An extensive analysis of Delta

[WorldTraveler]

Over the past couple weeks, a wealth of data has been released both by airlines themselves and by the US government (which collects and releases data about the airline industry) that provides great insights into the US network airlines. Because I have long had an interest in the US network carriers, I always find it interesting to jump on this data when it becomes available.
The data also provides a great opportunity to see how well the merger of DL and NW is progressing and to find out in detail where the strengths and weaknesses of DL’s network are relative to its competitors. Further, since there are a number of new Delta employees and customers from both PMNW and PMDL, there is a good chance they don’t really understand the strengths of each other’s network s – which are obviously one now and which benefit each side equally. IN the process we can also gain some insight into how the combined UA/CO merger might play out and how DL and UA/CO might affect both AA and US and the low fare carriers.
So let’s get started:
Domestic Network
The two ton giant of the Delta network and of the US airline industry is ATL – and for good reason. It is well known that ATL is the busiest airport in the world but few people appreciate that DL moves almost 50% more revenue through ATL every day than AA does through DFW, which is the 2nd largest US airline hub based on revenue. In fact, DL moves about 20% more domestic revenue through ATL (locally boarded and connecting revenue) than AA moves through its entire DFW hub (domestic and international revenue).
For comparison, DTW and MSP are large mid-sized hubs; DL at DTW (the larger Midwest hub revenuewise) carries less than half of the total revenue of DL at ATL. UA revenues through ORD are somewhat larger than DL’s at DTW but AA at ORD is smaller than DL at DTW. CO at EWR and IAH and UA at ORD are all fairly similar sized in terms of revenue and about 25% larger than DL at DTW.
The key difference between each of the hubs – and what sets DL at ATL apart is the amount of connecting traffic through the hub. While DL has shifted a lot of its network capacity away from lower cost north-south domestic flows, more than 75% of the revenue that DL carries through ATL is connecting revenue. AA’s DFW hub has a slightly lower connecting percentage while CO’s hubs are much more local market focused. UA at ORD has a similar connecting percent of revenue as DL. DL at both MSP and DTW have slightly lower connecting percentages of revenue than DL at ATL.
The reason for considering the percentage of connecting revenue is to see how much more service an airline can offer from an airport as well as to see how well that airline can defend its hub from competitors. DL is obviously able to offer as much service from ATL because DL both dominates the ATL local market and pushes so much connecting capacity through the airport. DL’s ability to grow DTW international flights as quickly as it has is because DTW has the necessary domestic feed to go into markets like GRU and HKG which are strategically necessary from DTW but where the local market would be too small to support the flights – but ATL would be a pretty small airport if DL provided only as much service as the local market could support.
It is also worth noting that FL carries almost 75% of its passengers THROUGH (connecting) ATL … they have been struggling financially because they have been doing the same thing DL did in the early 2000s…connecting low fare passengers which should be served non-stop or not at all.
It is also worth noting that even large international gateways like UA to Asia from SFO and CO at EWR have 50% or more connecting traffic – so the notion of connections is necessary to support large international hubs. While US carriers hub in the US (largely, NRT and JVs excepted), foreign carriers have hubs on the opposite ends which carry traffic throughout their home regions.
One notable point of pride for DL employees should be NYC. After years of not seeming to be able to figure out what to do with NYC, DL has put enormous effort into building its presence in NYC – and it is working. When you count LGA, EWR, and JFK together, DL is now boarding more local NYC passengers than CO is although CO has just under a 10% local market revenue advantage. Over the past four years, CO has maintained about 25% of the local NYC market by revenue but DL is now within 1.5 percent of CO, increasing from 15% just four years ago. DL’s gains have come most at the expense of AA who has seen its revenue share drop several points. DL has also reversed B6’s revenue gains, sending it back to the 10% revenue share of NYC that it had in 2006 but which peaked at more than 12% just a year ago. It is also worth noting that while DL historically did poorly from NYC-northern Europe while CO did much better to northern Europe, the NYC-Europe local market is increasingly being divided along alliance lines, meaning that the number of partners a carrier has in Europe is increasingly becoming a factor in the share and average fares that a carrier can expect. For this reason, DL and UA/CO are at an advantage because of the larger sizes of their alliances in Europe. Still, it is worth noting that DL has very successfully expanded from NYC-Scandinavia despite that region being home to Star carriers. DL now carries as much revenue to ARN and CPH from NYC as CO does despite CO being in those markets for a much longer period of time.
The size of the NYC local market cannot be underestimated; it is about 50% larger than the four main airports of the LA basin and more than twice the size of the Chicago area. So, a 25% revenue share in NYC is worth far more than a 50% local market revenue share in Chicago – and no carrier has that high of a share.
It is also very likely that DL could become the largest local revenue carrier in NYC if the DL/US slot deal goes through even with the additional market share that UA will add to what CO already has, and there seem to be indications that a slot agreement that is satisfactory to the FAA might be forthcoming. While UA/CO combined will have larger ops in NYC, a higher percentage of CO’s traffic at EWR is connecting than DL’s at LGA/JFK, making more seats available for the local market – although with the slot deal, DL is willing to push more connecting traffic through LGA. At the same time, DL will likely be better positioned to capture NYC local domestic market share from B6 by replicating an east coast version of B6’s JFK hub at LGA.
DL’s domination of its hub markets is unique in the industry. While Chicago and New York are both larger local markets than ATL and are also large hubs, both cities have multiple hub carriers in the city, making it much harder for one carrier to obtain a dominant market position. While AA at DFW, CO at IAH, and DL at ATL all have about 66% local market share, the ATL market is larger – remember that ATL is a one airport city while AA and CO split their home markets with airports at which those carriers are not dominant – and thus the total revenue for the carrier in the city is smaller.
DL’s hub dominance extends to CVG, DTW, MEM, MSP, and SLC – all markets where DL has more than 65% of the local market revenue. No other carrier dominates its hubs to the extent DL does with respect to local revenue. Even though DL has downsized CVG and many think DL will throw in the towel on CVG, it is key to note that DL has not allowed its local market revenue share to decline even with the reductions in flights; even though DL has eliminated nonstop service in a number of markets from CVG, it has been able to keep that revenue on DL – something that AA was not able to do when it pulled down BNA, RDU, or SJC years ago or STL more recently – or which US did not do with PIT or BWI….
Although many would like to argue otherwise, the network airline industry requires market size in order to reap the highest financial returns. The market leader in the airline industry is able to control pricing and usually commands revenue premiums. CO has had a revenue premium in most NYC transatlantic markets because of its size – but that is being equalized as DL’s JFK hub grows. Even though AA is the largest carrier in some key ORD business markets, UA has a higher overall average fare – even domestically – because of UA’s larger size in the CHI market overall. UA has long commanded revenue premiums to non-Japan Asia where it has dominated the market compared to NW or any other US carrier.
A good case study in how remaining competitive has an effect on the size of the hub is DL’s hubs at ATL and SLC vs FL and WN compared to UA at DEN vs. F9 and WN. No carrier has more than a 15% market share in any of DL’s hubs outside of NYC – where DL’s near 25% market share is worth more than the 70% market share in ATL. WN and B6 have both been unsuccessful in increasing their market share in SLC over a number of years and both have largely shifted their focus away from SLC and seem to be content with a relatively small presence. OTOH, WN moved in aggressively into DEN and used the low fare environment which F9 started and has hammered away aggressively at UA ever since. UA adopted a strategy of selectively matching WN and F9’s fares and UA now has less than 40% overall revenue market share – THE LOWEST PERCENTAGE any network carrier has in a single network carrier medium/large hub in the US. Further, WN now carries almost as many local domestic passengers as UA from DEN. DEN’s viability as a UA hub is questionable in my mind, esp. considering that UA’s costs will rise as part of the merger process. Conversely, DL has the lowest unit costs (CASM) in the US network industry which gives them the best ability to compete with low fare carriers. It should be noted that philosophically, DL and NW are on similar pages with regard to defense of their hubs. NW was able to keep competitors to a fairly small position in NW’s hubs and NW aggressively - more so than DL – protected its hubs when competitive challenges were made.
It is also notable that DL has very strong market position in a number of medium and small markets. DL and NW both had regional market strength prior to the merger and they are extending that to further markets… many DL supporters or employees have heard of DL’s recent focus on medium sized cities like RDU, IND, and STL – markets where DL has been able to shift revenue to DL. It is also worth noting that as AA has pulled down BOS, DL has become the largest network carrier – and that trend will continue with the launch of the two new LHR flights, making DL the largest international carrier at BOS, up from just a 5% share held by NW five years ago (DL had no TATL service from BOS 5 years ago although they tried LGW in the past). DL will also be the largest domestic network carrier based on flights and seats although AA generates more ASMs based on the further distance to its hubs as well as it transcon flights.
