DELTA'S MISSE CONNECTION.

The No. 3 U.S. airline arrives late to Latin America and pays the price.

THE ANNUAL CEO CONFERENCE HAS BECOME MORE THAN just another trade show for Latin America's aviation industry, it has become the venue for top U.S. airline jocks to announce their plans for Latin America. Robert L. Crandall, former head of American Airlines, was the first--years ago--to spell out how his carrier would attack the region. Then came United Airlines' Gerald Greenwald, followed shortly thereafter by Continental Airlines' Gordon Bethune. By the time Leo F. Mullin, president and CEO of Delta Air Lines, showed up last year, most of the reunion regulars thought they had heard it all.

Mullin was the first to admit that, "market potential in Latin America is not exactly a well-kept secret." And he recognized the questions on everybody's lips: "What makes Delta think that we can win in this highly competitive market?" he said. "How can we succeed against a carrier such as American Airlines, which already holds 50% of the market? The answer in a single word is this: Atlanta."

An aviation-industry outsider, Mullin offered a new vision. More than 60% of the traffic to and from Latin America flows through Miami, but statistics show that about 55% of the passengers arriving in Miami are connecting through to another destination.

Delta would use its powerful hub of operations with easy worldwide connections--six times as many flights as American Airlines' offerings from Miami--to woo Latin American passengers away from American's stronghold. The company would launch a major offensive in the region over several years, initiating, together with its Latin American partners, service to 20 cities in 17 Latin American countries, with 25 flights per day. Driving home the message that Mullin meant business, the same day of his speech Delta closed an estimated US$50 million deal to buy a 35% stake in Peru's troubled airline Aeroperu--the first equity alliance between a global carrier and Latin airline in more than a decade.

Tough takeoff. A year later, Delta's plans have skidded off the runway. It is downsizing aircraft on its Central American routes, and its almighty hub in Atlanta is no longer intimidating anyone. Aeroperu went bust. The No. 3 U.S. airline's push into Latin America is by no means over, but its tough takeoff reflects how a US$14 billion airline's ill-timed and poorly executed strategy can lead to serious mistakes and even humiliating defeat at the hands of a tiny Peruvian carrier.

By the time Mullin took the helm at Delta in August 1997, the other major U.S. airlines had secured their positions in Latin America long before. American had purchased routes to the region from failed Eastern Airlines in 1989; United had bought defunct PanAm's Latin American system in 1991; and, after emerging from bankruptcy, Continental was aggressively expanding southward from its position as the leading international carrier to Mexico. Nonetheless, Delta saw an opportunity to take part in the high growth and high margins of Latin America, which, at the time, was the world's fastest growing market.

At first, Mullin appeared poised to win the region and much, much more with Delta's proposed takeover of Continental. The seemingly done deal would have combined the Atlanta-based carrier's strong East Coast and European operations with the Houston-based carrier's Southwestern and Latin American operations to create a formidable competitor. But then, at the 11th hour, David Bonderman, the controlling shareholder of Continental, suddenly barrel rolled his airline out of Mullin's sights and into formation with Northwest Airlines.

Delta's stunning loss of Continental in early 1998 was quickly followed by an aggressive air assault on Latin America Within a year, the airline launched service to 11 cities in eight countries, offering in combination with its code-share partners almost 6,000 airline seats between the United States and Latin America every day As the buildup took place, competitors questioned Delta's actions.

"If Delta, because of their own survival, feels that they need their own Latin American presence and they couldn't afford to buy one, then they will have to make one. It will be interesting to see which is the cheapest way," Continental CEO Gordon Bethune told Latin Trade shortly after his airline jilted Delta "I personally see that as a very difficult road for anybody to follow, coming in at this late time. But hey, it's their money and it's their right to do it any way they want."

Atlanta power point. By imposing Atlanta on Latin America's flight path, Mullin felt Delta would have an enormous capacity to gather, concentrate and redistribute passengers. For example, American Airlines' operation in Miami offers passengers 101 daily departures to 27 U.S. cities while, from Atlanta, Delta offers customers 598 daily departures to 97 U.S. cities. That's more than three times as many destinations and almost six times as many departures. As Delta CEO Mullin likes to say "Simply put, Delta can take passengers from anywhere to everywhere."

That type of out-of-the-box thinking is what an industry out-sider like Mullin, a banker turned utility-industry executive and finally head of a major airline, might be expected to bring to the table. However, airline experts don't buy the idea that an airline can sell passengers on the idea of flying to its hub to catch a connecting flight to someplace else. "You can't live on connections alone," says Robert Booth, president of airline consultant Aviation Management Services. "Atlanta is not a Latin American destination. It will take time to build traffic."

For a hub to be efficient, there must be a critical mass of people who either come from or are going to the place where the airport is located. Otherwise, there is no way to justify the frequent flights to multiple destinations. In Miami, for example, some seven to eight million passengers pass through the largest U.S. gateway to Latin America every year compared with fewer than 400,000 in Atlanta. Says Peter Reavely, a planner for Miami's International Airport: "I doubt anybody in El Salvador even knows where Atlanta is."

