Delta’s Long-Term Focus on China

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After rapidly expanding its presence in Seattle, Delta (NYSE: DAL) now plans to set up an international hub in China, to complement its recent partnership deal with China Eastern Airlines (NYSE: CEA) and code-share agreement with Shanghai Airlines (a wholly owned subsidiary of China Eastern). As part of its long-term strategy, Delta envisions a hub in Shanghai, China’s largest and most populous city, similar to its hub in Amsterdam, so that the airline can extend its services to passengers traveling from and around China to the US.  With the expansion into the world’s largest economy, Delta will continue to establish its West Coast presence to create a gateway to serve the Asian markets. We currently have a price estimate of $46 per share for Delta, which is 5% ahead of its current market price.

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Delta, which currently operates daily flights to China’s capital, Beijing, from Seattle and Detroit, plans to launch a daily flight from Los Angeles to Shanghai by July this year, subject to government approval [1]. This will be Delta’s fourth daily nonstop flight to the Asia-Pacific region, apart from its existing routes to Tokyo-Narita, Tokyo-Haneda, and Sydney.  By mid 2015, the airline intends to operate 28 weekly departures to Shanghai, using its hubs at Detroit, Seattle, Los Angeles, and Tokyo-Narita. While Delta’s partnership with China Eastern (a member of SkyTeam Alliance) will facilitate international flights to and from China, the airline may not receive permission from the Chinese government to offer intercity flights. Consequently, Delta plans leverage its agreement with Shanghai Airlines to offer connecting flights to nearly 30 destinations in the interiors of China, beyond Shanghai, including Guangzhou, Shenzhen, and Nanjing. This would also include flights to four new destinations — Zhengzhou, Guiyang, Nanning, and Tianjin.

The Atlanta based airline is also co-locating with China Eastern inside the Shanghai Airport by relocating its passenger operations from Terminal 2 to Terminal 1 from April 13, 2015 [2]. This will enhance the customer experience by providing access to China Eastern’s new SkyTeam Lounge (opening in late 2015) and SkyTeam Elite benefits such as priority check-in, priority boarding, and preferred seats. In addition, Delta is offering its website and airport kiosks in the local language to create a customer-friendly image in the Chinese market. It also plans to appoint Chinese-speaking flight attendants on every flight to and from China and include Chinese cuisine in its in-flight meal option. In order to facilitate online payments from Chinese customers, Delta has also started accepting payments from Alipay, a leading third-party online payment company in China. The airline will soon allow passengers to book flights through Alipay.

With the addition of the Shanghai hub, Delta will be able to serve the top five Asian markets from Seattle –- Seoul, Tokyo, Beijing, Shanghai, and Hong Kong. This will provide a boost to the carrier’s air traffic, resulting in increased profits. However, as Delta ventures into the Chinese market, it may be faced with a number of hurdles. For instance, despite having a hub at Tokyo, Delta might face stiff competition from United (NYSE: UAL) which already has a significant presence in the Chinese market. Additionally, the airline will require strong cooperation from its Chinese partners to surpass the restriction on flying intercity flights within China. While it remains to be seen how Delta deals with these challenges, we believe that China will contribute to a major part of the airline’s long-term business and future earnings.

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Notes:
  1. Delta to launch daily service between Los Angeles and Shanghai, 14 January 2015, www.delta.com []
  2. Delta to relocate terminals in Shanghai Airport, 7 April 2015, www.delta.com []