In Washington’s 3 major airports, DL is the 3rd largest carrier by revenue behind UA and WN and larger than US showing that even in large non-hub cities, DL’s presence at multiple airports can have more value than a large hub at one airport. WAS will change if the slot deal goes through but DL seems to realize that it must maintain levels in all key cities as well as many medium and small markets.
DL’s clear domestic weakness is up and down the west coast. While DL competes fairly effectively in east-west markets from/to the west coast, DL is lagging UA and AA which does drive overall west coast revenues. Still, DL’s revenue size at LAX is within 5% of AA’s revenue size at LAX so the notion that DL is uncompetitive at LAX is not at all founded; at SFO, DL is larger in terms of revenue than AA. However, DL’s revenue on the JFK-LAX/SFO nonstop markets is below industry average, reflecting DL’s historic reluctance to put long haul premium cabins in a market where that is the norm among network carriers and which Virgin used to its revenue advantage as it introduced service – and is doing very well. DL’s average fares have gone up faster than the industry average since DL put BusinessElite on all JFK-LAX/SFO flights so perhaps they have finally figured out what it needed to compete in those markets. Despite not performing well in JFK-LAX/SFO compared to AA and UA, DL does pull its share of passengers in the NYC transcons and also does well in both revenue and passengers in competitive transcon markets like SEA where a premium cabin is not the norm.
Finally, even though AA and UA’s domestic route systems were built from the early days of the industry around the top northern tier business markets in the US, DL has done a very good job of growing its presence where it has historically been weak. DL’s low costs (more later) and recognition of its need to be present in the key markets have allowed it to move into key markets like CHI-NYC. Although WN and DL had nearly identical average fares and total local revenue in LGA-MDW, DL recognized it needed to compete against AA and UA in LGA-ORD. Using the two class E175s, DL is now carrying a bit under half of the local revenue that UA carries in that market at average fares that are comparable to UA and AA. DL has also aggressively moved into many large AA focus cities like RDU, BNA, and STL where DL is shifting revenue from AA to DL. IN most of these markets, DL seems to be able to compete despite WN’s presence in those markets.
The major competitive takeaways from an analysis of DL’s domestic system and the competitive challenges are that
- DL has a very balanced domestic route system with a strong presence in all of the key regions of the US. Even after the UA/CO merger, DL is the largest US airline in the southeast, the Midwest, New England, and East of the Mississippi overall. However, the UA/CO merger gives UA the largest presence in all 3 of the largest US markets and DL will have to fight to keep UA from being able to use that advantage. It is more likely that UA and DL will pull traffic from other smaller carriers including AA than they will from each other. It is also noteworthy that DL’s relative position on the west coast is stronger than UA/CO’s in the southeast. Even though a great deal of Florida traffic originates outside of the SE and in regions where UA/CO is strong, there are growing numbers of businesses in the SE including Florida which UA/CO will not be able to serve as well as DL, US, or even AA can do with their larger SE presences.
While the relative revenue difference between DL and AA at LAX is probably not large enough to shift revenue, AA does control a higher percentage of premium revenue from LAX than DL. DL clearly will have to up the ante in LAX to provide a network advantage in order to be able to move more premium revenue to DL. In NYC, DL is already the largest revenue carrier at LGA and JFK which are the preferred airports for NYC originating traffic. DL needs to be able to translate that NYC revenue dominance into increased average fares, esp. in the NE-California transcons.
- AA has a very good presence in key business markets nationwide but its relative position in many small and medium sized markets will slip even further with the CO/UA and FL/WN mergers… in many of its non-hub markets, AA will slip to the number 4 or 5 carrier.
Although UA/CO will gain some strength in some medium and small markets, CO had very little market position in small and medium sized cities outside of to/from its hubs so UA is not picking up as much medium and small city presence as DL did with the NW merger.
- WN’s acquisition of FL at ATL will require that DL focus a lot of attention on its home market. The sheer size of DL’s ATL hub (nearly 4X more capacity than FL just within the US) will make it easier for defend its ATL hub. Still, DL has 8X more domestic capacity at SLC than WN so the formula is moving more to WN’s favor. (In contrast, WN has 60% of the domestic capacity at DEN that UA has while WN and F9 combined are larger than UA’s capacity). DL’s addition of seats to its mainline fleet, increased amenities and FC cabins, and corporate travel connections will all be necessary to allow DL to protect its market share. I believe DL will have to address its fee disparity to WN; in ATL, DL is aggressively pushing the American Express card that allows one free bag - a card that easily pays for itself in just a couple trips or if you take a family or travel partner. DL is probably not as likely to undo the bag fees (the biggest difference between DL and WN) as it will add more and more exceptions or push tools like the Amex card that give reduced or no-fee bag allowances. Changes to fare rules such as reduced or eliminated change fees are easier to do at a market level and DL can do that fairly surgically from ATL.
- Using some of WN’s other large focus cities/hubs as an example, WN has the capacity to increase the size of FL’s operation but it likely will only be able to do it by shifting a lot more passengers to the west and southwest parts of WN’s route network since FL, as a largely east coast carrier now is already carrying 75% connecting traffic through ATL and is doing that only by carrying a lot of low fare traffic to Florida, a strategy that WN will undoubtedly undo since it has so much nonstop service to Florida that doesn’t have to go through a hub, making it more effective to serve that kind of traffic. At the same time, WN’s cost advantage to DL diminishes on longer haul flights where DL is able to use the lower cost 757, 738, and M90 which compare fairly favorable cost-wise w/ WN’s fleet. In order to reduce costs, WN can use larger aircraft but it has to stimulate the local market more than FL has done and then grow its own local market share in order for ATL to work for WN. There are probably more challenges for WN to make ATL a large, profitable operation than there are for DL to defend its share.
- WN’s growth into east coast business markets will provide overall benefit to WN nationally but even in markets like CHI, DEN, and HOU where WN has a high market share relative to the network carrier at the same airport, WN doesn’t receive average fares close to the levels obtained by the network carrier in the same city or airport –although LGA-MDW average fares are within a few percent of LGA-ORD average fares. DL probably can maintain its premium passenger base in ATL. It must fight for all of the lower fare passengers; unlike UA which decided it didn’t need those passengers, DL must fight for them because once your market size shrinks enough, other carriers will start picking off even your average fare passengers – and cumulatively, those bring in lots of revenue. DL cannot allow that to happen in ATL.
- Throughout the US this summer, DL is reducing capacity slightly; UA/CO are reducing capacity at about twice the rate while AA and US are increasing domestic capacity. Not surprisingly, B6 and WN/FL are increasing capacity the most aggressively. While all carriers are going to defend their largest markets, UA/CO will be reducing overlap capacity, opening up opportunities for competitors who choose to continue growing. As UA/CO rationalize capacity through the merger, AA and US have the potential along with DL and the low fare carriers to pick up some of that market share that UA could lose.
- While DL has pulled back significantly to/from Florida, it is still the largest US network carrier in Florida as a whole; AA’s large presence in MIA does not make up for DL’s larger presence in other markets. Further, DL seems to be focusing on growing domestically in AA’s MIA hub instead of FLL where WN and B6 have grown substantially. DL now carries more local traffic between JFK and MIA than AA.
- DL is the #2 US carrier between the US and Canada thanks to NW’s presence there – but UA/CO is twice the size of DL, making it very easy for them to shift market share from DL, esp. given the AC relationship. (more on Westjet and alliances later)
- DL has to address its west coast position – which is #3 among network carriers at LAX and #4 among all US airlines. DL is the largest network carrier in the Pacific northwest thanks to NW’s historic strength there. The AS codeshare does produce solid connecting traffic to DL’s west coast international flights but it is likely that DL is paying a premium for AS to deliver those connections.
I personally believe that DL will make a merger proposal to AS and that AA won’t be able to effectively counter because of AA’s higher costs than DL – which make it impossible for AA to effectively operate in most of the west coast markets that AS currently serves. On a stage length adjusted basis, DL’s CASM is within about 3% of AS, making it very possible for an AS-DL merger to work. In comparison, DL has a 15% CASM advantage over AA, putting AA’s CASM difference with AS at around 20%. Still, DL would likely have to pay a premium for AS since AS is profitable and does obtain solid codeshare revenues from sources that DL would lose (such as AA). Also, the combined AS/DL size in Alaska could be problematic with regulators. (more on alliances and AS later)
- DL is the largest network carrier to Alaska and number two to Hawaii; surprisingly, DL obtains a revenue premium to Hawaii over AA indicating that DL’s greater market share in the west coast-Hawaii markets translates into higher average fares to Hawaii overall. DL does not seem to be showing much interest in further developing Hawaii, probably partly because Hawaii flying requires aircraft that can be better used .
Lots of info here…. I’ll follow with an analysis of international markets and other aspects of the network airline industry.

