DELTA FEELS SQUEEZE BUT STAYS ALOFT
Absence of rivals in some markets is key to the carrier’s performance despite dip in revenue
It seems for air passengers in the United States, things are getting more uncomfortable – and complaints have soared by more than half on last year.
Fewer flights were on time and consumer complaints about airlines rose in May, according to the latest government figures.
The transportation department said at the weekend that 79.1 per cent of flights on the 12 largest US airlines arrived on time in May, down from 83.4 per cent in May 2016.
Hawaiian Airlines had the best rating, followed by a closely bunched group of Delta, Alaska, SkyWest and United. Virgin America was last.
While Delta may have been mildly cheered by the rating, there are more worrying concerns on a financial level for the carrier.
Shares of Delta dipped at the weekend after the company reported second-quarter profit and revenue had plummeted, below Wall Street expectations on higher costs for fuel and labour.
Delta reported net income of US$1.22 billion, down 21 per cent on a year earlier. The chief executive Ed Bastian said the carrier sped up technology investments and made other changes so it can recover more quickly from interruptions this summer.
Delta’s fuel and labour costs also grew by $445 million from a year earlier, or an 18 per cent bump for fuel and 9 per cent for labour.
Excluding what it termed non-repeating costs, Delta said adjusted earnings were $1.64 per share. Nine analysts surveyed by Zacks Investment Research had predicted $1.66 per share on average.
Revenue rose 3 per cent to $10.79bn, below the analysts’ forecast of $10.83bn.
Investors are looking for airlines to limit their growth to push up fares. Delta said it would increase seats for sale by 1 per cent in the third quarter compared with a year earlier.
Analysts generally gave lukewarm responses to Delta’s results and third-quarter forecast. The Stifel analyst Joseph DeNardi expressed concern that rising costs will limit profit margin in the rest of 2017.
Going back to delays industry-wide in the US, there were 27 ground delays of more than three hours, which could subject the airlines to fines. The transportation department logged 1,262 consumer complaints about the US airlines, up 54 per cent from May 2016.
Still, in general the US aviation sector looks reasonably stable. While all US airlines have benefited from consolidation and tame fuel costs, the biggest carriers have become the real cash cows. But even among the Big Three, there can only be one at the top. Delta, despite its less than uplifting latest result, still sits as king of the profit hill.
But such divergence in an industry where airlines generally pay about the same for everything seems extraordinary. What makes Delta outshine American Airlines and United Continental? All three pay employees about the same, face similar fuel costs and fly in similar global networks.
In fact, when it comes to overheads, all three carriers were within 0.3 cents of each other in the first quarter when it comes to cost per seat mile, or how much to fly a passenger one mile excluding the fuel expense, a standard industry metric. By this measure, Delta actually had the highest expense, at 11 cents per mile, and it rose further in the second quarter.
So what is Delta’s secret? According to analysts, three things appear to separate it from the others. One is a regional operation that sports higher fares and profit margins than the other two. It also helps that there is less competition in Delta’s hubs and that it keeps a sharp eye on revenue generation. But it is that regional segment where Delta seems to be reaping the most benefit relative to rivals, according to a recent report from Stifel Financial.
Delta may have taken a hit overall in the most recent quarter, but it had a 39 per cent profit margin on its regional operations last year, excluding fuel, compared with 26.2 per cent at American. Overall, Delta’s 32.6 per cent margin was only 2.3 percentage points higher than American’s.
“If I’m flying people from New York to Chicago, my ability to get an outsized fare is really bad. I’m flying from two major hubs and there’s a lot of opportunity for people to switch on me,” says George Ferguson, a senior airline analyst with Bloomberg Intelligence. “But if you’re in Montgomery, Alabama, and you need to connect into Atlanta to go somewhere else, I think you’re stuck. And I think that’s the game.”
More crucially, Delta wields a market share of 76 per cent in Atlanta, its base and home to more than a third of its domestic capacity. At the next largest US airline hub, Dallas-Fort Worth, American has only 69 per cent market share and the hub represents only 22 per cent of its domestic capacity. American has its highest margins at its Charlotte hub, where it has 92 per cent market share.
The most germane answer to why Delta appears to enjoy a structural advantage for profitability is simply a function of where the airline flies. Towns with limited air service, such as Valdosta, Georgia, Grand Forks, North Dakota, and Roswell, New Mexico, often host only one of the Big Three.
“In this game, the object is to go fly where [rivals] ain’t,” says Mr Ferguson. “And that’s the place where you can get a better fare.”
In this game the object is to to fly where rivals ain’t. And that’s the place where you can get a better fare