own 49% of Aeromexico, the two closest carriers to us on either side of the country. We’re invested in Air France KLM. We invested in Korean. We invested in China Eastern. We invested in Gol down in Brazil.

As a consequence what you see is this network of influence that we’re having within those companies. Those companies want to know what Delta has learned about operational efficiency and prowess and premium, we want to learn what it takes to win in those local markets. And over time while we can’t own them in terms of whole-owned consolidation we can have meaningful enough investment that we create an international network of carriers that will be uniquely tied where you have Delta as the centerpiece. That’s our goal.


Copyright: boarding1now / 123RF Stock Photo

On the one hand the U.S. airline market is mature. There aren’t significant opportunities for major airlines to grow. They may earn profits during good times. Two years ago American’s CEO Doug Parker said his airline would never lose money again, and always spin off between $3 billion and $7 billion a year – like an annuity. But that’s not a vision for growth (indeed American says they plan to expand commensurate with GDP growth), and it’s not a vision for how to be valued like a growth stock.

Making investments in other airlines around the world whose assets can be better utilized, or where airline markets are growing faster than in the U.S. – such as potentially Mexico, Brazil, and China – is a strategy for higher rates of growth.

On the other hand there are huge potential pitfalls. After a Delta executive went in to run India’s Jet Airways Delta is said to have looked at a 24% investment. That airline has now collapsed.

Etihad Airways had previously taken a similar stake in the Indian airline, plus separately in its spun off frequent flyer program, as part of its own strategy to form an alliance of owned-airlines such as also-liquidated air berlin, as well as Air Serbia (49%), Alitalia (49%), Air Seychelles (40%), and Virgin Australia (21.8%). Delta isn’t likely to fare as badly as Etihad did to say the least.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Airlines and hotels both provide a product with a daily expiration date if not consumed. Just as hotels, I see the major airlines turning into a branded seat broker providing technical and marketing services to local carriers that will act as service levels similar to what you find as chains in a hotel portfolio. Moving away from capital and labor ownership which they will cede to the “local chains”. These chains will pay the major brand from their revenue.

  2. @ Gary — So, once Delta completwly devalues SkyMiles, they can begin screwing a new bunch of people. Good plan.

  3. They are fools to trash their only ability to provide something approaching worldwide service, and unilaterally disarm against OneWorld and Star Alliance. They actually believe their reputation for being superior is somehow more important than where you can fly to….. nope. This is not the “airline business”… this is the transportation business, and if I can get to Maputo via one alliance but not another, well, guess who loses….

  4. @RGC’s comment has real business merit.

    I’d also note that Etihad’s investments to create its own network ALL failed. This is either complete, 100% incompetence by management (difficult to believe given the complete totality of failure) or a belief that the pool of capital to be tapped by the firm from the emirate was virtually unlimited, “so why not” – this is completely antithetical to entities operating at arm’s length.

  5. So many folks say that ‘Delta is superior’ but I get so much more value from flying SWA. I guess that it’s a different profile for everyone, but as a business traveler, I value SWAs flexibility in making changes, as well as the value in the frequent flyer program. With Delta, I find that the skypesos are worthless, and there’s so many fees when making changes. It’s just not worth it. For overseas flights, it’s always biz class on a european or asian carrier. Anyway…will be interesting to see what happens. 🙂

  6. Given that airline employees don’t actually buy tickets, and thus aren’t actually customers of their own products, it’s hard to believe that they can speak for what does and doesn’t work for customers.

    I do believe that “alliances” haven’t worked for Delta, and a lot of that has to do with their SkyTeam partners. Going to Asia, they have no partners in the south of it. Star has ANA in the North, Thai in the middle, and Singapore in the South. You can get some pretty good coverage of that region that way. One World has JAL in the North, and Cathay, Malaysian, and Sri Lankan in the south and west. What’s SkyTeam got? Korean in the north and that’s it, which gets you diddly for second tier cities in SE Asia. (And the whole point of an alliance in the first place…)

    Going to Europe, *SkyTeam* serves me well, but Delta itself doesn’t do jack. I live in the mid-atlantic, and I’ve got my choice of overseas carriers to take me where I need to go. I don’t have to set foot on DL metal to do it. The European carriers have covered the east coast well enough that a connection at JFK or ATL isn’t required for many people.

    Point being, unless you live in ATL or the SE USA where only Delta regionals fly, they’re the least appealing option for overseas travel. And because I have a choice, their lousy FF program makes them last on my list to boot.

  7. @Johnny: With appropriate credit to Gary , I like that idea, but only because One Centavo was already trademarked.

  8. @john

    Funny. If you have to take out three partners to make it a garbage can, as a whole, the alliance isn’t bad. I can say the same about the other alliances as well.

    SkyTeam is the weakest of the three, but Delta’s biggest problem is that most people don’t have to fly Delta to fly SkyTeam. For European travel, heck, I can just fly AF/KLM without ever touching DL metal. If you live in a secondary US city and don’t have non-stop options, then your choice on DL metal is to connect through ATL. That’s going to be an indirect routing for many people. CLT, IAD, PHL, and EWR are going to be better options for a lot of people.

    For Asia travel, KE flies to more US cities than any other carrier. So you can just get on KE directly. But KE doesn’t cover much of south Asia, so one is better off with Star or 1W if they go to the secondary Asia cities.

  9. @Dan

    I’m not saying its a terrible alliance, it just isn’t a good one. Tbh, OW without CX, BA, JL would be just as bad. Point was, DL could just cozy up and joint venture with those airlines and you wouldn’t be missing much.

