They call it "the Pit." And really, it is one. Windowless and fluorescent cold, the office at the Atlanta headquarters of Delta Air Lines Inc. has the raw charm of a room that's been assembled on the fly. The furnishings include an assortment of cast-offs from other departments. A Nerf-basketball hoop is taped to one of the walls.
In other words, the Delta office looks like that of a dotcom. And it's filled with dotcom-er look-alikes -- seven smart, young executives who have spent the past 10 months pulling 6-day weeks of 14-hour days. These are the people who make up the e-Ventures team, the shock troops behind the airline's bid to make itself an e-commerce force. Playing the roles of investment banker, venture capitalist, and management consultant, the e-Ventures crew has sealed 14 partnerships with Internet companies that promise to whisk Delta into the world of the Web.
Until recently, Delta's reputation in tech circles has been less than sterling. But the company has engineered a potentially powerful model for old-line organizations that are venturing onto the Net. There is no "delta.com" here, no spin-off that has been kept insulated from the parent. The airline's e-commerce strategy and operations stay in-house and at the core of the business. At the same time, Delta has used its partnerships as a way to speed implementation -- to merge technological nimbleness with the company's power and reach.
The big idea: Big companies bring big-time credentials to the e-commerce table. They also bring in brand clout and established systems that work. What big companies don't do so well is move quickly. But they can import speed and e-commerce savvy by arranging smart, flexible partnerships that serve both sides well. "It's about focusing on the core business but still bringing in new ideas. That's what makes Delta's model special," says high-level technology consultant Charles Feld, 58, who served as Delta's interim CIO for two years, until December 1999.
Ultimately, Delta hopes that its partners will help reorder how the company does business. Delta wants the whole company to be more like its people in the Pit. "The big question is, how does this technology become part of our everyday work?" says Vincent Caminiti, 56, Delta's senior VP for sales and distribution. "We are striving to understand that everything we do involves an e-commerce opportunity."
E-Ventures, E-Nablers, and E-Commerce
Delta is a company that is sorely in need of an edge. Although its operations and profits have improved sharply in the three years since Leo Mullin took charge as chief executive, the company remains more vulnerable than most carriers are to low-priced rivals. Fiscal-year earnings that ended on June 30 at just more than $1 billion were about flat from the year before, and Delta's stock remains sluggish, much like that of other airlines.
E-commerce won't influence these numbers right away. But over time, Delta's partnerships and the ventures that result from them could help build new sources of revenue and could cut operating costs dramatically. And better, more accessible information could strengthen customer loyalty.
By taking an equity stake in every one of its partners, Delta could also participate in the financial upside that is associated with the dotcom sector. Exhibit A, the mother of all partnerships: Delta's famously prescient deal with priceline.com Inc. In 1998, Delta agreed to contribute a steady supply of unsold seats to the then-fledgling venture. In return, the airline took a 10% interest in priceline. Over the past two years, Delta has sold part of that stake for an equity gain of $784 million. Its remaining shares are worth approximately half a billion dollars.
Ed West, 34, Delta's executive VP and CFO, was a member of the team that engineered the priceline partnership. Although he is as straightlaced as any big-time CFO, he is where he is in part because he saw the promise of e-commerce for Delta early on and then pressed others at the airline to embrace that opportunity.
West is honest enough to admit that no one, including himself, imagined that Delta would reap anything close to the investment gains that it has made from that priceline transaction. He also admits that Delta didn't fully grasp the long-term strategic implications of the priceline deal until the company was well into negotiations. "At first we thought that priceline would provide us with a way to go after customers who would not have flown at all," he says. "We thought that we could raise our overall traffic and distribute our product more efficiently. But over time, we figured out that we could do with other companies what we had done with priceline. We started thinking about all of the opportunities that we could go after and about how we could structure ourselves to pursue them."
