As other US airlines play catch-up, Delta and United bask in their dominance
Delta Air Lines and United Airlines are unquestionably the market leaders in the US, as both companies continue to distinguish themselves from airline operators that are struggling to define themselves in an evolving market.
Those airlines are arguably in a unique position to continue building their market momentum as the large ultra-low cost carriers in the US battle an identity crisis, and other airlines undertake turnaround plans to improve their financial performance.
As other airlines remain distracted, Delta and United can focus on further distancing themselves from those airline companies attempting to adapt to customer preferences that those two airlines have catered to for years.
That only creates upside for Delta and United in the future.
- Delta Air Lines and United Airlines make strides in loyalty revenue and see upside in corporate demand.
- Those airlines continue to carve out a competitive advantage from their diverse product offerings.
- It will take time for efforts by other airlines to move up-market to bear fruit.
- Delta Air Lines and United Airlines continue to feed passengers into their eco-system, and remain intent on being the airlines of choice for those travellers.
Delta and United see significant upside in loyalty revenue...
Delta has long been the market leader from a product and branding perspective in the US. It had an opportunity to define itself after the airline closed its merger with Northwest Airlines in late 2008.
Continental Airlines and United Airlines had challenges with their union, and American Airlines and US Airways didn't close their merger until late 2013.
Former United CEO Oscar Munoz named Scott Kirby as president in 2016, and Mr Kirby became CEO in 2020.
Mr Kirby, and other executives that he added to the C-Suite, have worked to transform United into a formidable force in the US market place, and United is not shy about its ambitions to reach or surpass Delta's dominance. United's net promoter score in 3Q2024 was up five points year-over-year and 24 points compared with 2019 year-to-date.
But Delta shows no signs of ceding its leadership position. