Since the pandemic began, the focus in the airline industry has been on who has the most cash. What’s the cash burn rate? How do they stem that? When will they be back to NOT burning cash? Those questions were all important, but that’s no longer the case. More airlines continue to find ways to prepare for a post-pandemic life, but not everyone has begun to make that shift. Those that don’t risk being left behind.
I realize this may sound strange and overly confident in the recovery, but it’s not. It’s just a reflection of how the industry is choosing to compete today. If everyone had antitrust immunity, got together to discuss options, and decided to go with a broad cash conservation strategy, well, then it would make sense. But this is a competitive industry and some are making moves to solve their problems no matter what. Because of that, no airline can afford to sit idly by.
It’s the dynamics of US bankruptcy law that make this especially true. Sure, a tiny airline might go out of business, but that will not be the fate of any of the main players in the US. Instead, the worst case scenario is that they file for Chapter 11 bankruptcy protection, reorganize, and come out leaner and meaner. That would be bad news for management in some cases, but don’t worry about them. That golden parachute will help them sleep at night. It’s worse news for all the airlines that don’t go bankrupt.
Of all the airlines, Delta finds itself in the stickiest situation. While others are looking ahead and trying new things to address new and previous issues, Delta remains focused on its primary hubs, hoping everything will eventually get back to the way it was last year. With the COVID vaccination plan already in motion, the recovery is coming. It certainly won’t happen in January or February, but it’s going to start soon after. It’s just a matter of when. Thinking everything will look the same on the other side is dangerous.
Delta Tries to Wait it Out While JetBlue Makes a Move
I continue to be confused by Delta’s strategy during the pandemic. It has gutted its focus cities and tried to rally around its primary hubs. Just last week it floated a big increase in Florida seats for March from its hubs. That isn’t much of a stretch. New York and Boston have seen massive cuts, responding to the demand in the northeast, but with NYC slot waivers being handed out, Delta has a free pass. It can just ramp up later. The only place Delta seems to be making a concerted competitive move is in Los Angeles. And by that, I mean Delta just isn’t cutting as much there. It’s not trying anything new.
At LAX, Delta has maintained a very high level of service, higher year-over-year than all other hubs save Salt Lake City with nearly 80 percent of the previous year’s flights being operated in January. Demand in LA is still very low, but Delta seems to want to win there. That’s fine. Take that chance, lose a bunch of money, and maybe it will net something on the other side. Or maybe it won’t, since LAX really doesn’t like any airline having a dominant position.
But while this is happening, Delta is ignoring other markets that it should be defending, right in its own backyard. Look no further than Raleigh/Durham. Delta had made that a focus city, but it has kept a skeleton schedule for months now, and it won’t resume significantly more flying until at least April, if then. Just recently, it permanently canceled flights to Austin, Cleveland, Columbus, and Pittsburgh. What happens in a vacuum? Someone steps in.
JetBlue had already announced an initial move from Raleigh/Durham beyond its own focus cities earlier this year when it said it would fly to Cancun, Fort Myers, Los Angeles, Montego Bay, and San Juan. Just recently, JetBlue has doubled down, now adding Austin, Jacksonville, Las Vegas, Orlando, Newark, San Francisco, and Tampa. This is a smart, strategic move for JetBlue, and it’s a market where the brand will likely resonate.
Delta opted to cut back significantly in these markets. It hasn’t flown to Austin, Fort Myers, Jacksonville, Las Vegas, or Newark since the pandemic began. Austin is gone for good while the others will maybe, possibly, eventually come back? The rest of the markets are operating again, but at about half where they were. The only exception is Cancun, which has grown.
Delta has used a strategy of maintaining fare integrity while sacrificing share. Looking at the short-haul markets that overlap with JetBlue, Delta’s fare has stayed relatively the same while other airlines have reduced fares. The end result is that before Q2 2020, Delta had a ~30 percent passenger share in those markets. In Q2, that had plunged to just under 10 percent. I only wish we had more recent data to look at, but anecdotes suggest the strategy hasn’t really changed.
Meanwhile, JetBlue is also trying to build up a solid strategic play in Newark (which I like) and in Los Angeles (which I don’t). The difference between the two airlines could not be more striking.