Comments, questions, and debates are welcome!

 

[SRQRoadWarrior]

WT...This is the first time I have responded on this forum as I just signed up...but you are the key reason I even signed up.

I started reading your posts on that other airline forum. I started reading them back in the 2007 time frame when you were discussing why you felt back then that USAir would indeed fail in their attempt to take over Delta. Well to make a long story short you were spot on with most of your analysis back then. I gained a lot of respect for you at that time.

I have then followed your posts on various subjects since then, and again, in most cases, yes, I did feel you again were right on target.

I felt I had to respond to this analysis you just did, and to put it mildly, I am extremely impressed, and I do believe based on what you said, that Delta is by ALL means positioned to be far ahead of UAL/CO and of course everybody else. They do have their act together.

I started following the airline industry back in the 1970's. Even back then I started to have it figured out that Eastern was not going to make it, and Delta had their act together (yes their were bumps...I am saying basically overall).

Anyway, it is easy to criticize people and hard to give compliments. This is a compliment to you for thee analysis you provide that is usually pretty accurate.

 

[WorldTraveler]

WT...This is the first time I have responded on this forum as I just signed up...but you are the key reason I even signed up.

I started reading your posts on that other airline forum. I started reading them back in the 2007 time frame when you were discussing why you felt back then that USAir would indeed fail in their attempt to take over Delta. Well to make a long story short you were spot on with most of your analysis back then. I gained a lot of respect for you at that time.

I have then followed your posts on various subjects since then, and again, in most cases, yes, I did feel you again were right on target.

I felt I had to respond to this analysis you just did, and to put it mildly, I am extremely impressed, and I do believe based on what you said, that Delta is by ALL means positioned to be far ahead of UAL/CO and of course everybody else. They do have their act together.

I started following the airline industry back in the 1970's. Even back then I started to have it figured out that Eastern was not going to make it, and Delta had their act together (yes their were bumps...I am saying basically overall).

Anyway, it is easy to criticize people and hard to give compliments. This is a compliment to you for thee analysis you provide that is usually pretty accurate.

First of all a big welcome to this forum..... I think you will find it a good place to converse. Unlike other forums, there is much more of a willingness to let conversations go where they might instead of feeling a need to micromanage as happens elsewhere.

Second, thanks very much for your kind words.... they are a breath of fresh air.

Like you, I have followed the airline industry for more than 30 years and can clearly see long term trends playing out. Knowing history - in any aspect of life - makes it easier to interpret the here and now.

The reality is that DL was a very well run company for many years before deregulation and succeeded during the early years of the deregulated era because they built on the franchise they built in the heavily regulated era. Although DL was a strong proponent of deregulation - it happened under Georgia native son Jimmy Carter's watch in Washington - DL was hard pressed to figure out what it was supposed to be for many years. While DL was developing some pretty strong cllues in the late 80s and 90s that led to the Pan Am and Western acquisitions, they were still very confused about some of the other pieces of the puzzle.
As often happens, bankruptcy provided a time for some serious soul-searching and DL did that soul-searching well and came out w/ a pretty realistic view of who it is and should be in the global industry.... While alot of people find it hard to acknowledge, DL has executed almost faultlessly against the objectives it laid out as it came out of bankruptcy. But DL did have a clear vision of where it needed to go and has stuck to that plan and strengthened it as they have moved forward.

The reality is that life is full of cycles of success - nations and civilizations along with companies and individuals rise and fall. I simply happen to believe that the next few years will be DL's and they will demonstrate leadership in the industry the likes of which the US airline industry has not often seen.

I believe the greatest competition in the US airline industry will be between DL and the new UA. UA is far from a pushover and has a whole lot of assets to work with - but I tend to believe that having a drive to keep pushing forward is far more important than sitting on a huge pile of assets... UA was well regarded as having one of the best route systems in the industry for years and yet in just two years after the NW merger, DL - which had nothing to speak of in Asia of its own - was on the verge of overtaking UA as the largest airline between the US and Asia - not just in capacity but also in revenue. It was only because of the CO merger that UA has gained enough breathing room that they can sit back and recognize what they are dealing with - and that type of scrappiness will play out throughout the world as DL and UA aggressively compete:
NYC where DL will the slot deal could overtake CO/UA as the largest local revenue airline in NYC
London where getting a deal with Virgin could change the competitive environment in the UK to DL's favor
California - where internal growth or an AS merger could make DL the largest airline in So.Cal and on the west coast as a whole
China/HKG - where a couple more years of aggressive DL growth could put DL at least on parity with UA
Latin America - where some significant alliance changes (very possible) and new DL growth could retilt the game....

and the chances are that at least a couple of these things will happen..... DL just yesterday announced a series of new multi-year sponsorships in the LA area that demonstrate it is not content w/ its #3 network carrier position in LA.....

Further, UA/CO look at the DL/NW merger and want to be able to replicate it but the reality is that there are a whole lot of cultural things between UA and CO that are different and changing the direction of either of those two airlines will be much harder to do than it was for DL to merge with NW. As difficult as it has been for alot of PMNW people to watch, the merger process would have been a whole lot more difficult if DL had taken a "let's negotiate the differences" position instead of simply deciding that one way or another is the way the combined will go (often the PMDL way) and then executing against that decision.

Life is a process of little steps that taken together produce a long path... it doesn't take too many wrong steps by your or others to significantly change the outcome....
We need to be able to crtiically evaluate ourselves and others - and accept the genuine criticism others have about us... but we also need to have the courage to do what needs to be done when it needs to be done - and keep the big picture in mind.

Welcome again and jump in here w/ both feet!

I'll try and get my international analysis up here today.

 

[Kev3188]

WT...This is the first time I have responded on this forum as I just signed up...but you are the key reason I even signed up.

I started reading your posts on that other airline forum.

Welcome!

If we're talking about the same "other forum," I think you will like it here. Plenty of opposing viewpoints/debate, but less of the sixteen-year-old-who-thinks-airplanes-are-neato factor. I liken it more to a lively banquet than a packed arena.

 

[WorldTraveler]

Welcome!

If we're talking about the same "other forum," I think you will like it here. Plenty of opposing viewpoints/debate, but less of the sixteen-year-old-who-thinks-airplanes-are-neato factor. I liken it more to a lively banquet than a packed arena.

People here seem to get the idea that aviation is a business - even if there is great debate about how it should be divided and controlled - ie labor/mgmt discussions are one of the focal points of this board - even if there are some of us that believe that absent a healthy airline about which all employees should understand - there is no dough for anyone....

-----

so here goes my analysis on DL international.... more topics to folllow and of course discussion, debate is welcome...



