Skift Take

Delta is generally considered the most fiscally sound of the U.S big three, and that likely won't change soon. But Delta, like its competitors, needs to come up with a cohesive strategy on how to challenge the discount airlines beginning to move into the trans-Atlantic market.

As new trans-Atlantic discount airlines such Norwegian Air and Wow Air attract more international passengers, often stealing share from established players, Delta Air Lines signaled Thursday it may alter its offerings to keep pace.

“What we know know is that Delta has a very, very strong brand —much stronger than some of the [ultra low cost carriers] — and that people would prefer to fly with us than they would on some unknown, non-brand names,” Delta President Glenn Hauenstein told investment analysts. “But in many cases, we don’t have similar configuration mixes and product offerings. I think that is where we are going to be looking.”

Hauenstein made the comments on Delta’s third quarter earnings conference call, after the carrier reported net income of $1.26 billion. That was $278 million less than the same period in 2015, though the airline blamed roughly $150 million of the decrease on its August technology failure that snarled the carrier’s flights for days.

While absolute profits are important, airlines and investors tend to focus on another metric, revenue per available seat mile, or RASM, which measures how much money a carrier makes for each mile it flies. On Thursday, Delta said second quarter RASM fell 6.8 percent year-over-year, with about one point attributable to the IT failure. Delta CEO Ed Bastian called the current climate “weakest revenue environment in recent memory,” and said Delta plans to grow its capacity by only 1 percent for the fourth quarter, an unusually low growth rate for the carrier.

All of Delta’s regions, with the exception of Latin America, which is finally improving after many successive quarters of lower year-over-year unit revenues, are under some pressure. But the trans-Atlantic market is a particular concern, Delta executives said.

Hauenstein said Delta faces a supply-and-demand imbalance caused by three factors —terrorist events, increased competition from airlines like Norwegian and Wow Air, and Brexit, a problem because the devaluation of the British pound makes UK-originating passengers less valuable. Unit revenues in the trans-Atlantic sector fell 9.7 percent, year-over-year, Hauenstein said.

Delta plans to trim its trans-Atlantic schedule slightly, and while Hauenstein said Delta likely will continue to report more year-over-year trans-Atlantic revenue declines in the coming quarters, “we do expect that the pace of declines will moderate going forward.”

heated transatlantic competition

Though terrorism and Brexit fears may eventually ebb, Delta is facing a considerable challenge on the trans-Atlantic sector from several airlines with ambitious growth plans.

Leading the way is Norwegian Air, an Oslo-based discounter flying Boeing 787s from the UK and Continental Europe to many U.S. cities, including San Francisco, Los Angeles, New York, Boston, Orlando and Fort Lauderdale. The carrier, which has massive growth ambitions, is beginning to hire U.S. pilots, who will be based in Fort Lauderdale. Iceland’s Wow Air often offers even cheaper fares for its more bare-bones product, though it is smaller in the United States. Wow Air also requires passengers to make a connection in Iceland, while many of Norwegian’s passengers fly nonstop.

In a September interview with Skift, Norwegian CEO Bjorn Kjos said he would not be surprised if major airlines like Delta implemented new strategies to compete with discounters.

“You have a lot of smart airlines,” Kjos said. “So yes, it’s doable. And why shouldn’t they do it?

Even more competition may be coming. JetBlue Airways has suggested it might eventually fly between the East Coast and Europe with Airbus A321s or widebody jets. Meanwhile, Eurowings, owned by Lufthansa, is starting to expand in the United States. And there’s always the chance one of Europe’s most powerful ultra low cost carriers, such as Ryanair or Easyjet, could start flying trans-Atlantic, though that does not seem likely soon.

Hauenstein said Delta is evaluating what it can do to cater to travelers who might be enticed by a low fare airline. Delta might implement new fare products or cabins, he said. As one example, Delta soon will introduce a new premium economy cabin on long-haul aircraft, an offering similar to what Norwegian sells.

What Delta will not do, however, is create its own low cost airline, as Air Canada is doing with its Air Canada Rouge subsidiary, which flies mainly leisure routes from Canada to Europe, Latin America and Asia. Delta has created two low cost airlines in the past two decades —Delta Express operated on domestic vacation routes between 1996 and 2003, while Song flew from 2003 to 2006 — but neither was a rousing success.

“You don’t need to create an airline within an airline,” Hauenstein said. “You just need to adjust to what people what to buy in the marketplace. The closer we can get to what our customers want to buy in every sector, the more successful we are going to be. And trans-Atlantic is no exception to that rule.”

Delta is also fearful the three Middle Eastern airlines, Etihad Airways, Emirates Airline and Qatar Airways, may add trans-Atlantic routes. The aviation agreements between the U.S. and the United Arab Emirates and Qatar allow the three airlines to fly from Europe to the United States, on what are called fifth freedom routes. For now, the airlines operate relatively few of them, though Emirates flies between New York and Milan.

Bastian said the U.S. State Department diplomats have been speaking with their Gulf counterparts regarding fifth freedom flights. U.S. airlines generally oppose them from Gulf carriers, and would prefer to see the governments halt them. (Not all stakeholders agree, however, with FedEx arguing it needs fifth-freedom rights to shuttle packages between the Middle East and Asia and Europe.)

“We have reason to believe the State department is making progress,” Bastian said, “but freezing and or eliminating fifths would be a great start.”

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Tags: delta air lines, low-cost carriers, norwegian air, wow air

Photo credit: In the early 2000s, Delta created a discount airline called Song, in part to compete with upstart JetBlue Airways. Though Delta retired Song, the airline is now facing a threat from trans-Atlantic discount airlines, but it has no plans to create another airline-within-an-airline. Aero Icarus / Flickr

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