The primary focus during this pandemic has been around which airlines are in better or worse shape financially. There’s good reason for that, but as the recovery speeds up, the time has come to look at other metrics. Since the recovery in air travel demand is uneven at best, there are significant differences between the airlines that will influence their near-term fortunes. Among the Big 3, United is the most poorly-positioned thanks to its fleet and network composition. Meanwhile, Delta’s conservative nature has created a further opening for American.
Over the weekend, United and American finalized their July schedules, and as expected, domestic is coming back much faster than international travel. Looking at a week in mid-July vs last year, here’s how each airline breaks down:
Nobody is bullish on international, though Delta seems a little more conservative. Meanwhile on domestic, it’s American that’s downright bullish while United is the most conservative.
The international perspective is easy to understand. This large deficit compared to last year is about people not wanting to cross borders due to complete confusion and fear around entry requirements, quarantines, etc. It isn’t really about short-haul vs long-haul, though empty widebodies going long distances are a lot more costly than empty narrowbodies going short distances. When we look at who has the most international exposure, that’s where we can start seeing why these numbers look the way they do.
United’s Fleet Skews Toward Widebodies In a Time When Nobody Wants Them
With international traffic sagging, airlines will be more successful if they have more narrowbody aircraft that are better suited to domestic travel. After all, those widebodies are expensive, and the payments don’t stop just because they aren’t flying. (And if they’re just flying empty, that’s even worse.) Looking at 10-Ks from the year-ending 2019, you can see that United has the highest percentage of widebodies in its fleet by far.
I didn’t dig into regionals to determine which aircraft were owned by the mainline carrier or which contracts were ending soon. I just looked at the numbers as a percentage of total fleet as well as the percentage excluding regionals. With regionals included, United compares better, but it’s still significantly higher than the others.
American and Delta actually have similar numbers of widebodies (150 and 154 respectively), but American has a larger regional and narrowbody fleet. It’s United with 196 widebodies at year-end that stands out.
All of these airlines have the ability to retire airplanes, and they’ve done just that since these December numbers. But now we have to look at why United has so many more widebodies. That’s because United has higher international exposure. And right now, that’s bad.
United Has Significantly Higher International Exposure
If we look at available seat miles for all of 2019, we can see how much capacity is regularly allocated to international flying.
It shouldn’t surprise anyone to see that United has the highest percentage of international flying since the airline has the highest percentage of widebodies. That means United has a bigger chunk of its network that won’t recover as quickly.
One interesting quirk here is that if you look at percentage of flights instead of ASMs, Delta is actually below American. What that says is that Delta has more long-haul flights while American does more short-haul. Considering American’s Miami strength going into shorter Latin American markets and Delta’s Asia strength going over the vast Pacific, that makes sense.
We’ve established so far that United has more exposure to weak international markets than anyone else, and that’s bad. But what about domestic? Why is there such a discrepancy on that side? Some of it is strategic, but some of it is just bad luck based on the network.
United Has More Flying In Domestic Hotspots
This metric is far from precise, but I have spoken with multiple people at multiple airlines, and they’ve all said the same thing. In effect, those people in the middle are traveling more while those on the coasts — specifically the West Coast and the Northeast — are not. In other words, those who were hit earliest and hardest are less willing to get on an airplane than those in the rest of the country. (I’m sure there are political beliefs and economic concerns influencing decisions here as well, but I’m not going to dive into that today.)
I wanted to look into this further, but the hard part is actually figuring out where to draw the lines. So, here’s what I did:
In Oregon and Washington, I took everything west of the Cascades. In California, I mostly took what’s west of the Sierra Nevadas, but I did leave out places like Fresno and Bakersfield. Then again, they’re so small they won’t have an impact. In the northeast, I took Washington/Dulles and National and then went northeast from there. I didn’t bother separating out New York since there’s not a huge amount outside of NYC anyway. But in Pennsylvania I did draw a line splitting the state. Feel free to argue amongst yourselves about what you’d change, but this was the cleanest way I could do it.
With that broken out, what do we find?
I started with the percentage of flights (left) in this geography, and United has more than half its flights touching those areas. It’s the major hubs in Newark, San Francisco, and Washington/Dulles plus a minor hub in Los Angeles that hurt. The other airlines are more than 7 points lower thanks to having more hub capacity in the middle.
But flights alone don’t say much, because you could still have a significant number of people connecting over hubs regardless of where the hub is located. That’s when I turned to the DOT O&D Survey to see passenger numbers. Those (right) are the percent of passengers originating or terminating in the hotspots regardless of connecting points. In this case, United has an even higher concentration versus the others.
This all makes sense rationally. Think about Delta funneling people into Florida via Atlanta and American handling much through Dallas/Fort Worth and Charlotte. Those are great hubs that have large catchment areas that fall outside the hotspots. United has Denver and Chicago has some benefits, but the rest of its network isn’t all well-suited to where demand is today.
What About Delta?
This helps to explain why United is scheduling less domestic capacity. Its network requires it. But what about Delta? These numbers are overly generous since Delta is really restricting capacity even further by having hard caps on load factors on its aircraft. This conservative restoration of service appears to be more of a strategic move than anything. Delta has said it wants to be a premium airline, so maybe that’s this strategy. Or maybe it knows it has enough cash on hand that it can afford to bring service back more slowly. I don’t really know. What I do know is that this is creating an opening for American.
If demand continues to return as it appears to be doing domestically, American is positioning itself to take more than its fair share due to Delta’s limited capacity. Of course, if demand doesn’t return, then American will have more exposure to losses. It’s a risk that makes sense for American since it needs demand to return faster. Being in the weakest financial state pushes you to take calculated chances.
United is hamstrung, Delta is hamstringing itself, and American is taking a swing. Whether it actually succeeds depends entirely on the American public’s willingness to get on a plane.