Convinced that Atlanta's huge operations could be extended to include Latin America, Delta moved into Venezuela and Central America in April 1998. Taking advantage of the latter's recently adopted policy of completely liberalized air travel to and from the United States, Delta's big 757s scorched onto tarmacs in Guatemala City, Panama City, San Jose, and San Salvador. Continental added capacity, as did United, and suddenly there was a glut.

Federico Bloch, CEO of Grupo Taca, Central America's leading aviation group, felt the heat. Within months, passenger capacity grew at a 20% clip, while passenger traffic was increasing at a mere 5%. Margins groaned. "It was tough; everybody was coming into the market at the same time," Bloch says. "But we became more efficient, we streamlined operations. Now, we hold the same market share as we did before the invasion.

Delta did not fare as well. For the first three months of service, its big planes flew less than a third full from Atlanta to Panama and San Salvador, in part because the airline had launched service during the worst period of the year. "April set them up for May, which is the worst month of the year; they should have started in June to be ready for increased traffic in July," says airline consultant Booth.

Aeroperu buys the farm. Rudi Forster, managing director of Delta's Latin American operations, says that the April start-up had to do with aircraft availability and admits, "It was hard going in the first few months." Delta has reduced the size of aircraft flying its Atlanta-to-Central America routes. He says, "November, December and January were very strong months."

But by that time, Delta had bigger problems emerging farther south in Peru with its pricey purchase of Aeroperu. That carrier was buying the farm, posting losses of more than $5 million a month.

The U.S. airline had wasted no time in getting involved in operations. Less than a month after its entry, Aeroperu's board of directors was shaken up to include three members named by Delta, three from Aeromexico and three from minority shareholders. Additionally, Forster headed the task force that reported to the board and the executive committee on efforts to revamp areas including marketing, maintenance and operations.

Delta's Forster says, "We saw Aeroperu as an opportunity to build a hub within South America" It would collect passengers in Lima, not just from Peru but also secondary cities like Iquique and Afica in Chile and Mendoza, Argentina, that don't have direct access to the United States.

The plan never got off the ground. Delta tried to improve standards of safety and reliability, as well as administration, but couldn't get the job done. "After eight months, incredibly, Aeroperu still didn't meet Delta's standards to sign a code-share agreement," says Jaan Albrecht, who took over as CEO of Aeroperu in December 1998, after the board discovered an unapproved bank overdraft an estimated $15 million. He says that Delta officials lacked the language skills and local market experience to understand what was happening at Aeroperu. "By the time that [Delta officials] figured out what was going on, it was already too late," he says, noting that the airline lost $62 million in 1998 and racked up debts of $174 million.

Albrecht stopped the operational losses and got creditors to agree to temporarily halt collections, but then local rival Aero Continente moved in for the kill. The tiny carrier with alleged ties to money laundering started a price war during the high season in January, lowering one-way domestic fares nationwide to $44 from $59, and dropping them to $39 a month later. "After sales taxes, airport taxes and agency commissions, a $39 fare nets the company around $28 per passenger," Aeroperu legal advisor Raul del Solar says. "There is no way to fly someone from Lima to Iquitos, for example (1,000 kilometers) for $28. It's below cost."

Aeroperu matched the $44 fare, but couldn't drop its fares further and finally ceased operations in March. Little Aero Continente had downed a Delta-backed airline.

Clipped wings. Certainly for Delta, the ongoing saga of Aeroperu is its worst experience so far in Latin America. David Grizzle, senior vice president for corporate development at Continental, says that Delta fell short in Peru because "most of these deals require adapting to each situation. It required a type of activity that Delta has never done before. Delta is still not flexible enough to manage an equity alliance."

While American and Continental are busy buying stakes in a number of Latin American carriers, Delta's Aeroperu fiasco has clipped its wings regarding any more Latin equity deals, according to one Colombian airline president who met recently with Delta executives. That comes as no surprise. Shareholders are not likely to be keen to invest in Latin America so soon after taking a multimillion-dollar bath in Peru in less than eight months. The as-yet-undisclosed losses from Aeroperu will go straight to the U.S. airline's overall bottom line.

At a time when other airlines are forging equity alliances, however, Delta's reluctance to provide capital could mean that it remains a distant fourth behind other U.S. airlines doing business in the region. For now, Delta continues to expand operations, adding service from Atlanta to Sao Paulo in July as well as more flights to the region from New York City. It is also building on its relationship with partner Aeromexico to include closer ties in computer systems and ramp handling.

And like its Atlanta hub strategy, Delta wants to be different. "Our plans are not just based on what our competitors are doing:" says Delta's Forster. But as the other U.S. major airlines buy their way into Latin America, go-it-alone Delta may find itself without a connecting flight.