The Tokyo Drift – Delta’s Loss Is American’s Gain

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American Airlines, which had previously failed to sustain operations at its New York-Haneda (Tokyo) route, has become the rightful owner of the Haneda slot after Delta shuts down its Seattle-Haneda service in October of this year. Delta had been struggling to operate daily flights on the route since the US Department of Transportation (DoT) mandated it to do so to retain rights over the Haneda slot. Last week, Delta finally announced its plans to terminate the service stating that it was not financially viable for the airline to operate daily flights on the route under the current regulatory and market conditions. American plans to launch a daily service from Los Angeles to Haneda after it takes charge of the Haneda slot in October. While the news was positively received by the investors, we believe that the slot win does not make a strong business case for the world’s largest airline. In this article, we aim to discuss Delta’s reasons for giving up the Haneda slot and American’s motive for rebidding for the slot.

See our complete analysis for American Airlines here

Why Does Everyone Want A Slot At Haneda?

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Due to the trade restrictions between US and Japan, Tokyo has always been a relatively under-served yet attractive market for the US airlines. Tokyo has two main airports – the Narita International Airport, which handles the majority of the international traffic and the Haneda International Airport, which manages mainly domestic traffic and was opened for international traffic only half a decade ago. Given the proximity to Central Tokyo, business travelers prefer to fly to the Haneda airport rather than to Narita. Thus, Haneda has more commercial relevance for the US airlines.

To improve their trade relations, the US and Japan signed the open skies agreement in 2010. However, the agreement allowed only four US return flights to operate to Haneda on a daily basis. As result, all the airlines wanted to grab a slot at the coveted airport. In 2010, the DoT granted one slot to Hawaiian Airlines for its Honolulu service, one slot to American for its New York service, and two slots to Delta for its Los Angeles and Detroit service. However, these slots have changed hands over the years. While Hawaiian continues to successfully operate its Honolulu service, American’s slot was taken over by United in 2013 for its San Francisco-Haneda route. Delta continues to hold the remaining two slots, but its Detroit route was reallocated to Seattle in 2013.

Haneda

Why Did Delta Move Out?

Except Hawaiian Airlines, none of the US airlines have been successful in making profits on their flights to Haneda. This is because the US airlines were allocated night slots for arrival at Haneda and an early morning departure back to the US. While the late evening arrival is perfect for passengers originating or terminating their journey in Tokyo, it is difficult for business travelers to find a suitable connecting flight from Haneda due to its limited access to international flights. As a result, passengers end up choosing flights to the Narita airport, cannibalizing the traffic away from Haneda flights. Further, an early morning departure is costly from an aircraft utilization standpoint. Thus, these routes have not been commercially feasible for most of the US airlines.

Despite gaining favorable time slots at the Haneda airport, Delta has been unable to make the cut. Apart from operating flights to Haneda, Delta also uses its hubs at Seattle and Los Angeles to operate daily flights to the Narita airport. While the Los Angeles market is large enough to sustain daily operations to both Haneda and Narita, the seasonal demand for Seattle makes it hard for Delta to remain profitable on the route. While Narita provides several onward connections to Asian markets such as Singapore, Bangkok, Manila, Taipei, and Shanghai, Haneda does not offer much connectivity. Further, Delta does not have a Japanese airline partner to provide connectivity beyond Haneda to points within the country or in other Asian markets. While Delta can manage to operate its Seattle-Narita route due to the availability of connecting flights, it is extremely unprofitable for Delta to operate daily flights to Haneda. Consequently, the airline started operating only seasonal flights on the route to retain the Haneda slot. The following table details out the number of flights operated by Delta on this route.

Delta_Seattle

However, in its quest to reclaim a slot at Haneda, American challenged Delta’s rights over the slot due to its seasonal operations on the Seattle-Haneda route. In response to American’s petition, the DoT issued a ruling in late March that allowed Delta to hold the slot, provided it operated daily flights between Seattle and Haneda. It also stated that if Delta was unable to sustain daily flights on the route, the slot would be granted to American. While the airline made sincere efforts to comply with the ruling, it was forced to give up the slot due to its inability to operate profitably on the route.

See our complete analysis for Delta Air Lines here

What Brings American Back To Haneda?

American previously held a slot at Haneda which was used to operate flights between New York and Haneda. Since the airline could not earn much profit on the route, it pulled back the service in 2013. Moreover, the airline did not even apply for a reallocation to a different route to retain the rights to the slot. However, in 2014, with a changed management post its merger with US Airways, American decided to regain the Haneda slot in pursuit to expand its presence in the Asian market. Consequently, the airline submitted an application to the DoT making a case for gaining authority over Delta’s Haneda slot. Hawaiian Airlines, the only airline that has been successful in operating flights to Haneda, also submitted an application for the slot to launch a flight between Kona and Haneda.

After reviewing the applications, the DoT allocated the slot to American, ignoring the fact that the airline had previously failed to sustain operations at Haneda. Surprisingly, the DoT also overlooked American’s plans to shift its daily Los Angeles-Narita flight to Haneda rather than adding any new capacity on the route. However, Hawaiian’s plea to add new capacity between Kona and Haneda, currently an unserved market, went unnoticed. Thus, we believe that the DoT’s decision to award the Haneda slot to American may be politically driven and is biased towards the interests of business travelers rather than travelers in general.

Further, from American’s perspective, moving its Los-Angeles-Narita flights to Haneda would not be a sensible decision. It would be far more profitable for American to operate flights from Los Angeles to Narita as its Oneworld and joint venture partner Japan Airlines has a big hub at Narita, which will open numerous onward flight options for American’s customers. On the contrary, the unfavorable flight timings and lack of connecting flights at Haneda will continue to create a strain of the profitability of the route. Moreover, the Los Angeles-Haneda route is already served by Delta and All Nippon Airways (ANA, a Japanese airline), and shifting the flights from Narita to Haneda would only increase competition for American. Thus, we figure that American’s decision to recoup the Haneda slot does not have a strong business case but is aimed at pushing Delta out of one of the most desired markets.

LA

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