Delta Claims Travel is Countercyclical

Jay Shabat

October 17th, 2022

People have more than two years of that pandemic cliche, “pent-up demand,” to get out of their system. That’s driving continued robust travel demand at Delta Air Lines, which sees no slowdown even as the economic outlook sours on both sides of the Atlantic.

“While we are mindful of macroeconomic headwinds, the travel industry is experiencing a countercyclical recovery,” Delta CEO Ed Bastian said during the carrier’s third quarter-earnings call last week, kicking off earnings season. “Global demand is continuing to ramp as consumers shift spend to experiences, businesses return to travel and international markets continue to reopen.”

Bastian added that, from Delta’s view, travel demand did not “come close to being quenched” during what was a busy, and often chaotic, summer.

Economic outlooks widely predict recessions in both the U.S. and Europe. Rating agency S&P Global forecasts a contraction beginning in Europe this fall, and in the U.S. in the first half of 2023. High inflation, the energy crisis, a strong U.S. dollar, and other factors are contributing to the weak economic outlooks.

But even as S&P and others have released their bearish outlooks, airlines and other travel industry companies have repeatedly said they were seeing little or no falloff in demand or bookings. Marriott International CEO Anthony Capuano said in September that the hotel company was “just not seeing the impact yet in the data,” referring to the economic uncertainty.

Delta, for its part, continues to see strong demand both in the U.S. domestic market, and across the Atlantic for the fall, said President Glen Hauenstein. This is driven, in part, from high levels of leisure demand continuing after Labor Day when the segment normally slows down, and from improving corporate demand. Corporate bookings at Delta recovered to roughly 80 percent of 2019 levels at the end of September, and are expected to rise to the “low to mid-80s” during the fourth quarter.

And the airline continues to see more blended trips, or those that include both leisure and work components, and is adjusting its flight schedule accordingly. Even Hauenstein admitted to changing his travel patterns since the pandemic: “I went to Paris last week for meetings, and I spent the weekend for leisure. Before I probably would have just come back.”

“I can’t imagine as we get to spring and summer next year that we don’t see robust demand” for international travel, Hauenstein said. Delta plans to fly 8 percent more seats across the Atlantic in summer 2023 than it did this year.

That demand will likely keep airfares high through the winter. New data from the U.S. Bureau of Labor Statistics released Thursday show airfares were up 42.9 percent in September compared to last year.

“Industry supply is constrained by aircraft availability, regional pilot shortages, and hiring and training needs,” Bastian said on the coming period. Delta forecasts a “mid-teens” percentage increase in unit revenues compared to 2019.

The issues Bastian cited have slowed the airline industry’s recovery. This summer, U.S. carriers flew roughly 15 percent less than they had planned at the beginning of the year, according to trade group Airlines for America. Add to that high fuel prices and interest rates, and the cost of operating a single flight has gone up dramatically since 2019.

And regional capacity at Delta is not expected to fully recover from the U.S. pilot shortage until 2024 or 2025, Bastian said. However, the airline’s fleet of small Airbus A220s and Boeing 717s will allow it to make up some of that lost capacity in the interim, he added.

Delta’s system capacity will be down roughly 8-9 percent compared to three years ago in the December quarter. However, that represents an at least 9 point improvement from the 17 percent decline in the September quarter.

But the airline does not plan to keep capacity depressed for much longer. Delta aims to fully restore its network — if not capacity — by next summer. That recovery will come in two parts: international, particularly to Asia, more of which will come back this winter; and U.S. domestic, particularly at its core Atlanta, Detroit, Minneapolis-St. Paul, and Salt Lake City connecting hubs.

“We choked off what I would say is more of our traditional flow in very key markets where Delta has historically been the leading carrier, particularly in the Southeast,” Hauenstein said. “As we head into 2023, our task that we’ve assigned our team is to get those historical high-yield flow customers back on Delta.”

While Hauenstein did not name names, there is only one other carrier with a hub in the Southeast that competes for the same passengers: American Airlines. The Fort Worth, Texas-based carrier is the most recovered major U.S. airline in terms of capacity, and has found particular success in domestic flying and providing the most connectivity to small- and medium-sized U.S. cities — something that, at least in the Southeast, Delta excelled at pre-pandemic. American recently signed a new agreement with affiliate Air Wisconsin to further expand its regional feed in Chicago, which competes directly with Delta’s Detroit and Minneapolis hubs for passengers.

Roughly 75 percent of Delta’s planned capacity growth in 2023 will be focused on resuming flights at its four core hubs, Hauenstein said.

But recovering domestic connectivity is not Delta’s only challenge to American next year. It will also implement its long-planned joint venture with Chile’s Latam Airlines Group. U.S. authorities signed off on the pact in September, allowing the carriers to move forward with the partnership that allows them to coordinate commercial activities on flights between the U.S. and South America. The deal will make Delta and Latam together a much more formidable competitor to American, the dominant airline on U.S.-South America routes.

