Why Delta Is Banking on Cargo To Amp Up Profits

It's so easy to forget about air cargo. Most travelers don't see it, and it's not a "sexy" part of the business. But in a low margin industry like the airlines, it can be very important. For Delta (DAL), growth in this business is a key part of its profit plans. I had the chance to sit down with cargo leadership at the airline to learn more.

If you think about an airline like Southwest (LUV), cargo just can't be big business. There isn't much space in the belly of a 737, so while Southwest can fly mail around the country, it's never going to be a huge component of what the airline does. In fact, for the first six months of 2010, Southwest had $5.8 billion in revenue and cargo was only $63 million of that, or about 1 percent.

For Delta, it's a different story, and I had the chance to walk the airline's Atlanta facility along with the heads of the cargo division. For the first six months of 2010, Delta had $15 billion in total revenue and only $387 million in cargo revenue. That's 2.5 percent of revenue, and clearly they'd like that to grow.

In an industry where profit margins are slim, that cargo revenue can be huge, but Delta has made a lot of changes in cargo lately, some that negatively impact revenue but positively impact the bottom line.

The old fleet of dedicated freighter aircraft that Northwest operated was retired. According to Neel Shah, VP of cargo:

They were 30 years old and [the cargo market] was in a really bad economic condition at the time. We couldn't make emotional decisions.... If we had different or newer aircraft, we might have tried to make it work but we retired these just before significant maintenance events that would have been very costly. The decision to retire the freighters also freed up pilots for the mainline operation, it allowed to get rid of some unnecessary infrastructure, and more. There was a net positive impact of $200 million. Besides, trying to make sure those were full every day? I became a big fan of antacid.

In addition, Delta has really focused on expansion internationally in the last decade, and that has opened opportunities much further. Now big widebodies that used to fly between Atlanta and Florida (ugh, what an awful plan back then) now fly to far flung destinations.

For example, while walking the expansive cargo build-up floor where they put together freight for each destination, I found a seriously tricked-out motorcycle that was heading to Lagos, Nigeria. I'd love to hear the story behind that one, but the point is that Delta is in a unique position of being able to carry things quicker between the US and places like Africa than nearly anyone else.

So it seems like an obvious area for growth, and it is, but there are hurdles. Cargo is, of course, increasingly regulated because it shares the same tube as passengers. Regulations change just as quickly on that size of the business, and it has a major impact. For example, as of August 1 of this year, cargo now has to be 100 percent screened for dangerous materials.

There are also strict rules on who you can and can't accept shipments from. For example, you can't just walk up to the cargo office and send something. You have to be what's called a "known shipper" and because of that, it's a very different kind of business than on the passenger side.

A full 50 percent of Delta's cargo revenues come from a mere 14 companies. These companies are doing tremendous volumes, and that actually gives them some big leverage. For example, let's say you're surprised to see your airplane on a flight upgauged from a 757 to a 767. There's a decent chance that a freight customer needed enough excess capacity on a certain flight to make that happen. Cargo actually has people planted in the Network Planning group to deal with things like this. If it's a big enough account, it can even create a permanent aircraft size increase to fulfill large, regular cargo needs.

For Delta cargo, Atlanta and its enormous refrigerated storage units are huge, but it's not everything. While 30 to 35 percent of Delta cargo touches Atlanta at one point (half is transfer cargo), the largest market for originating or destination cargo is New York. Detroit has also become very important as a cargo gateway to Asia since many of Delta's Asian flights originate there.

The Delta/Northwest merger really enabled the airline to step up the cargo operation. When working with so few shippers, it helps to have global coverage. Northwest brought the very important Asian component and now it's a formidable combined network.

So the merger is done, the operation is growing, and things are moving along quite nicely, in the eyes of the cargo folks. But what's next? Will we see the return of dedicated freighters? Neel wouldn't rule that out.

We're in no way opposed. If it will be accretive to the bottom line, we'll look at it.

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