Delta had already spent more than $150 million to overhaul its aging information systems, which, until then, were a tangle of disparate, often unconnected databases that might give passengers one departure time on an airport monitor and a conflicting time inside the Crown Room Club. "It was a nightmare," says Feld, who oversaw the drive to rewire the carrier's airport operations. Today, analysts say, Delta has a technology infrastructure at least equal to those of other major airlines -- and a robust base for its push onto the Web.
But to capitalize on its investment, Delta had to form an effective decision-making organization that was focused on the Web. Its solution: a three-tiered structure that was designed to spur innovation within the company and to attract ammunition from outside. First, Delta identified nine broad e-business opportunities -- among them expanding its reach to small businesses, enhancing the customer experience, and selling to leisure customers. The company appointed a senior executive to be a strategy owner for each opportunity. These owners became the brain trust, charged with seeking Web initiatives that could meet business demands.
Next, Delta appointed a team of e-enablers, Web-savvy representatives from across the company's various functional units. Strategy owners can call on e-enablers to determine how a locally invented strategy will work in practice, function by function: What is the effect of a segmented online-marketing push on distribution? How can an airport's flight-information system be integrated with its reservations system?
Finally, West created the e-Ventures squad. He wanted there to be a group of specialists at the company who were without other responsibilities and who were able to throw themselves full-time into e-commerce implementation. "We needed people who could get going quickly, who could start moving against these opportunities without worrying about their day jobs," he says.
West dedicated two of his own executives to the team, and had Boston Consulting Group (BCG) bring on another five executives as full-time contractors. That was last October. Within three months, the team had identified more than 50 prospective partners for a dozen or more possible deals.
The chase was on. By May, Delta had settled a deal with e-Travel Inc., which provides travel-service software to large corporations, to steer customers directly to Delta's online-reservations system. The deal helped Delta reduce agency reservations fees and gave e-Travel new corporate leads.
Delta also formed a partnership with TRX Inc., which will fulfill online orders for MYOB ("mind your own business") Travel -- myobt.com -- a new site that is aimed at small-business customers. In April, Delta agreed to partner with PeoplePC, which will provide PCs and training to most of Delta's employees. These deals happened at lightning speed. "It's unbelievable how fast these guys move," says Nick Grouf, 32, PeoplePC's founder, chairman, and CEO. "For an organization of 75,000 people, Delta is incredibly nimble."
The Way to Go Wireless
Delta can move fast because the e-Ventures team acts as a hub for strategic information, coordinating tactical relationships across the company. The squad doesn't determine strategy per se; that job is left to business units and, ultimately, to Delta's executive committee. But "e-Ventures is our strategy conscience," says Michele Burns, 42, Delta's treasurer and senior VP of finance, who oversees the team. "The group looks at each initiative and asks, Does this conflict with anything that we're doing now? Does it fit with what we could be doing?"
Such coordination wasn't critical for a transaction such as priceline's, which only involved Delta's finance, network, and distribution operations. But consider Delta's agreement in April to develop wireless services with partner SoftNet Systems Inc. Beginning later this year, the partners aim to offer broadband wireless-Internet services to Delta passengers in up to 54 U.S. airports. If the plan flies, customers will be able to check email, retrieve updates on travel information, and get Web-based entertainment services by plugging an access card into their laptops.
And that's just the beginning. Delta will extend seamless wireless access to hotels and convention centers. It also wants to use the same technology to create wireless links for its airport employees. Baggage-cart drivers could be carrying handheld computers with wireless access to get updated gate information for arriving flights. Gate agents could reduce lines by checking in passengers using wireless links to the central ticketing system.
The basic idea for a wireless system was born three years ago in Delta's airport-operations department. This past January, then-operations-portfolio director Tim Rider, 35, was charged with assessing a variety of wireless-technology possibilities. Later that month, Delta CIO Bob DeRoades called a summit to evaluate all of the new technology initiatives in the company. Rider's wireless strategy was put near the top of the priority list. In the Pit, Tracy Hankin, 32, a three-year BCG veteran, had already taken ownership of the company's wireless ventures. Together, Rider and Hankin put together the team that was charged with steering the venture.
