Delta Won’t Adjust Its Approach Despite Worries of Economic Downturn

Just after the early 2000s dot.com bust, United Airlines, which operates a San Francisco hub, removed olives, lemon peels and grapefruit juice from its onboard bar, a move it estimated saved $50,000 per year.

A few months later, 9/11 happened and just about every airline, including United, made more drastic cuts, taking away food and slashing frequent flyer perks. Some airlines stopped cleaning their aircraft so often, or deferred whatever onboard improvements they had planned. Business travelers weren’t flying as much, and when they did, they demanded lower fares.

Cuts tied to the economic cycle are common in every industry, but they’re likely more prevalent with airlines, which can quickly go from making billions of dollars to losing billions, often for reasons outside of their control. They are susceptible not only to the usual cycles, but also to shocks other companies are not. If oil doubles in price, many corporations can absolve the spike. That’s much more difficult for airlines.

Repeated boom-and-bust cycles have made some airlines wary about adding perks, especially in economy class, where margins can be thin. There’s no doubt U.S. airlines, which are making bigger profits than carriers in the rest of the world, can afford to add more extras for coach passengers. But why do that, if they’ll have to take them away?

Slowly, though, U.S. airlines are evolving. Most once again serve small free snacks, like chips, cookies and pretzels, on most domestic flights. And carriers that removed free alcoholic drinks on long-haul flights have brought them back. Airlines even again offer free movies and TV shows for coach passengers.

Delta has been a little more generous than its competitors. For regular economy passengers, it recently improved its onboard snacks. And in its domestic extra legroom section, Comfort Plus, Delta now provides free cold meals. It’s also soon introducing a new premium economy section on long-haul flights, with extra wide seats, better food and more legroom. Delta wants to make more products available for customers willing to pay for them.

Delta announced its fourth quarter earnings on Thursday — it made pre-tax net income of $622 million on total revenues of almost $9.5 billion — but on the earnings conference call, an analyst pushed Delta executives on whether all the investments made sense. “Do you have a litmus test so you don’t repeat the mistakes of the past, where you add a lot of frills onto the product and then, come a downturn, you have to take that way?” asked Savi Syth of Raymond James.

But Delta Glen Hauenstein said preparing for the next downturn made no sense, arguing the airline must give customers want they want now.

“In this part of the economic cycle — with consumer confidence high, with consumers flush with cash — they are willing to pay for more frills,” he said. “We make a mistake as an industry, I think, when we anticipate, or try to be in the minds of consumers, as opposed to responding to what’s important at that point in time.”

Delta plans to continue to test to see what perks passengers want. Recently, for example, it served free meals to all customers on flights between New York and San Francisco and Los Angeles to see if customer satisfaction scores would be higher. Delta has not shared the results of the test, but it hinted it might permanently reintroduce food on important domestic routes.

“As we continue to refine our customer segmentation, we want to continue to provide what customers are willing to pay for,” Hauenstein said. “In different parts of the economic cycle different things are important to each segment.”

If the economic climate changes, Hauenstein suggested Delta will not fret about removing the extras, just as airlines did in the early 2000s.

“If fares become more relevant to customers than some of the amenities we put on, then absolutely [we would remove perks.]” he said. “I don’t think you box yourself into the fact of saying what customers want to today is what they want five years from now.”