How Has Delta Managed Its Capacity In The Face Of Rising Competition & Increasing Pressure On Unit Revenues?

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Burdened by debt and strapped for cash, U.S. airlines saw their fortunes reverse in late 2013, as crude oil prices crashed. This meant that the carriers could now pay their debt, upgrade their old and inefficient fleet, and use their savings on fuel to expand capacity. As a result, 2014 turned out to be one of the best years in a long time for the American aviation industry. Unfortunately, the continued increase in capacity, coupled with a weak European economy and a strong U.S. dollar, put pressure on the carriers’ unit revenues (PRASM) and passenger yields. To deal with the unit revenue headwinds, most of the bigger U.S. airlines began to implement capacity discipline, while the small ones decided to remain on the path of aggressive capacity growth in the hopes to see their revenue grow.

The legacy carrier, Delta, grew its consolidated capacity, as measured by available seat miles, in 2014-2015 in low-single digits, with most of the growth coming from domestic expansion. In 2016, the trend continues as the international markets remain under pressure and the company tries to defend its share in Boston by growing domestic capacity by approximately 5% year to date.

In this note, we talk about how the legacy carrier, Delta, has been managing its capacity in the face of increasing competition and pressured unit revenues.

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Atlantic Or Trans-Continental Expansion

Delta’s recent joint venture partnership with Air France-KLM and Alitalia is aimed as a response to JetBlue’s efforts to boost its trans-continental market presence. To defend its share, the carrier announced its intention to expand services from New York and Boston to Europe in the summer of 2017. The service will result in flights between Boston and Dublin, between New York and Lisbon, and between New York and Berlin. Further, it will launch daily seasonal flights for the period May-October 2017 to Portugal. While Delta’s Dublin and Lisbon services will be operated using a Boeing 757-200 aircraft with 164 seats, Delta’s Berlin service will be operated using a Boeing 767-300 aircraft with 225 seats.

Proposed New Flights
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For the nine months ended September, Delta has increased its capacity on the Atlantic routes by 0.6%, with the occupancy rate declining slightly by 130 bps. Most of the decline stems from the impact of weaker Euro exchange rates, worsened by supply and demand imbalances.

Limitations In The D.C. Area

Currently, Delta operates 54 peak-day flights to 11 destinations from the DC area. However, because of D.C. Area’s (DCA) perimeter rule, only 20 round-trip flights beyond 1,250 nautical miles are made available to commercial carriers. To provide service to the West Coast, Delta will reallocate one of its two “beyond-perimeter” round-trip flights between Salt Lake City and Los Angeles, to offer services from WashingtonDulles to Salt Lake City. As a result, it will continue to maintain the number of total seats Delta offers between the D.C. area and Salt Lake City.

Investing in Los Angeles

Since 2009, Delta has been the fastest-growing carrier at LAX, more than doubling its number of seats and growing from 70 daily departures to more than 175. Earlier this year, Delta announced a $1.9 billion plan to modernize, upgrade, and connect Terminals 2 and 3 at Los Angeles International Airport (LAX) over the next seven years. Further, in the year so far, the airline launched 5 daily flights from LAX to Denver International Airport, a key route for business travelers in Los Angeles. Delta has increased services from JFK to Seattle to 10 daily flights, while adding a third flight from JFK to Boston. It hopes to launch new services to Aspen and Los Cabos in December, and to Ronald Reagan Washington National Airport in April. The company says it will use a Boeing 757-200 aircraft for the route.

Possible Future LAX Configuration

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Source: crankyflier.com

 Trimming Presence In Asia

To solve the capacity issues plaguing the company, Delta has been trimming its presence in Asia as is evident from approximately 7% reduction in capacity on the Pacific route. However, it is imperative for the carrier to maintain some sort of presence, in the face of United’s expansion in the region. Consequently, it entered a partnership with Korean Air to offer services from Atlanta to Seoul in the middle of 2017. Combined, Delta and Korean Air will offer round-trip connectivity to 142 destinations in the Americas and 33 destinations across Asia between their joint AtlantaSeoul schedules. The move could potentially help reduce headwinds in the Pacific for the company if South Korea grows at the forecast rate of 3% through 2021. A 291-seat Boeing 777-200LR aircraft will be operated on the aforementioned route. 0811

 

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