The sheer breadth of the proposal made the project unusually complex. "With 75,000 employees and one million customer touch points a day, don't underestimate the effect that this technology could have," says James Whitehurst, 32, principal of the e-Ventures group. "How do we negotiate wireless rights in airports? How do we use the technology to further customer service? We have a motto around here: Beware of destroying option value. We don't want to do anything now that might hurt us later."
That's why Rider and Hankin enlisted e-enablers from 30 different functional areas. "This project was totally invasive for Delta," Rider says. Rider's and Hankin's basic questions: How would the wireless initiative affect your group's operation? And what needs to happen within your group to make the venture a success? Betty Hollan, 39, general manager for Delta's hospitality services, was chosen to be the e-enabler who represented the Crown Room Clubs. Her expertise was important, since the airline plans to install the wireless system in every club nationwide, but not in every airport terminal. "I got a homework assignment," Hollan says. "My team had to determine that there was a customer need. Then we had to assess where our clubs were, and how many customers used each one. And we also had to work out an implementation schedule."
Within a month, the team had settled on a technology strategy. It had also narrowed an initial list of five possible partners down to SoftNet and two others. "We looked for a partner whose vision matched ours," Hankin says.
Hankin, who was an investment banker before she joined BCG, took over the partnership negotiations. She kept e-enablers in the loop, though. At points, the group met every afternoon; e-enablers were fed contractual details and were asked to return their feedback. The process was stunningly efficient. "They funneled all of our contacts with Delta through a single contact," says SoftNet CEO and chairman Larry Brilliant, 56. "They kept us insulated from their process, so we didn't need to have 10 meetings" to iron out details.
From concept to contract, the wireless partnership took just two months. Now comes the hard part: Delta and SoftNet have to make it work. Hankin and Rider, who is now Delta's director of wireless programs, will oversee the initiative through its implementation; the e-enablers will stay involved to coordinate activity between departments. "The work really starts now," says Hollan.
The wireless venture won't bring riches to Delta overnight. But it's a credible piece of a broader e-commerce strategy -- one that promises, over time, to tap into new revenue sources, deliver cost savings, and, possibly, redefine the company's relationships with its customers. Some 40 possible partnerships are now in the e-Ventures hopper -- and with each deal that actually gets made, Delta gains more technology, flexibility, and speed. And it acts more and more like its people in the Pit.
Keith H. Hammonds (email@example.com) is a Fast Company senior editor. Contact Michele Burns by email (firstname.lastname@example.org). As this article went to press, Ed West announced that he's leaving Delta to become CFO of Internet Capital Group.
Sidebar: Virtual Tickets, Real Money
Airlines are racing to sell more tickets on the Web. Why? Simple. It's much, much cheaper than any of the alternatives.
Today, Delta Air Lines, like most major carriers, distributes about 70% of its tickets through travel agents. Each one of those round-trips costs the airline $10 in fees. Delta's annual tab: $330 million.
The cost of accepting an online reservation and of processing an e-ticket via delta-air.com, however, is close to zero. Delta has sold nearly 5% of its tickets, representing $400 million this year, on its site -- second among airlines only to Southwest Airlines. And Delta is building online business through an alliance with e-Travel for large corporate sales, and through its new MYOB ("mind your own business") Travel Web site for smaller-business customers.
By 2003, Delta expects that delta-air.com will account for up to 20% of the company's sales. Online agencies will sell another 15% to 20%. Those percentages include tickets that are distributed through Delta's partner priceline.com and through the industry consortium (which is still in the works) that Delta is spearheading in an attempt to compete head-on with Travelocity.com.
Delta's net financial benefit from online distribution this year: $20 million. And the company expects that number to leap to $150 million by 2002. "Even for a $16 billion company," says senior VP Vincent Caminiti, "that's real money."