WorldTraveler
Corn Field
- Dec 5, 2003
- 21,709
- 10,662
- Banned
- #1
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 DLs 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 dont really understand the strengths of each others 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 lets 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 DLs 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. AAs DFW hub has a slightly lower connecting percentage while COs 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. DLs 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. DLs gains have come most at the expense of AA who has seen its revenue share drop several points. DL has also reversed B6s 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 COs traffic at EWR is connecting than DLs 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 B6s JFK hub at LGA.
DLs 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.
DLs 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 DLs 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 UAs 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 DLs 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 DLs hubs outside of NYC where DLs 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 F9s 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. DENs viability as a UA hub is questionable in my mind, esp. considering that UAs 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 NWs 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 DLs 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 Washingtons 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, DLs 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.
DLs 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, DLs revenue size at LAX is within 5% of AAs 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, DLs revenue on the JFK-LAX/SFO nonstop markets is below industry average, reflecting DLs 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. DLs 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 UAs 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. DLs 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 WNs presence in those markets.
The major competitive takeaways from an analysis of DLs 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 DLs relative position on the west coast is stronger than UA/COs 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.
- WNs acquisition of FL at ATL will require that DL focus a lot of attention on its home market. The sheer size of DLs 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 WNs favor. (In contrast, WN has 60% of the domestic capacity at DEN that UA has while WN and F9 combined are larger than UAs capacity). DLs 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 WNs other large focus cities/hubs as an example, WN has the capacity to increase the size of FLs operation but it likely will only be able to do it by shifting a lot more passengers to the west and southwest parts of WNs 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 doesnt have to go through a hub, making it more effective to serve that kind of traffic. At the same time, WNs 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/ WNs 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.
- WNs 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 doesnt 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 didnt 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; AAs large presence in MIA does not make up for DLs larger presence in other markets. Further, DL seems to be focusing on growing domestically in AAs 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 NWs 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 NWs historic strength there. The AS codeshare does produce solid connecting traffic to DLs 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 wont be able to effectively counter because of AAs 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, DLs 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 AAs 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 DLs 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…. Ill follow with an analysis of international markets and other aspects of the network airline industry.
Comments, questions, and debates are welcome!
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 DLs 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 dont really understand the strengths of each others 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 lets 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 DLs 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. AAs DFW hub has a slightly lower connecting percentage while COs 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. DLs 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. DLs gains have come most at the expense of AA who has seen its revenue share drop several points. DL has also reversed B6s 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 COs traffic at EWR is connecting than DLs 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 B6s JFK hub at LGA.
DLs 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.
DLs 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 DLs 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 UAs 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 DLs 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 DLs hubs outside of NYC where DLs 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 F9s 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. DENs viability as a UA hub is questionable in my mind, esp. considering that UAs 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 NWs 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 DLs 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 Washingtons 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, DLs 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.
DLs 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, DLs revenue size at LAX is within 5% of AAs 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, DLs revenue on the JFK-LAX/SFO nonstop markets is below industry average, reflecting DLs 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. DLs 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 UAs 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. DLs 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 WNs presence in those markets.
The major competitive takeaways from an analysis of DLs 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 DLs relative position on the west coast is stronger than UA/COs 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.
- WNs acquisition of FL at ATL will require that DL focus a lot of attention on its home market. The sheer size of DLs 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 WNs favor. (In contrast, WN has 60% of the domestic capacity at DEN that UA has while WN and F9 combined are larger than UAs capacity). DLs 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 WNs other large focus cities/hubs as an example, WN has the capacity to increase the size of FLs operation but it likely will only be able to do it by shifting a lot more passengers to the west and southwest parts of WNs 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 doesnt have to go through a hub, making it more effective to serve that kind of traffic. At the same time, WNs 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/ WNs 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.
- WNs 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 doesnt 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 didnt 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; AAs large presence in MIA does not make up for DLs larger presence in other markets. Further, DL seems to be focusing on growing domestically in AAs 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 NWs 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 NWs historic strength there. The AS codeshare does produce solid connecting traffic to DLs 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 wont be able to effectively counter because of AAs 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, DLs 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 AAs 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 DLs 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…. Ill follow with an analysis of international markets and other aspects of the network airline industry.
Comments, questions, and debates are welcome!