International
Transatlantic – Europe/Africa/Middle East
- DL regained title as largest transatlantic airline with NW merger but lost the title with the CO/UA merger.
- Eastern Europe service by Pan Am provided basis for DL to have the best overall coverage of Europe; UA/CO will be much smaller while no other US carrier serves region.
- The UK is DL’s weakness where it is #3 of the US network carriers and there is a fairly sizable drop between #2 and #3. While DL has done very well at developing LHR, obtaining average fares comparable to AA – the largest US carrier – DL’s market share is less than half of AA and CO/UA. Rumors of a potential DL partial ownership stake in Virgin Atlantic could change things significantly; even if VS simply becomes a Skyteam member and DL/VS seek/obtain ATI/JV, DL gains a much more level playing field. DL’s new double daily BOS-LHR and single daily MIA-LHR service provide an opportunity for DL to expand into key competitive markets; DL’s MIA service will be the first competitive US carrier nonstop from MIA to Europe in several years. DL is “packaging” its MIA service along with service by Skyteam carriers from MIA to their hubs.
- DL’s position of having two strong east coast gateways has served it well but again will be challenged with the CO/UA merger. IN the past year, DL shifted enough European capacity to JFK to make JFK DL’s largest European gateway. DL is still larger on a transatlantic basis from ATL since TATL also includes the Middle East and Africa.
- DL’s hub at JFK is the 2nd largest European gateway in terms of total revenue carried, behind CO at EWR, and followed closely for now by DL at ATL. DTW is about 1/4 the size of ATL in terms of European revenue.
- As noted above in the NYC discussion, US carrier strength markets in Europe are moving more toward alliance lines instead of the traditional division where DL did well to northern Europe from ATL but better to southern Europe from JFK. The KLM part of the AF-KL relationship has helped DL increase its strength in northern Europe as has NW’s strength in the upper tier of the US which tends to generate more traffic to northern Europe.
- DL and UA/CO will be very similarly sized to the Middle East which has been a lucrative market for all players. ATL-DXB is one of DL’s top revenue routes DL’s performance in DXB surpasses UA’s. OTOH, DL was unable to make KWI work while UA continues to do fairly well in that market. DL has shifted capacity from ATL to TLV to JFK via the 744 in order to help grow its NYC market share and has been reasonably successful in generating traffic although CO still commands a market fare premium… typically a carrier with multiple smaller aircraft as CO does EWR-TLV generates higher average fares than a carrier which operates a single larger aircraft (as DL does on JFK-TLV).
- AA/BA/IB will push to increase their share into continental Europe but the sheer size and strength of Skyteam and Star’s hubs/continental Europe carriers will make AA’s task difficult. Conversely, CO and DL have added more capacity than UA operated US-LHR before Open Skies went into effect and UA/CO is now larger than AA standalone between the US and LHR.
- US continues to develop its European route system from both PHL and CLT. Previously known as a heavy discounter to Europe, US is increasing its average fares in the process, partly by focusing on connecting to/from Star hubs, even though US does not have ATI with its Star partners. US has been fairly aggressive in duplicating DL’s strength markets from US hubs.
- Africa has been a real success story for DL in terms of identifying and developing new markets. The World Cup likely made DL’s ATL-JNB route solidly profitable and DL continues to increase its average fares because of its nonstop in both directions route – which has also forced SAA to do the same thing. DL’s growth in Africa may slow as security issues limit future growth and as service to countries like Luanda require gaining a few key contracts – which I am guessing DL did not obtain and thus cancelled its Luanda launch.
- UA/CO will aggressively look for opportunities to expand in Africa and AA could well make several MIA-Africa routes work if it chose to do so.

Transpacific/East Asia
- The largest purpose of DL’s merger with NW was gaining access to Asia, a region where DL’s presence was bottom tier prior to the merger. With the merger and in the two years since, DL has now grown to be the largest carrier across the Pacific in terms of capacity; UA remains larger by about 25% because a higher percentage of its routes involve China and Hong Kong which are both higher value and longer routes.
- Japan was the heart of NW’s transpacific system and remains so for DL. At times, all of NW’s transpacific revenue went to or through Japan but that number has dropped to around 70% as DL has aggressively expanded into other countries in Asia nonstop from the US. DL’s US-Japan network is larger than AA-JL combined and it was only by adding CO to the UA-NH alliance that the immunized Star carriers became larger than DL alone between the US and Japan.
- DL receives a revenue premium compared to US carriers on US-Japan routes, just as UA does to/from HKG and China where it is stronger. The strength of DL’s Japan operation can be seen from a couple markets -
o LAX – Last summer, DL carried more LAX-NRT local traffic at higher average fares than either UA or AA even though DL used a smaller aircraft (the 332) which did not have a FC cabin. NW has consistently been the largest US carrier between the US and Japan and that trend will continue with the new LAX-HND addition.
o SFO – despite using the 763ER on SFO-NRT, DL still obtained nearly ½ of the local SFO-NRT revenue that UA obtains… again using a smaller, less well-equipped aircraft (although I personally believe that the 763 should not be on the Pacific until it has full lie flat seats and AVOD throughout the cabin since that is the minimum level of service by Asian carriers.
o JFK – Although DL restarted JFK-NRT in the first summer after the merger became official (even though DL and NW were still operationally separate airlines), DL jumped to carrying the highest revenue – at higher average fares compared to AA on JFK-NRT and CO from EWR. After switching to the 744, DL is now carrying more than twice the NYC-NRT local revenue that AA carriers and slightly less than twice what CO carries.
- While many people thought that DL would downsize NRT as a hub, they would do well to remember that DL would lose the presence on the US-Japan segments if there was not flow traffic to carry through NRT. Further, the configuration of the DL slots at NRT make it impossible to turn the aircraft back to the US without an overnight. About ¼ of the revenue on DL’s Japan-Asia segments is Japan originating and markets such as China and HKG have higher levels than other markets. In time, I expect that DL will reduce its shorter Japan-Asia flying such as to S. Korea and Taiwan and add new longer haul markets in SE Asia where a connection in NRT is still necessary and where DL can effectively use the widebody aircraft that must flow through Japan due to slot configurations.
- Outside of Tokyo, DL’s SEA-KIX route was a very strong restart of mainland service – as evidenced by the 333 that will fly the route this summer – a noticeable upgrade from the 763ER.
- DL doubled its US-China capacity last year and will continue that in the year ahead. Strong demand is helping all US-Asia flights so DL is not alone.
- Competitively, the UA/CO merger doesn’t impact Japan much but it does make a larger mountain that DL must climb in order to get to a competitive position in China and HKG. While DL is working aggressively to close the gap in China, right now they are not willing to start another flight to HKG. DL’s position in HKG requires particular attention since UA and CO combined and AA’s relationship with CX puts both larger than DL in HKG… although the NRT-HKG route does help, it is not enough for DL to remain competitive in the west coast-HKG market.
- The AS codeshare has been very effective in helping fill seats on DL’s TPAC flights from LAX and SEA but DL’s reluctance to add more SEA service indicates that perhaps DL wants a better deal before they move forward with additional flights. (I am guessing that DL is paying above normal prorates to ensure AS makes seats available for DL’s TPAC passengers)

Latin America

Latin America is particularly interesting as a case study for DL. While it is true that Atlanta has one of the smallest Latin populations among cities with large hubs, DL has managed to build ATL into the 2nd largest US carrier hub to S. America. If all of Latin America is considered, DL at ATL drops down a position but the power of the ATL hub once again works well in developing new international markets, esp. long haul ones. While lots of people want to point out how large the local demand is in a city, it is the demand that is spread through hundreds of smaller cities that DL is able to capture in a large hub like ATL.
It is worth noting that only about 20% of AA’s total Latin revenues come from MIA so they too rely on significant connections not only to make MIA work but also DFW and even NYC-GRU, one of AA’s top revenue flights.
Still, 82% of DL’s LatinAmerica revenue flows through/originates in ATL, demonstrating the need DL has to diversify its Latin network and build from other gateways.
DL’s average fares on JFK-GRU have improved significantly over the past year – coincidentally or not as DL has restarted operating the flight on a daily basis (lesson – you can’t effectively compete against larger competitors if you don’t even operate on a daily basis). DTW-GRU appears to be off to a very healthy start…
I believe DL will make a strategic move in the not too distant future to develop S. Florida-Latin America.

More to follow

 

[Veritas]

More to follow

Do you have a day job?

 

[tech2101]

People here seem to get the idea that aviation is a business - even if there is great debate about how it should be divided and controlled - ie labor/mgmt discussions are one of the focal points of this board - even if there are some of us that believe that absent a healthy airline about which all employees should understand - there is no dough for anyone....

-----

so here goes my analysis on DL international.... more topics to folllow and of course discussion, debate is welcome...



