Song's Startup Flight Plan

By: Scott KirsnerWed Dec 19, 2007 at 12:40 AM

How does an established corporate giant (in this case, Delta Air Lines) respond to disastrous economic circumstances and the rise of a new breed of competitors that operate by different rules? By creating a whole new operation (in this case, Song) that runs by those rules, and then trying to fly beyond the competition. Here's a behind-the-scenes look at the ambitious flight plan and bumpy launch of an internal startup.

The Strategy: From "Dabbling" to Leading

Delta has launched startups from inside the parent company before -- one successfully and one not so. Founded in 1924 as a crop-dusting operation in Macon, Georgia, Delta began carrying passengers in 1929, running a route from Dallas to Jackson, Mississippi. The passenger business was dicey until the mid-1930s. By the 1990s, however, Delta was setting records, becoming the first airline ever to transport more than 100 million passengers in one year.

Almost one-third of all Delta traffic goes to Florida, explains Selvaggio. But when low-fare carriers, such as Southwest and ValuJet (the predecessor to today's AirTran), began serving the Florida market, Delta realized that it would have to create its own low-fare offering -- or simply surrender the cost-conscious leisure traveler to the competition. In 1996, the company created a division called Delta Express -- its last startup prior to Song and the one that Song will replace over the course of this year -- to serve leisure fliers heading to Florida.

The Delta Express operation, a success at first, fell prey to what Selvaggio calls "cost creep." The initial deals with pilots had them working for lower wages, but only until the pilots' union negotiated an increase. And the 737s that made up the Delta Express fleet had just come out of intensive rehab -- which meant that their maintenance costs would only rise over time. As Delta Express's costs steadily increased, other low-fare airlines devised ways to drive their own costs down.

"Express wasn't seen as part of our future," says David Pittman, Song's CFO and an 18-year Delta veteran. "It wasn't a matter of survival, because at that point, we were making billions of dollars on the main line [Delta flights]. We never thought that things would be the way they are today. People think of Song as part of our future."

With Delta Express, Selvaggio says, "we were dabbling. There wasn't a real commitment to win in the market. And that market is growing so much that you don't want to dabble in it. You want to be a leader."

Song's new strategy for leadership is to start with low costs and high productivity -- and hold on to them over the long haul. "We need to make sure the costs stay low every year," says Pittman. "Which means we don't stop reinventing ourselves, asking how we can do more with less. We need to find better processes and technology to take pennies out of the cost."

Passengers will be prodded to buy their e-tickets either online or by phone, using an automated voice-recognition system that will launch later this year. And rather than each passenger receiving the same free snack, passengers will have to pay for their food. That way, they'll have a wider range of high-quality choices. "The customer may put no value on a free bruised apple and a warm bottle of water," says Tim Mapes, Song's managing director of marketing programs and services. "But it's a different experience if you're buying a cold bottle of Evian and a perfect Harry and David pear."

The Change: Same People, Different Company

In Selvaggio's office at Song, two photographs lean against the wall. Both show him playing his fluegelhorn at a Los Angeles Lakers game. (He also played it during Song's flight-attendant audition process, with Serratelli on drums, to emphasize that every flight is really a performance.) When Selvaggio arrived at Delta -- he had previously run US Airways Express and Midway Airlines -- the two photos had to be reframed "in the Delta-standard size and style," he explains. He makes it clear that he's not crazy about how they look.

Still, Selvaggio believes that the advantages of launching a carrier within Delta may outweigh the advantages of the JetBlue approach of starting from scratch. "There are a lot of things you don't want to re-create when you're starting an airline," Selvaggio says. "Delta has a great workforce, an infrastructure, and a digital nervous system that works very well."

A scorecard that measures the effectiveness of Song's leadership has emphasized that the startup needs to improve the "competitive position and greater good of Delta." So while some members of the Song team had proposed staffing the new airline with a 50-50 mix of Delta veterans and new hires, the airport-customer-service personnel, flight attendants, and pilots on Song will in fact all come from within the Delta ranks.

Initially, the idea was that not only would a 50-50 mix help Song create a corporate culture and customer experience that was distinct from Delta's, but it would also help keep costs down, since new hires could be paid lower wages. "But we did a 180 on that," says Joanne Smith, Song's vice president of customers. "We decided that we could get better productivity out of our own people and that we would have lower training costs." (Smith is the lone member of Song's executive team who joined the startup from outside Delta.)