Asked about the timing of the Delta-Latam partnership, Bastian said meetings on implementation were “beginning literally as we speak.”

Delta reported a $695 million net profit in the third quarter. Revenues were up 11 percent compared to 2019 to nearly $14 billion. Key for the airline are its total unit revenue and unit costs excluding fuel performance, which were up 34 percent and 22.5 percent, respectively. Delta flew 18 percent less passenger traffic during the period.

Raymond James analyst Savanthi Syth described the results in a report as “mostly in line with expectations,” with few surprises. She noted that, while Delta management repeatedly cited 2023 plans, they did not provide specific guidance for next year.

For the fourth quarter, Delta expects revenues 5-9 percent above 2019 levels, and an operating margin of 9-11 percent.

Edward Russell

Delta’s Premium Home-to-Seat eVTOL Deal

Delta had a big news week. The lone holdout among major U.S. carriers is investing up to $200 million in Joby Aviation, a developer of electric vertical takeoff and landing (eVTOL) aircraft, to develop new last-mile connections in the Los Angeles and New York markets.

The deal could bring Delta into the urban air mobility market as soon as 2024, though that timeline is suspect given the certification uncertainty of eVTOLs. Joby, however, is the furthest along in certification of its aircraft among players in the sector that also includes Archer Aviation and Vertical Aerospace. The eVTOL segment is hot with airlines today in their dual push for low-carbon electric propulsion technology and to expand into travelers’ trips to and from airports. AirAsiaAmericanUnited Airlines, and others have ordered hundreds of the electric air taxis in the hopes of offering local journeys to and from airports.

Delta’s deal with Joby, however, is not just equity in exchange for a hundred-plus aircraft order. Instead, Joby has agreed to a five-year exclusivity agreement from commercial launch to provide Delta with a “premium” and “seamless” air taxi product — dubbed “Home to Seat” — in the U.S. and UK. Los Angeles and New York are initial markets with plans to expand beyond them.

“This is a groundbreaking opportunity for Delta to deliver a time-saving, uniquely premium home-to-airport solution for customers in key markets we’ve been investing and innovating in for many years,” Delta CEO Ed Bastian said. Bastian, as recently as August, held back endorsing the burgeoning eVTOL and other electric aircraft segment, saying the industry had “more questions” than answers.

Raymond James analyst Savanthi Syth in a report last week described the partnership as Joby managing “operations and branding” and Delta “operational and airport expertise.”

“Joby and Delta will work together to create a differentiated, premium experience for Delta customers featuring seamless booking, simplified transit, and greater time savings,” she wrote. “We expect this partnership is yet another lever in its premium revenue focus.”

Syth added that Delta’s investment in Joby, given its known rigorous investment standards and involvement with its partners, is likely to “garner additional investor interest” in the eVTOL segment.

Delta will initially invest $60 million in Joby, and potentially raise that to $200 million if certain “milestones” are achieved. The full investment would represent a roughly 2 percent ownership stake, and include a seat on Joby’s board, according to Raymond James. And, to the exclusivity agreement, that would apply to the premium service that Joby and Delta will develop, which will be separate from Joby’s standard airport air taxi business.

JetBlue Ventures also has an investment in Joby.

One big question that Delta, as well as other airline operators of eVTOLs, faces is how much demand exists for these premium services. Price points, while not yet set, are often compared to those charged by Blade in New York for helicopter flights between Manhattan and New York’s JFK airport; flights on Blade begin at $195 one way. In many markets, a $200 one-way fare is several multiples the cost of an airport train or bus, and significantly more than a taxi.

According to The Air Current, Delta expects roughly 1,000 passengers per airport to use the service when it reaches scale. Based on current schedules, that represents 5 percent of the roughly 20,000 seats Delta operates out of Los Angeles International Airport on a daily basis. A niche service yes, but a respectable number nonetheless.

In addition, certification of the actual electric air taxis is only one of the hurdles to carrying paying passengers. Another is how the U.S. Federal Aviation Administration will manage them in already congested airspace over major cities. Air traffic control staffing issues have been widely cited by airlines — including Delta — as contributing to flight delays and cancellations in Florida and the Northeast. In addition, eVTOLs could be blocked from serving the most sought-after destinations in cities if local residents object to the noise or activity.