International
Transatlantic – Europe/Africa/Middle East
- DL regained title as largest transatlantic airline with NW merger but lost the title with the CO/UA merger.
- Eastern Europe service by Pan Am provided basis for DL to have the best overall coverage of Europe; UA/CO will be much smaller while no other US carrier serves region.
- The UK is DL’s weakness where it is #3 of the US network carriers and there is a fairly sizable drop between #2 and #3. While DL has done very well at developing LHR, obtaining average fares comparable to AA – the largest US carrier – DL’s market share is less than half of AA and CO/UA. Rumors of a potential DL partial ownership stake in Virgin Atlantic could change things significantly; even if VS simply becomes a Skyteam member and DL/VS seek/obtain ATI/JV, DL gains a much more level playing field. DL’s new double daily BOS-LHR and single daily MIA-LHR service provide an opportunity for DL to expand into key competitive markets; DL’s MIA service will be the first competitive US carrier nonstop from MIA to Europe in several years. DL is “packaging” its MIA service along with service by Skyteam carriers from MIA to their hubs.
- DL’s position of having two strong east coast gateways has served it well but again will be challenged with the CO/UA merger. IN the past year, DL shifted enough European capacity to JFK to make JFK DL’s largest European gateway. DL is still larger on a transatlantic basis from ATL since TATL also includes the Middle East and Africa.
- DL’s hub at JFK is the 2nd largest European gateway in terms of total revenue carried, behind CO at EWR, and followed closely for now by DL at ATL. DTW is about 1/4 the size of ATL in terms of European revenue.
- As noted above in the NYC discussion, US carrier strength markets in Europe are moving more toward alliance lines instead of the traditional division where DL did well to northern Europe from ATL but better to southern Europe from JFK. The KLM part of the AF-KL relationship has helped DL increase its strength in northern Europe as has NW’s strength in the upper tier of the US which tends to generate more traffic to northern Europe.
- DL and UA/CO will be very similarly sized to the Middle East which has been a lucrative market for all players. ATL-DXB is one of DL’s top revenue routes DL’s performance in DXB surpasses UA’s. OTOH, DL was unable to make KWI work while UA continues to do fairly well in that market. DL has shifted capacity from ATL to TLV to JFK via the 744 in order to help grow its NYC market share and has been reasonably successful in generating traffic although CO still commands a market fare premium… typically a carrier with multiple smaller aircraft as CO does EWR-TLV generates higher average fares than a carrier which operates a single larger aircraft (as DL does on JFK-TLV).
- AA/BA/IB will push to increase their share into continental Europe but the sheer size and strength of Skyteam and Star’s hubs/continental Europe carriers will make AA’s task difficult. Conversely, CO and DL have added more capacity than UA operated US-LHR before Open Skies went into effect and UA/CO is now larger than AA standalone between the US and LHR.
- US continues to develop its European route system from both PHL and CLT. Previously known as a heavy discounter to Europe, US is increasing its average fares in the process, partly by focusing on connecting to/from Star hubs, even though US does not have ATI with its Star partners. US has been fairly aggressive in duplicating DL’s strength markets from US hubs.
- Africa has been a real success story for DL in terms of identifying and developing new markets. The World Cup likely made DL’s ATL-JNB route solidly profitable and DL continues to increase its average fares because of its nonstop in both directions route – which has also forced SAA to do the same thing. DL’s growth in Africa may slow as security issues limit future growth and as service to countries like Luanda require gaining a few key contracts – which I am guessing DL did not obtain and thus cancelled its Luanda launch.
- UA/CO will aggressively look for opportunities to expand in Africa and AA could well make several MIA-Africa routes work if it chose to do so.

Transpacific/East Asia
- The largest purpose of DL’s merger with NW was gaining access to Asia, a region where DL’s presence was bottom tier prior to the merger. With the merger and in the two years since, DL has now grown to be the largest carrier across the Pacific in terms of capacity; UA remains larger by about 25% because a higher percentage of its routes involve China and Hong Kong which are both higher value and longer routes.
- Japan was the heart of NW’s transpacific system and remains so for DL. At times, all of NW’s transpacific revenue went to or through Japan but that number has dropped to around 70% as DL has aggressively expanded into other countries in Asia nonstop from the US. DL’s US-Japan network is larger than AA-JL combined and it was only by adding CO to the UA-NH alliance that the immunized Star carriers became larger than DL alone between the US and Japan.
- DL receives a revenue premium compared to US carriers on US-Japan routes, just as UA does to/from HKG and China where it is stronger. The strength of DL’s Japan operation can be seen from a couple markets -
o LAX – Last summer, DL carried more LAX-NRT local traffic at higher average fares than either UA or AA even though DL used a smaller aircraft (the 332) which did not have a FC cabin. NW has consistently been the largest US carrier between the US and Japan and that trend will continue with the new LAX-HND addition.
o SFO – despite using the 763ER on SFO-NRT, DL still obtained nearly ½ of the local SFO-NRT revenue that UA obtains… again using a smaller, less well-equipped aircraft (although I personally believe that the 763 should not be on the Pacific until it has full lie flat seats and AVOD throughout the cabin since that is the minimum level of service by Asian carriers.
o JFK – Although DL restarted JFK-NRT in the first summer after the merger became official (even though DL and NW were still operationally separate airlines), DL jumped to carrying the highest revenue – at higher average fares compared to AA on JFK-NRT and CO from EWR. After switching to the 744, DL is now carrying more than twice the NYC-NRT local revenue that AA carriers and slightly less than twice what CO carries.
- While many people thought that DL would downsize NRT as a hub, they would do well to remember that DL would lose the presence on the US-Japan segments if there was not flow traffic to carry through NRT. Further, the configuration of the DL slots at NRT make it impossible to turn the aircraft back to the US without an overnight. About ¼ of the revenue on DL’s Japan-Asia segments is Japan originating and markets such as China and HKG have higher levels than other markets. In time, I expect that DL will reduce its shorter Japan-Asia flying such as to S. Korea and Taiwan and add new longer haul markets in SE Asia where a connection in NRT is still necessary and where DL can effectively use the widebody aircraft that must flow through Japan due to slot configurations.
- Outside of Tokyo, DL’s SEA-KIX route was a very strong restart of mainland service – as evidenced by the 333 that will fly the route this summer – a noticeable upgrade from the 763ER.
- DL doubled its US-China capacity last year and will continue that in the year ahead. Strong demand is helping all US-Asia flights so DL is not alone.
- Competitively, the UA/CO merger doesn’t impact Japan much but it does make a larger mountain that DL must climb in order to get to a competitive position in China and HKG. While DL is working aggressively to close the gap in China, right now they are not willing to start another flight to HKG. DL’s position in HKG requires particular attention since UA and CO combined and AA’s relationship with CX puts both larger than DL in HKG… although the NRT-HKG route does help, it is not enough for DL to remain competitive in the west coast-HKG market.
- The AS codeshare has been very effective in helping fill seats on DL’s TPAC flights from LAX and SEA but DL’s reluctance to add more SEA service indicates that perhaps DL wants a better deal before they move forward with additional flights. (I am guessing that DL is paying above normal prorates to ensure AS makes seats available for DL’s TPAC passengers)

Latin America

Latin America is particularly interesting as a case study for DL. While it is true that Atlanta has one of the smallest Latin populations among cities with large hubs, DL has managed to build ATL into the 2nd largest US carrier hub to S. America. If all of Latin America is considered, DL at ATL drops down a position but the power of the ATL hub once again works well in developing new international markets, esp. long haul ones. While lots of people want to point out how large the local demand is in a city, it is the demand that is spread through hundreds of smaller cities that DL is able to capture in a large hub like ATL.
It is worth noting that only about 20% of AA’s total Latin revenues come from MIA so they too rely on significant connections not only to make MIA work but also DFW and even NYC-GRU, one of AA’s top revenue flights.
Still, 82% of DL’s LatinAmerica revenue flows through/originates in ATL, demonstrating the need DL has to diversify its Latin network and build from other gateways.
DL’s average fares on JFK-GRU have improved significantly over the past year – coincidentally or not as DL has restarted operating the flight on a daily basis (lesson – you can’t effectively compete against larger competitors if you don’t even operate on a daily basis). DTW-GRU appears to be off to a very healthy start…
I believe DL will make a strategic move in the not too distant future to develop S. Florida-Latin America.

More to follow

Are you writing your thesis, or is this some kind of graduate assignment?

Do you have references? I would like to use some of your material in my MBA coursework.

 

[WorldTraveler]

Are you writing your thesis, or is this some kind of graduate assignment?

Do you have references? I would like to use some of your material in my MBA coursework.

see the PM I sent you... I participate here because I am interested in seeing others benefit as well.

 

[metopower]

see the PM I sent you... I participate here because I am interested in seeing others benefit as well.

Thanks for the insight. Also for being positive.

 

[Veritas]

see the PM I sent you... I participate here because I am interested in seeing others benefit as well.

If you have references and cites to buttress your conclusions, why don't you share those with all of us?

 

[WorldTraveler]

If you have references and cites to buttress your conclusions, why don't you share those with all of us?

Since you are a person of "truth" then you can be certain we are on the same page.

The simple fact is that I am not writing here for academic reasons; there is popular media and there is academic media. This board falls under the former category but that doesn't mean that there is a lack of truth in popular media.

Further, I have the experience and education to know where to obtain the information I reference and to properly interpret it. That is who a subject matter is. Because this is an anonymous forum, no one here is fully known to each other.

If you have valid reasons to want to know my background and the sources of information I use and are also willing to appropriately credit me for using MY information and opinions, then feel free to send me a PM with such information and we can get started.