  10. Given a bad case of the Delta-envy disease that’s been plaguing the two other US biggies for years, my major concern is that they might try to emulate this approach with disastrous consequences for their companies as well as customers. I wonder if we should expect more tightening in partners redemption in the near future.

  11. DL’s first venture into a informal alliance was their first back in the mid-late 80’s with Swissair and Singapore. At the time it stimulated a lot of enabling technology, such as interline through check in.

    Not seeing anything with this announcement to make the DL pilots feel better about migration of DL customer bookings and routes to non-DL metal.

  12. Some of these comments seem like they have zero knowledge about DL. DL flies to more secondary EU cities than UA or AA. No need to connect to a cr*ptastic intra-EU flight. DL also flies to CDG/AMS from many secondary US cities, MCO, RDU, IND, etc. As for TATL there’s lots more than ATL. You have BOS, DTW, JFK, MSP, SLC, SEA, etc..Many more choices than UA/AA. As for Asian partners theres Vietnam Airlines and Garuda Indonesia both of which are highly regarded as top service airlines.

  13. @wayne

    Agree viz Europe but disagree about vn and ga. Unfortunately sgn/han and cgk/dps aren’t the hubs that sin, kul, or even bkk are. Further, one can’t earn full mileage as a dl medallion when flying vn or ga while if fly mh, I get full aa earning.

  14. @Dan Because of the joint venture, Delta doesn’t care if you fly AF/KLM directly. Revenue is shared by both carriers, so Delta will still benefit, just as if you were on their plane. Not to mention that Delta is a major AF/KLM shareholder.

  15. @Wayne,

    I’m not sure where you got the idea that Garuda is viewed as a top service airline. Compared to the majority of Indonesian carriers, yeah, it has at least tried to make an effort which is why it made it in to SkyTeam in the first place. But it has got financial issues and its biggest shareholder is the Indonesian government, which is bad enough, but it wants the airline to cut its fares to compete with LCCs. And we all know what that would eventually mean for service.

    Garuda is the only carrier I’ll fly in Indonesia. But it’s not because I think their service is awesome or their operation solid. I fly it because it’s the least screwed up.

  16. The best thing about Bastian’s plan is – its a plan. Every company needs a plan. Bastian seems to think DL can somehow control other airlines worldwide to make DL the centerpeice without having actual ownership control. Maybe, but that would depend on who the airlines other owners are.

    He doesn’t specify why he thinks alliances aren’t valuable to customers. I fly internationally a lot. I’ve found great value in alliances. First, with Skyteam as DL elite, and now even more as an AA elite with Oneworld. Star Alliance is so strong it makes me even think about flying UA and that takes a lot.

    He doesn’t specify why he thinks alliances are not valuable for member airlines. My guess is he sees little value because alliances don’t allow members to control price and capacity. Bastian wants to collude.

  17. @Doug Swalen – Look up reviews, GA is consistently in the top for service. It’s J service is considered to be one of the best in world. Fiances may not be great, but arent horrible either. Regardless of fiances, the airline has gotten top reviews for at least last few years for service.

  18. @Rob – GA/VN are consistently rate top for onboard product/service. Yes SGN/HAN and CGK/DPS arent the best airports, but they’re not awful either. CGK/DPS are on par with most modern airports.

    As for earnings, that’s a DL thing. DL has long played favorites with its earning tables for partners.

  19. @ Doug Swalen

    Bule. Service inflight on Garuda is spectacular (I admit customer service when you email tends to be less so but I have a problem with that only because I expect more than the usual you get in the US). I fly Lion (old comfortable seats), AirAsia, Batik, Malindo (which is actually Malaysian). You must have a large budget & not get around much. You are treated better on all of the above as compared to the US3. If you won’t fly any of the foregoing how do you know they are all screwed up?

  20. Former DL management says:

    DL was very late to the Asia game. Their merger with NWA should have brought in expertise on how to do customer service, but they mistakenly believed that being best in the US service meant something internationally when the US airlines define the bottom of every rating. They ignored the best practices of Asia out of domestic hubris. All the growth is in areas DL doesn’t serve well. Japan has super high growth potential, as does China, Thailand, Vietnam, and the Philippines (all markets DL can’t serve well or is closing) but Korea? Really? And what about Hawaii, quickly becoming an Asia/US green tech hub? DL doesn’t seem to care to compete there. They are a strongly domestic airline. Buying carriers is great, but not realistic as most will never cede control.

  21. Dan…are you kidding me? you said…”Given that airline employees don’t actually buy tickets, and thus aren’t actually customers of their own products, it’s hard to believe that they can speak for what does and doesn’t work for customers.”

    Airline employees have to buy tickets to fly on their own airlines for the simple reason that there is no longer any space available to fly as a standby passenger. Look at the current load factors over the last decade. If you don’t BUY a ticket YOU AREN’T GETTING ON A FLIGHT. So yeah airline employees see the product first hand. Also the “front line” employees speak to customers every day by the HUNDREDS, so yeah these employees can speak for what does and doesn’t work for customers.

  22. The younger generation may have forgotten, or never known, that the bulk of Delta’s overseas routes were PanAm’s before that great airline was totally mismanaged financially. As far as standing for something Delta has never even begun to match the prestige of Pam American Airways which, to many foreigners, represented the United States. Shocking decision of US Government to let PanAm fail. It showed the world that capitalism was ONLY about money.

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