Edward Russell

In Other News

  • American gave a preview of its third quarter financial results, which it will report this week (Thursday, October 20). Simply put, unit revenue trends in the quarter came in better than forecast, while the opposite was true for unit costs — they also (less happily) came in higher than expected. More specifically, American expects to report a 25 percent increase in total RASM, compared with 2019. In late July, the airline told investors that the increase would likely be 20-24 percent. Non-fuel CASM, however, which it said would be up 12-14 percent, actually came in closer to the higher end of that range. The average fuel price per gallon last quarter, meanwhile, was roughly $3.75, in line with previous guidance. American disclosed its third quarter profit margins as well, subject to final revisions. Operating margin excluding special items was approximately 7 percent. Pretax margin was 4.5 percent, a figure above its July estimate put in the range of 2-4 percent.

    Separately, the U.S. Justice Department rested its case on October 14 in its suit against American and JetBlue‘s Northeast Alliance. The regulator claims that the partnership reduces competition and could cost consumers as much as $700 million annually. American and JetBlue defend their pact as offering consumers more choice. The trial continues in Boston.
  • American‘s close ally International Airlines Group said market trends were “better than expected” in the July-to-September quarter, attributing the strength to robust passenger revenues. Its operating profit for the three months was something in the neighborhood of $1.2 billion. Forward bookings, meanwhile, show “no indication of weakness.” IAG will report its third quarter results on October 28.
  • Qantas, which only reports financial results twice a year, last week provided an interim update. The Australian airline said its pretax profit for the calendar second half of 2022, excluding special items, will likely register between $770-830 million. That’s in U.S. dollars, which have appreciated sharply against the Australian dollar this year; one U.S. dollar was worth roughly 1.4 Australian dollars at the start of the year compared to roughly 1.6 Australian dollars now. The bullish guidance comes as strong demand “accelerates recovery” from the Covid crisis. And that’s enabling the company to reduce debt and restore wages. Domestically, revenues from both leisure and business travel now exceed pre-crisis levels. Yields are strong internationally too, but they’ll likely fall as Qantas and others restore capacity. Qantas Loyalty, long a critical profit contributor, should post record earnings. Operational performance is improving too, aided by a policy of keeping more spare planes available for use. Qantas did caution, however, that the “broader operating environment remains complex,” citing high fuel prices, inflation, and higher interest rates.
  • EasyJet also gave a bullish trading update, telling investors to expect a roughly 21 percent operating margin for the July-to-September quarter. That’s the final quarter in the airline’s fiscal year, results of which it will report in late November. It’s also the quarter that coincides with the European summer travel peak, typically the most profitable time of the year for European LCCs. If its quarterly estimate is correct, EasyJet will have broken even at the operating level for its full fiscal year, which ends in September. Aside from the demand recovery throughout Europe, EasyJet said it benefitted from changes to its route network and strong ancillary revenue growth. EasyJet Holidays, which sells tour packages, also grew rapidly. Capacity in the September quarter was 88 percent of what it flew in 2019. Forward bookings continue to look good, and favorable hedges provide some protection against high fuel prices and the strong dollar.  
  • Will Air India merge with Vistara? There’s increasing talk that this will indeed happen, now that both are owned by the Tata Group. But Tata only owns 51 percent of Vistara, triggering questions about the future role of Singapore Airlines, which owns the other 49 percent. Singapore has a keen interest in the high-potential Indian market and might wind up with a stake in a combined Air India-Vistara.
  • It’s never a bad idea to copy Ryanair. Lufthansa’s Eurowings, just like Ryanair, secured an air operator’s certificate in Malta. Why Malta? Does Eurowings want to expand there? No, the move has nothing to do with network strategy. It’s all about labor strategy, taking advantage of Malta’s “economic and regulatory framework.”
  • Pilots at U.S. regional Republic Airways ratified a new five-year accord with the airline. While the deal offers quality of life and other improvements to cockpit crew members, the pay increase is the biggest change: Captains get an up to 54 percent increase to at least $140 an hour, and first officers an up to 94 percent increase to at least $90 an hour. The increases make Republic’s pay comparable to that offered at American subsidiaries Envoy, Piedmont Airlines, and PSA Airlines; the three American Eagle carriers set off the current round of regional pilot pay hikes when they announced their deals in June.
  • Long-haul, low-cost startup Norse Atlantic Airways is confident that its winter schedule cuts, and a decision to sublease four of its 13 Boeing 787s to other carriers, is enough to carry it through the low-demand winter period. The airline expects load factors and yields to rise under its revised schedule, which includes the suspension of Los Angeles-Berlin and -Oslo flights, it told investors last week. Norse’s capacity cuts, and power-by-the-hour lease agreements, will allow it to “lower cash burn over the winter period,” CEO Bjorn Tore Larsen said. Demand on routes that are operating is “strong,” he said. Norse plans additional transatlantic routes from London Gatwick in the summer 2023 schedule it plans to unveil in early November.

Edward Russell & Jay Shabat

Jay Shabat

October 17th, 2022