But it also doesn't change the fact that there are always people in the world who want someone to document everything for them and then still won't believe it....with respect to the airline industry, I have participated in online forums for more than 7 years; it won't take too much effort to find some of the things I have stated and see whether what I have said has come to pass or not.... I can assure you that if you google my username, you will have plenty of posts to get you started....but there's several thousand posts right here on this forum as well.

I would also add that I do indeed have a full-time job as well as a very full personal life... but that doesn't stop me from following an industry which I thoroughly enjoy and writing things that some find quite beneficial and useful - but what I write on this thread is the culmination of decades of watching the industry punctuated by new information that has recently become available. It's easy to sit down a write when you know what you are talking about, have pertinent information, and are passionate about something and what you do is a process rather than a point in time.

In the interest of sharing information and constructively increasing our collective knowledge, I welcome commentary, questions, and or debate from you or others about the topics I have discussed.

 

[Veritas]

Further, I have the experience and education to know where to obtain the information I reference and to properly interpret it. That is who a subject matter is. Because this is an anonymous forum, no one here is fully known to each other.

<snip>

I have participated in online forums for more than 7 years; it won't take too much effort to find some of the things I have stated and see whether what I have said has come to pass or not.... I can assure you that if you google my username, you will have plenty of posts to get you started....but there's several thousand posts right here on this forum as well.

<snip>

...what I write on this thread is the culmination of decades of watching the industry punctuated by new information that has recently become available. It's easy to sit down a write when you know what you are talking about, have pertinent information, and are passionate about something and what you do is a process rather than a point in time.

In the interest of sharing information and constructively increasing our collective knowledge, I welcome commentary, questions, and or debate from you or others about the topics I have discussed.

In other words, you post unfounded opinion which is not supported by fact or impartial analysis by experts in the field.

I happen to know the backgrounds of several of the other regulars; based upon their professional experiences in the field of commercial aviation and the sources they rely upon, their opinions carry a lot more than that of a self professed expert who refuses to share his or her sources.

Thanks for playing.

 

[WorldTraveler]

In other words, you post unfounded opinion which is not supported by fact or impartial analysis by experts in the field.

I happen to know the backgrounds of several of the other regulars; based upon their professional experiences in the field of commercial aviation and the sources they rely upon, their opinions carry a lot more than that of a self professed expert who refuses to share his or her sources.

Thanks for playing.

As I fully expected, you decided before you ever read what I wrote that you had made up your mind about what you wanted to believe - and that you were not going to give anybody else credibility if they happened to disagree with what you want to believe.

So, once again, the discussion is not about me or about other people but about the facts that I have presented. And, yes, they are facts and they are supported by data.... just because I haven't cited everything in a manner that would meet the requirements for a doctoral dissertation doesn't mean the facts are not there - and they are not there.

I would also like for you to show me just one thread on this forum that is backed up by the standard of documentation which you seem to want from me.

So, tell me the specific facts that you don't agree with me about and I'll tell you why I have said what I have said including the sources to back up what I have said.

Until you are ready to engage in an honest and cerebral discussion about the facts, you are nothing more than a disenfranchised player who has been left on the sidelines and can only participate by taking potshots at those who are still in the game.


When you are ready to have a substantative discussion about facts and not engage in character assassinations, I'm all ears.

In the meantime, I'll continue what I do well and what others do appreciate.

 

[NAPAUS]

I curious as why if someone/anyone questions Delta and it's policies, culture, weaknesses or even strengths it is a kin to being blasphemous. Is it taboo to question or doubt the supreme goodness of Good Ol' Boy Delta. I just don't get. Its cult-like and borders on the likes of The former Soviet Union and questioning the communist party. Its actually quite laughable... and even more pathetic.

 

[WorldTraveler]

I curious as why if someone/anyone questions Delta and it's policies, culture, weaknesses or even strengths it is a kin to being blasphemous. Is it taboo to question or doubt the supreme goodness of Good Ol' Boy Delta. I just don't get. Its cult-like and borders on the likes of The former Soviet Union and questioning the communist party. Its actually quite laughable... and even more pathetic.

Not sure if you are replying to me but will assume so since my reply was the one immediately prior to yours.

If you are replying to me, apparently you haven't read or comprehended what I have written so far so let me clarify.....

First, I am fully capable of analyzing any of the carriers in the US airline industry based on their own merits and have no desire or intention to give DL credit for anything for which it is not due - and I also have no problem w/ criticizing DL for whatever it deserves criticism about.

That said, DL has executed one of the most significant turnarounds in the airline industry over the past year and it has given them a great opportunity for them to move ahead competitively and they have done just that. In the history of post-deregulation era aviation, CO's turnaround around in the 90s and DL's turnaround in the 2000s are probably the most significant in the industry. But that is my opinion and you are free to disagree or not.

What is not my opinion is the facts that I have presented - and I have made it pretty clear what are opinions and what are facts. Facts are items such as that DL has obtained the largest revenue and traffic share on the NY state side of the NY market and has overtaken AA. There are data sources to demonstrate that - multiple data sources - and the fact that I did not cite them doesn't make them less true.

There are also opinions and interpretation and those are also clearly indicated. Anyone who can critically read anything on any subject should be capable of knowing the difference between facts and opinions and how the two are related.

What I see from you is that you apparently don't like the statements I am making - most likely because you don't want to give DL credit for what it has done for one reason or another -and you can't cogently mount a discussion on the substantiive issues at hand so you instead resort to character assassination in attempts to discredit what I say - as if it ultimately changes the reality of which I speak. While the American political theater might provide great examples for you to follow in developing that skill, politics and business are very different animals - and the fact that no one is winning in the American political process demonstrates the process doesn't work - even though you and others seem to cling to that strategy of debate.

I have clearly stated that I welcome discussion on the issues I am discussing which is all the more reason why your charge that anyone who challenges DL is branded as a heretic is even more comical. You and others have been invited to participate in discussion on the issues at hand and yet you instead try to shoot the messenger, as if it will silience the truth which I am trying to disclose - and which you profess to be interested in by your username.

Perhaps a little more focus on the truth and a little less focus on trying to divert attention from a message you or others don't want to hear might yield a bit more meaningful discussion.....

---------------------------------------------------
so here goes part 3

We’re nearing the end of my analysis for this quarter but here are a few more topics.

Alliances/codeshare partners
Codeshare partners
Intercarrier relationships have changed such that simple codeshare arrangement s/ unimmunized partnerships are the last choice for developing revenue but they do have a role in the US industry –
AS – which successfully manages codeshare relationships with both AA and DL, likely pumping a lot of traffic onto AA, AS, and DL. No deeper relationship is possible because of US antitrust laws.
B6 – serves same purpose for AA, particularly in light of AA’s inability costwise to compete in many east coast leisure markets (such as NYC-Florida). Also helps B6 by countering DL’s growth in NYC and BOS. Indirectly helps LH because of LH’s ownership in B6.
G3 (Gol/Brazil) – has chosen to develop codeshare relationships with two large US carriers – AA and DL. Size would benefit AA in its ability to feed G3 but if AA regains a relationship with Tam (JJ) as part of the LAN-Tam merger, G3 would lose a partner. Further, G3 has relationships with AF and KL.
WS (Westjet) – the newest carrier which has chosen to split codeshare relationships; may become an equity target for AA or DL – but because the US and Canada do still have ownership limits – as do most countries, it is more likely that this and other US-foreign carrier relationships will be based on ATI/joint ventures where there is also the possibility to share revenue, obtaining the majority of the revenue value of a merger without the legal and cultural integration issues which are difficult enough for a domestic merger but which become very large for an international merger.
While it is likely that one or more of these partners will be acquired by AA or DL in attempts to strengthen their position – and deal a competitive blow to the other, domestic mergers are still more likely than those in the international arena.

