For Delta, long-term growth will come by flying more overseas routes

Red wine, cannoli and meatballs were abundant and free for passengers waiting to board the inaugural Twin Cities-to-Rome flight last Wednesday. As the plane pushed back from gate G6, an airport fire truck sprayed it with a water cannon to celebrate the new route. This type of fanfare is rare for second-tier airports like Minneapolis-St. Paul International, where fewer than 10 of the approximately 500 daily departures go beyond North America. But for Delta Air Lines, the largest carrier at MSP and the world's second-largest airline by revenue, long-term growth hinges on international expansion. Today, it gets two-thirds of its revenue from flights inside the United States.

"Delta needs to expand from a primarily domestic airline to an international airline," says Tim Mapes, the airline's senior vice president of marketing.

Delta's international reach grew substantially in 2008 when it acquired former Eagan-based Northwest Airlines, which had a strong route system to Asia. Delta, meanwhile, had many flights to Europe and a strong partnership with the Dutch airline KLM.

The company plans to grow its international business chiefly through partnership alliances, joint ventures and code-share agreements with overseas airlines, said Jeff Arinder, Delta's vice president of partner development. It will add overseas flights more gradually. For instance, the new flight from MSP to Rome, along with another between MSP and Reykjavik, Iceland, for now are summer-only routes.

As Delta's partnerships mature, Arinder said, "It will open the possibility for further expansion of Delta service to our partner's international hubs from Minneapolis."

For passengers, one connection into a region can produce dozens of other quick destination options. For instance, the Rome flight not only offers passengers access to Italy, but to dozens of cities across the Middle East and North Africa.

The company's long-term objective, however, is to fly Delta planes to more cities overseas.

"You can't have a big international presence without a big domestic presence, and the international piece makes the domestic piece more profitable," said William S. Swelbar of MIT's International Center for Air Transportation. "That ability to get the passenger on Delta and keep it on Delta is vitally important."

While no American carrier derives most of its revenue from international routes, the biggest carriers have been adding international routes routinely — in part to keep up with competitors that are reaching around the world and increasingly into the U.S.

Before the three largest U.S. airlines went through bankruptcy over the last decade, some derived as much as 80 percent of revenue in the domestic market, Swelbar said. Last year, domestic flights accounted for just 58 percent of revenue at United Airlines, 69 percent at Delta and 70 percent at American Airlines.

Delta's international strategy varies by geography.

The airline has had huge success in Europe through ventures with KLM, Air France, Alitalia of Italy and Richard Branson's airline, Virgin Atlantic, in which it bought a 49 percent stake in 2013. These agreements give Delta avenues to expand its flights at partners' European hubs.

In Asia, Delta's situation is more precarious with the future of its hub at Tokyo's Narita International Airport in limbo. The hub was a key asset of Northwest's, but the recent expansion of international flights at Tokyo's Haneda Airport, which is closer to the city and more appealing to some passengers, threatens to make the flights at Narita uncompetitive.

Delta lacks a partnership with a major airline in Japan, the wealthiest market in Asia, and has fractious ties with South Korea's Korean Air. Its future in the region, Delta executives say, rests with what it can do in China. Last year, Delta bought a 3.6 percent stake in China Eastern, the dominant carrier in Shanghai, China's second-largest city.

"It's clear that China will quickly overtake the U.K. as the largest international travel market to the U.S., probably in the next 12-24 months," Ed Bastian, Delta's chief executive, said last month. "It is rapidly happening. And you need to be with a strong local partner if you are going to capitalize on that growth opportunity."

United has a relationship with Beijing-based Air China, the largest airline in China, and American has one with Cathay Pacific, the Hong Kong airline that for decades dominated international flights to China. That left Delta with China Eastern, the second-largest airline in China but one that still reaches every corner of the country and much of Asia.

"We are careful because we do not have open skies [agreements] between the two countries or antitrust immunity, so the partnership is very much at arm's length," Bastian said. "[Shanghai] is going to be the most important hub, not just in China, but, I think, eventually in Asia."

Delta also trails its big U.S. rivals in Latin America, a region that accounts for just 7 percent of its revenue. But it is the only region that has grown as a percentage of Delta's business over the past three years.

Delta owns a minority stake in Gol Linhas Aéreas SA, Brazil's second-largest airline, and recently obtained Mexican regulatory approval to increase its stake in Aeromexico from 17 percent to 49 percent. [It is still waiting on U.S. approval.] The increase will allow Delta and Aeromexico to share insight and advice more freely, Bastian said. On Friday, the Wall Street Journal reported that Delta and United were both considering bids for Avianca, a Panama-based airline. Delta declined comment.

Equity stakes, Arinder said, give Delta the ability to drive decisions, unlike code-share agreements that simply let the carriers sell each other's tickets. There are clearly headwinds to this approach, he said, that the airline will have to figure out in the future.

Analyst Swelbar says there are limits to the size of an airline's alliance structure.

"There are some real questions out there in the future whether that is the right way to continue to grow or should they be thinking about organic growth," he said. "The one thing you can never do in the industry is sit still. The air service map and architecture is being redone and reconfigured as we speak."

Kristen Leigh Painter • 612-673-4767