American Creates a Small/Mid-Size City Problem
This issue of competitiveness for Delta, however, extends beyond strategic focus cities. In small and mid-size cities, Delta is falling behind. We know that Southwest will dominate in mid-size cities so I don’t need to show that, and United has long been weaker in the domestic world. But American and Delta butt heads a lot, especially in the Southeast and Midwest, and I found this rather illustrative. Here’s a look at Indianapolis Cirium schedule data, a market that was a key part of the old Northwest heartland strategy that Delta inherited:
YoY Comparison of Indianapolis Flights and Destinations (in Circles)
Each airline has cut about 50 percent of flights, but Delta has also shrunk its footprint to serve just a bare minimum number of destinations. American, meanwhile, retains eight. This isn’t limited to Indianapolis. Take a look at Jacksonville, Kansas City, Lexington, etc. There are just a lot of examples like this. Delta is crawling back into its shell, rallying around its primary hubs, while others are trying to race ahead.
We can argue whether this is ultimately the right move for American, but in tons of cities around the US, it is proving to offer more utility than Delta now. I keep hearing about American floating this idea of a “green flag.” When the recovery comes, it wants to be off to a rolling start. (Or something like that. I don’t speak NASCAR.) That could serve the airline well in the future, or it could be a disastrous money-loser. Either way, American isn’t going out of business. In fact, Delta should hope this works for American, because it would be better off competing with an American that hasn’t gone bankrupt.
Southwest Grows Stronger
Beyond American, when it comes to domestic travel, nobody looks to be the opposite of Delta more than Southwest. It has added a mind-blowing 12 new airports this year plus the big expansion in Long Beach when it got those extra slots. These cities range from big leisure destinations like Miami and Palm Springs to ski spots like Montrose and Steamboat Springs. It includes primary airports like Chicago/O’Hare and Houston/Intercontinental. And yes, it even includes smaller cities like Fresno, Jackson (MS), and Colorado Springs. These are all plugging into Southwest’s “hubs,” which just keep getting stronger. That’s bad news for every airline.
Delta, as we know, continues to position itself as a premium, business-focused airline. That’s an area where Southwest sees opportunity. It has finally gotten around to doing basic things that will make it more competitive in that world. For example, it is finally participating fully in several global distribution systems. It still isn’t there in the most important in the US, Sabre, but even just doing it in the other systems can help move some share. The key point is that it is not sitting still.
United Puts In the Work
You can say the same for United. On the network side, it has put together some really interesting routes during this pandemic (Bangalore, Johannesburg, etc), but more interesting to me is that United is actually spending money while revenues are down. For example, it invested in an agreement with its pilots — offering things like guaranted premium cabin travel when deadheading to/from a flight — that creates flexibility during the recovery. United also hasn’t retired a single fleet type since it doesn’t know what will be needed once everything is back up and running. It wants to keep its options open.
The airline has also put money into its aircraft. It modified its 787-9s so they could fly further and open up routes like Bangalore. United has sped up the reconfiguration of the widebody fleet to have the new Polaris seats. It’s even putting money into direct carbon capture technology which will actually make the airline carbon neutral by 2050. This is an airline that is positioning itself for the — admittedly sometimes very distant — future.
Delta seems to be positioning itself for a future that looks a lot like the past. It wants to be a business-focused, premium airline. It’s just going to quietly go about its business until the time comes for that to happen again… if it does happen. It continues to block middle seats in the name of safety and has spent a ton of money on Delta Clean. The airline seems interested in trying to bank on healthy and safety as a differentiating factor. It even has a VP in charge of the effort.
Ultimately, every airline is doing something in the “health and safety” realm, and there hasn’t been any significant case of broad transmission on any US airline. Delta may get a short term bump for this PR effort, but once people have the COVID vaccine, well, they’ll care a lot more about price than they will about cleaning procedures. (And there’s no world where the empty middle seat can remain.) This seems like a short-term play instead of a long-term strategic focus. That’s not where I’d put my efforts.
The time to hide and wait for things to improve is gone. Some airlines seem to understand this better than others, banking that they know the way forward better than the rest. Only time will tell which strategy was right, but I’d certainly place my bets on those who are willing to take chances now to get ahead of their problems. It’s hard to imagine that the future will look like 2019.
