Airlines have been boom-and-bust businesses for as long as almost anyone can remember. But has Delta Air Lines cracked the secret code? Or is it just better at managing expectations?
An airline’s results can serve as a proxy for the economy’s overall health, in the home market, and even abroad. By measuring future bookings, airlines know how confident businesses are about the near term. By tracking leisure sales, they learn how consumers feel about what’s coming since few will book a Hawaii vacation nine months hence if they’re fearful they may lose their jobs.
In the near term, both groups must feel fine, according to Delta Air Lines, which reported annual results so strong on Tuesday the company’s CEO, Ed Bastian, called 2019 “the best year in our history” on its fourth-quarter earnings call.
Delta last year reported net income of $4.77 billion, an increase of 21 percent, year-over-year. Its revenues were $47 billion, up 6 percent, year-over year. Delta’s fourth quarter was also strong, with the airline reporting net income of $1.1 billion, up about 8 percent year-over-year, on total revenues of 11.4 billion.
Times are good for nearly every U.S. airline, as all capitalize on a healthy economy and a traveling public with plenty of cash and a near insatiable desire to fly. But Delta’s in better shape than the others for several reasons. It did not get caught up in the two big global aviation troubles of 2019, as it does not fly the Boeing 737 Max and does not fly to Hong Kong, where United Airlines last week took a $90 million impairment charge because of market weakness.
And it was better positioned than some of its rivals to capitalize on an uptick in premium demand, with companies and wealthier leisure travelers increasingly spending more for better seats.
Executives said Tuesday this year looks good so far, saying they expect to grow airline revenues by about 4 to 6 percent in 2020. They cited a few areas of relative weakness, including China and Korea, and said some manufacturing firms may have reduced travel slightly on a global basis. But overall, they said, demand is strong, especially in the domestic market.
“The health of our businesses in the U.S. and the U.S. corporate is doing quite well,” Bastian said.
Delta executives said they’ll work this year to increase revenue from existing areas of the strength. Here are some of the initiatives Delta executives highlighted Tuesday:
Delta’s revenue from premium products increased 9 precent in 2019, to $15 billion, higher than the 3 percent increase from economy class revenues. Premium products include everything from extra-legroom seats to flat-bed business class suites.
For now, Delta is pleased with the makeup of its cabins, but airline President Glen Hauenstein didn’t rule out the possibility Delta would add more extra-legroom seats if demand warrants it.
It could make sense, as premium travelers are some of Delta’s most loyal customers. The airline claims its data shows 70 percent of customers who fly in a premium cabin buy an “equal or better” product on a future trip, Hauenstein said.
Bloggers who track airline frequent flyer programs often chide Delta for offering one of the least generous loyalty schemes, but passengers don’t seem to mind.
Delta told analysts customers are using miles for more purposes than ever, including paying for upgrades and bag fees. About a year ago, Delta began offer upgrades with miles, and 1.2 million customers have redeemed for the better since then, Hauenstein said. The airline has made $135 million in incremental revenue from that upgrade functionality alone, he said.
Much of Delta’s revenue from its loyalty program comes, directly or indirectly, from its relationship with American Express, which buys points from Delta and awards them to its customers. These bank relationships work best for airlines when the two companies can increase the number of customers who apply for co-branded cards. In 2019, Delta said, it “acquired” 1.1 million co-branded cards, a new annual record.
Delta claims the relationship with American Express was worth about $4.1 billion in 2019. By 2023, Hauenstein said, that relationship could be worth nearly $7 billion, on a “combination of improved rates, continued acquisition momentum, and spend growth.”
The airline’s bare-bones fare is here to stay, executives said, even though Delta is increasingly positioning itself as the most premium U.S. airline.
Hauenstein told analysts Delta needs an entry-level product to entice customers into its ecosystem, so they won’t be tempted by a competing fare offered by another carrier. The goal, he said, is to persuade some customers to buy up on their next trip.
“Once they see the quality of service the Delta people provide, I think they stay with us throughout their entire life cycle,” he said. “And that’s an important product for us to continue and maintain.”
In the past decade, Delta has spent a fortune to boost its presence at big-revenue coastal hubs in New York, Boston, Seattle, and Los Angeles.
It was a strategy that made sense at the time. After merging with Northwest Airlines in 2008, Delta was then the world’s largest airline, yet all of the company’s big hubs were in the interior of the United States.
Delta changed that by moving aggressively to win new business, and the effort mostly paid off. It’s now a solid No. 1 in New York City, where it’s a favorite among corporate travelers across all industries. It also holds strong market positions in Seattle, where it courts the technology industry and Los Angeles, where it woos entertainment. It’s also aggressively pursuing JetBlue Airways in Boston.
But as United President Scott Kirby often reminds analysts, there’s money to be made in smaller markets too. Travelers in smaller interior cities often have fewer choices for travel, and they can pay a premium for efficient one-stop itineraries to major U.S. cities and international business centers. Kirby has been fanatical about building up United’s interior hubs in Denver, Chicago, and Houston, and now Delta’s hubs also will get a tune-up to improve connectivity, executives said.
“Your ability to connect traffic when you’re in Seattle is a lot less than when you’re in Salt Lake City or Atlanta,” Hauenstein said Tuesday. “We have really used our first-mover advantage post-merger to take advantage of having the opportunity to consolidate positions in some of the key coastal markets like Seattle, Boston, Los Angeles, New York.
“But we did that a little bit at the expense of growing connectivity in our interior hubs,” he added. “And so over the next several years, we’ll be working on continuing to improve the products and services we offer at the coastal hubs, but really refocusing a little bit on growing the interior hubs to improve the connectivity of the airline.”
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Photo credit: Delta Air Lines posted a big profit in 2019. Pictured is one of the airline's Boeing 737-800s. m01229 / Flickr