Alliances –
Despite the loyalties that some have to one alliance or the other, all have fairly broad global presences with the alliance reflecting fairly closing the network size of the US partner.
Oneworld is the smallest alliance and also has the most market concentration – least “spread out” network – but oneworld’s strength – like AA’s – is that where it is strong, it is usually dominant – with the exception of Japan. AA has a lower percentage of ATI/JV relationships with oneworld partners.
Skyteam – has grown rapidly such that it is as large as Star in many regions even though its carriers are not

Finances
Costs
Part of the argument for mergers is that there is some cost benefit that can be obtained from operating larger airlines with less overhead, a reduced number of systems, etc. That is all offset by the transition costs that are necessary to get to those commonalities.
DL estimated nearly $2B in cost savings/ revenue improvements from their merger over a couple year period; they say they are getting close to that point and Wall Street is reasonably comfortable DL has achieved that.
UA/CO are at the beginning of the transition – and while both have some strong leaders, there are some costs that they will not get out as easily as DL - ie UA/CO has no easy fleet types they can ground to reduce costs etc – and UA/CO is less likely to increase revenue as much as DL because UA or CO already had a pretty strong revenue presence in the top global markets (compared to DL which has used the merger to increase its presence in China, Africa, and the Middle East).
Most importantly, UA has no agreements from any labor group regarding integrated contracts – so labor has a lot more power to make or break this merger than they did at DL.
UA/CO’s unit costs in the past two quarters have grown at above average rates compared to AA and DL – and that will likely continue if not increase because UA/CO is reducing capacity at a faster rate, forcing unit costs up faster. DL has continued to grow its capacity which has helped to keep its costs down; AA is also adding capacity which will help offset some of the natural cost creep that occurs in the airline industry as people move up the pay scale.
DL’s unit costs are now about 12% lower than UA’s and UA’s costs are only about 5% lower than AA’s – and again, UA is going to have to shell out some money – perhaps a lot to win labor peace to make the merger work. AA execs statements that the pressure to reduce costs at AA will be reduced as other carriers’ costs increase may prove to be right. Historically, AA and UA have had similar cost structures and revenues. UA gained an advantage in BK but may give a lot of that up relative to AA in order to make the merger work. UA might simply become larger than AA but not look a whole lot different with respect to average revenues or costs.
DL will continue to have a lower cost operator than AA and UA by a fairly significant margin – at least 10% and likely closer to 15% depending on what UA has to pay for labor peace. A 15% cost difference WILL go a very long way in allowing DL to move into historically strong AA and UA markets… right now DL is focusing on obtaining revenue from AA – and AA is hard-pressed to defend itself because of the cost difference. If DL shifts the focus to UA (which they will wait longer to do because of UA’s larger size), DL could well be able to move a lot of industry revenue to itself with little reaction from UA or AA.
Balance sheets.
One of the greatest advantages that UA and CO obtained with the merger is a whole lot of cash in the bank. They can use that cash in a number of ways but given that they have a fair amount of debt, debt repayment probably makes the most sense. They could also buy new aircraft (which they are planning to do esp. on the int’l side) which will bring down some costs – but using the cash for that purpose might not entirely be the best use vs. keeping older assets in place. Given CO’s propensity to buy new aircraft, it is a good bet that UA will be one of the largest buyers of aircraft in the US. Paying down debt or reducing maintenance and fuel costs thru new aircraft will reduce costs so UA could offset some of its labor cost increases.
DL is counting on a more efficient labor force – which translates into lower labor costs since DL and UA employees on average have comparable total compensation. AA also will probably lean more in the direction of buying aircraft to help reduce costs.
The other likely use of cash is mergers and acquisitions – our next subject.

Mergers and acquisitions
Before answering the question about mergers and acquisitions, you have to do an overall assessment of network strength and weaknesses – partly done above but here is a brief recap
AA – strong but often #2 or 3 presence in the top business markets in the US, dominant in Latin America – the smallest global region, but with a strong presence in the UK and Japan using its own metal and joint ventures; these are the two largest int’l markets from the US. Beyond the UK and Japan, AA is a distant 3rd behind DL and UA in continental Europe, the Middle East, Africa as well as in Asia outside of Japan. A decent presence in all US global regions, but weakest in the mountains and Pacific NW.
Potential merger/alliance needs – west coast presence, domestic “bulk”, int’l presence esp. in continental Europe or Asia outside of Japan (but which could also be obtained through strong alliances)
DL – A well rounded presence in all of the primary markets in the US; generally #3 or below only in other airline hubs. Strong position in medium and small cities throughout the US – which can be sustained through DL’s extensive hub network. Weaker in California than in the Pacific NW. Transatlantic dominance (including through alliance) to continental Europe, but weak to the UK. Leading position in the Middle East and Africa. #3 to Latin America – lacking a Latin presence in the largest US markets. Rapidly closing gap between the US and China – and could close it with immunized alliances – but still has work to do in HKG, SE Asia,, S. Asia. and the S. Pacific relative to peers.
Potential merger/alliance needs – west coast presence, Latin America, potential Asia or UK carriers.
UA – excellent presence in all of the top northern tier/west coast markets but very little presence in the SE, including Florida, which also drives a minimal presence in the SE and Florida to Latin America markets. #2 in Africa and the Middle East but aggressively closing the gap. Obtains its Japanese strength relative to DL in Japan via alliances; position in Latin America could diminish without Star presence in SE US.
Potential merger/alliance needs – SE US, Latin America, Africa

So, here are my thoughts on potential mergers and acquisitions.
AA – few suitable domestic merger partners other than AS or B6 or WS– all of which could have large strategic value. US could strengthen position on the east coast. Issue for all is that AA’s high costs make it doubtful for any merger to work, esp. w/ a low cost carrier. Could have more success in international markets but likely advisable only if alliance relationships cannot be deepened to the point that AA obtains most of the revenue benefits.
DL – only really viable domestic merger is AS…. Unlike AA, DL’s costs are compatible with AS – same strategic benefit could be obtained – with advantage that whoever wins AS, likely deals a blow to the other network carrier that also codeshares on AS. DL’s strategic need to align with or surpass UA on the west coast is greater because DL cannot be #1 or 2 in Chicago. Absent a merger of AS with either AA or DL, UA will be #1 in all three of the largest US markets – unless DL elevates its position via the US slot deal and building a LGA hub. Growth of DL’s west coast-Asia network requires greater protection of its flow revenues to both reduce costs and ensure that feed will remain regardless of a merger – something not likely to happen if AA acquired AS.
As for internal growth in key competitive markets, a key reason DL has been able to move into markets dominated by AA and UA is because of the presence of low fare competitors in the market. Key business markets such as DFW and ORD in which DL is not strong relative to the hub carrier could see further internal growth as low fare carriers increase their presence, making it easier for DL to ride on the “coattails” of low fare carriers and reducing the ability of other network carriers to respond. Most of the remaining key network carrier markets which DL needs to have a presence in are historically strong AA and UA markets.
International carrier acquisitions/ownership stakes possible – media currently speculating on a DL bid for a partial ownership stake in Virgin Atlantic…. If it occurred, it would put DL into the #2 position in the US-UK market behind UA. Absent aggressive internal growth to/from Latin America, an acquisition may be necessary since Skyteam is disadvantaged in Latin America.

UA
Although UA has plenty of cash on hand right now, it will be at a disadvantage in any mergers or acquisitions in the next couple years as it integrates its current two airlines. Wall Street would likely view any further merger attempts very poorly until UA-CO competes its merger.
Further, outside of Latin America, UA/CO doesn’t NEED an alliance to maintain its position – unless alliance relationships start changing (key carriers in specific regions change alliances) or other US carriers acquire equity in foreign carriers.
AA and US
Both carriers have stated that they are comfortable without merger partners and there are few key strategic relationships that could be formed on the domestic arena.
There could be further mergers in the low fare/low cost and niche segments of the industry but that is not terribly likely nor will it dramatically change the competitive landscape.
While international mergers are difficult, they will occur esp. between countries who are more likely to relax ownership regulations. US carriers will not necessarily lose their competitive position and don’t have to participate in these mergers if they are running sound businesses and are taking advantage of the opportunities available to them – which should be reflective in their market valuations. The US remains the largest single market in the world (although growth in other countries could change that in time) while the ability to partner with US carries is necessary for most international carriers who want to have a truly global product offering. There are a host of legal issues that may limit further consolidation or access of foreign carriers to the US domestic market – and it isn’t likely it will happen until there is a clear need for US carriers to be able to do the same thing in other markets.

Summary of analysis/ my interpretation of the current position and future of the industry.
After looking at a number of topics, we can summarize our findings here among the largest 3 carriers – which is the primary competitive group for DL.
AA
AA’s route system was built around the top business markets in the US and they continue to maintain a strong market position in key markets throughout the US. AA also has a history of innovation in marketing and distribution and have thus developed strong brand preference and corresponding revenue premiums. AA entered the 2000s well positioned.
The 2000s, however, were the most challenging decade ever for AA. AA mgmt. tried to restructure outside of BK – a laudable move – but they obtained a fraction of the benefit that other carriers obtained through court-supervised restructuring. Unfortunately, fuel prices soared in the mid-2000s just after AA’s out of court restructuring so AA was unable to obtain much competitive benefit from its restructuring. Further, AA obtained a significant portion of its cost benefit in its restructuring from labor who now are unwilling to provide anything additional to the company. Since no restructuring in the airline industry has been accomplished without labor participation, it is unlikely that AA can restructure again without labor’s participation.
AA’s costs are now the highest in the US airline industry for large jet operators. Since costs are the single most important factor for competitiveness in a commodity industry – which the airline industry is regardless of each company’s efforts to distinguish itself from the others ,it is impossible for AA to financially succeed long term with high costs.
AA’s high costs are having a profound impact on AA’s ability to compete right now which is why a number of airlines including Virgin America, JetBlue, and Delta are directly targeting AA in efforts to obtain new revenue at AA’s expense. There are few strategic challenges that AA will win, including potential mergers, until AA’s costs are brought to at least industry standard levels.
AA and BA waited for years to agree to the demands of anti-trust regulators that were necessary to obtain anti-trust immunity and joint ventures. Although AA and BA ultimately had to give up far less than was demanded earlier, they lost valuable time to build an ATI-JV on the European continent where Star and Skyteam both are much, much larger and have multiple immunized partners. Further, CO and DL/NW alone added as much capacity to LHR in the 2 years after LHR opened to new US carriers making defense of LHR a prime strategy for AA and BA. CO and DL now carry more NYC-LHR revenue than AA alone.
On the Pacific, AA fought for and won JL as its only JV partner although AA and JL are the smallest of the three carriers/alliances.
The sole global region where AA is the #1 or #2 is Latin America/Caribbean. Including the Caribbean, AA has 35% market share but that number has fallen as US low cost carriers have aggressively grown in the Caribbean, and likely will continue to do so. The FL/WN merger provides the potential for Southwest to develop a presence in resort destinations. Looking at just Latin America, AA has more than a 40% market share by revenue and AA HAS aggressively grown and defended its market presence in the region although DL and UA/CO have both been able to grow their Latin networks as well.
AA mgmt. has stated that their network strategy is to not attempt to be the largest or even second largest airline in the US but instead focus on the top five markets in the country. However, AA is the largest airline in only 2 of those 5 – DFW and MIA, #2 in CHI and LAX, and #3 in NYC, its former home. Size in a network business such as the airline business translates so closely to market share and pricing power; no other US major or network airline has ever survived long-term by being #3 which is where AA’s US market size is. Until AA’s costs are competitive, they have few other choices than to just “hunker down” and attempt to defend the network they do have against competitors who continue to grow their networks, often at AA’s expense.
DL
Unlike AA or UA, DL was not one of the historically chosen airlines of the regulated era that were given access to some of the richest routes and markets in the US. While AA and UA have survived and grown beyond their original domestic deregulated network, Eastern, TWA, and Pan Am all have failed; the international networks of Braniff and NW have all been incorporated into other airlines. In terms of survivability and growth, DL has been the most successful of the non-chosen airlines of the regulated era which also included CO and US and its predecessors. Moreso than any other airline, DL is what it is today because of successful mergers and acquisitions including Chicago and Southern, Northeast, Western, parts of Pan Am, and Northwest. With the exception of C&S, DL’s network still clearly demonstrates the heritage it obtained through mergers.
The DL/NW provided Delta for the first time with the title of the US and world’s largest single airline even if that title was lost when CO/UA merged. Since emerging from bankruptcy, DL has methodically addressed its network deficiencies, including merging with NW to obtain a presence in Asia, and building NYC and London and other key global markets.
In many ways, the UA/CO merger provided an already “built-out” network with a #1 or #2 presence in every global region as well as in most of the top business markets in the US. The UA/CO merger requires DL to continue to act in order for DL to not be pushed into a #3 position in key competitive regions or markets such as Latin America and Los Angeles. Because the DL/NW merger has largely been completed, DL’s attention in the next few years will be focused on addressing its remaining network/competitive weaknesses. UA’s preoccupation with its own merger and AA’s high costs and efforts to resolve its labor issues will give DL greater ability to carry out its strategic initiatives.
DL’s growth has long been driven by its cost structure which has been rooted in its above average productivity, a direct result of being a largely non-union airline. Having the lowest costs among the US network carriers will allow DL to continue to grow its network at the expense of its network peers as well as defend its network from low cost carrier growth. DL’s aggressive growth and its efforts to address its network deficiencies are high stakes games; addition of US-HND transpacific flights is turning out to deliver much less revenue opportunity for all carriers because of the limited slot times but DL has the highest exposure (40% of all seats) and could be exposed to significant losses if other carriers do not pull down capacity first or be faced with reducing its own capacity which could reopen applications by other carriers to obtain some of the rights DL won. DL has been more aggressive in starting new markets only to have to pull them down including LAX-GRU – but was also able to use the frequencies it won for LAX-GRU as the basis to start DTW-GRU which appears to be performing much better than LAX-GRU ever did. Expansion into Africa has been limited by security concerns and in the most recent market, Luanda, DL’s apparent inability to win key contracts which it needed to have in order to make the service work.
Completing the NW merger requires for DL to address is customer service and product issues and to engage many of the PMNW employees who have nowhere near the trust or loyalty that DL has developed among its own employees.
DL is betting on an extensive upgrade of its existing product rather than an investment in new aircraft. While that strategy might reduce costs down and while DL can indeed build a business case that says the current financial benefit of waiting for new technology favors holding onto current aircraft, DL could face enormous expenditures to upgrade to the next level of aircraft technology when it does become available. At the same time, DL’s much lower levels of expenditures will allow them greater freedom to participate in merger and acquisition opportunities that might arise.
UA/CO
Also one of the industry’s regulated era chosen players, UA at one time had what was considered one of the US airlines’ most balanced networks. Post deregulation, UA’s shrewd acquisition of the most valuable parts of Pan Am allowed UA to move ahead of its US network peers with a key presence at LHR and in Asia and in Latin America. AA was a tough competitor in LHR and Latin America and surpassed UA in those regions; AA’s success is particularly noteworthy in Latin America where UA completely withdrew its presence in the MIA-Latin America market and in so doing also provided the opportunity for CO and DL to grow into S. America, leaving UA in the #4 position in Latin America among US carriers. CO’s growth in NYC came largely at UA’s expense where UA’s size was well below its national size. While UA has been successful in maintaining its market leadership in Asia and on the US west coast and at its Chicago home, it has not been as successful in defending itself in DEN where it now has the lowest market share at large medium hubs where only one network carrier has a hub.
Long a proponent of further mergers in the industry, UA recognized the benefits that were accruing to DL after its merger with NW (DL’s market value was larger than AMR, CAL, and UAUA combined) and was able to obtain a merger agreement with CO who proudly rebuilt itself after two BKs to become the well-deserved darling of the US airline industry; indeed, much of CO’s growth came in NYC where AA and DL maintained the status quo while CO turned once run down EWR into the US’ largest international gateway.
While UA obtained through the CO merger the network size and financial strength necessary to surpass DL, the cultural differences between UA and CO and the labor integration issues make it likely the UA/CO merger integration will be longer, more complex, and more costly than DL/NW. Further, UA/CO is using its currently leading size to more aggressively remove capacity than any other network carrier which could result in above average revenue growth as the lowest performing routes are removed from the network. But it could also send UA/CO’s costs even higher as some of the size-related cost efficiencies are lost; part of DL’s success post-BK and with the NW merger has been that DL was able to grow in order to reduce costs, something that is harder for UA to do given that its network is more “built-out” than DL’s.
UA does have a rich base of assets to work with as a result of the CO merger and can afford to give up a little ground without jeopardizing its long term positioning. DL and UA appear to be more focused on seeking their growth and defending their networks from AA rather from each other. Given that DL and UA both are missing a presence in the Florida-Latin America market (and UA cannot largely obtain the revenue benefits from alliances because of the limited number of countries that have Open Skies with the US), one of the key strategic challenges between DL and UA will be to see which one addresses its lack of presence in the key S. Florida-Latin America market.
While UA has plenty of cash on-hand now, its cost increases in the recent past has been well above average in the US industry, esp. relative to AA and DL which have maintained nearly flat unit cost growth ex-fuel.
UA will use its size to its advantage but it is also possible that it will simply raise the historical competitive environment between AA and UA to a new level with UA having the size and network scope advantage but with AA and UA having similar cost and revenue generation characteristics.
Should that occur, AA will be pressured by UA because of size and network advantage while UA will be pressured by DL because of DL’s cost advantage. The competitive intensity among the network carriers will be intense for years to come. History shows that it takes only a few missteps by any one carrier to provide opportunities for another and that a few key strategic successes can go a long ways to reshaping the competitive balance in the industry and in specific markets.