Delta's Dilemma

One of my favorite movies of the '80s is The Karate Kid. I like it mostly for the action and the often-cheesy movie wisdom it shells out frame after frame. Yet even the silliest movies occasionally offer a truism, and The Karate Kid is no different. My favorite is when Pat Morita's Mr. Miyagi, while reminding Ralph Macchio's Daniel of the seriousness of karate training, says: "You karate yes, OK. You karate no, OK. You karate, guess so -- (insert funny squishing sound here) -- squish like grape."

The truism is that a halfhearted commitment to something serious rarely works out, either in life or in business. Yesterday, Delta Air Lines (NYSE: DAL  ) appears to have made what I'd consider a halfhearted commitment at being a low-cost carrier. And, naturally, I'm doubtful the airline can pull it off.

But give Delta credit for at least trying a bold plan when nothing else has worked. The airline has lost more than $5 billion since 2001. The new strategy, which includes cutting 7,000 jobs and effectively shutting down its unprofitable hub in Dallas, aims to cut at least that much out of Delta's operating costs annually.

The wrinkle is that while cutting costs Delta will also spend to differentiate itself from low-cost flyers such as Motley Fool Stock Advisor pick JetBlue Airways (Nasdaq: JBLU  ) and Southwest (NYSE: LUV  ) . Specifically, the carrier will offer more amenities on longer-haul flights, such as leather seats and additional cabin lighting. Coincidence or no, the plan appears modeled after the coast-to-coast upgrades offered by UAL Corp.'s (OTC BB: UALAQ) United last week. But the United initiative was extremely specific, and Delta's plan calls for a gradual, systemwide overhaul. There may not be enough time to effectively implement such a sweeping change.

Delta also said it would expand by one-third its pseudo-hip Song fleet, a low-fare carrier within a carrier that somewhat mirrors United's Ted and competes with JetBlue, Southwest, AirTran (NYSE: AAI  ) , and Frontier (Nasdaq: FRNT  ) , among others.

Of course there are plenty of obstacles standing in Delta's way. The biggest may be its negotiations with pilots. Like troubledUS Airways (Nasdaq: UAIR  ) , Delta needs concessions from its pilots. But they aren't budging. Indeed, after seeing the pension situation at United, many older Delta pilots are taking lump-sum retirements. The payouts drain needed cash from Delta's coffers, and CEO Gerald Grinstein has warned that losing senior pilots in this manner could make it impossible to fend off a bankruptcy filing.

Delta's plan is the clearest evidence yet that all big airlines face what appears to be an intractable catch-22 -- to be a low-fare airline without appearing to be a low-fare airline. It's a dilemma that's bound to change the industry wholesale and, sadly, may leave a few squished carriers along the way.

Let others fret the turbulence of investing in high-risk sectors such as the airline industry. Grab a chair and a drink, and relax as you get paid to invest and beat the market at the same time. Give Mathew Emmert'sMotley Fool Income Investora try risk-free for 30 days.

Motley Fool contributor Tim Beyers owns no shares in any of the companies mentioned, but he has family members who are retired from United Airlines. You can view Tim's Fool profile here.


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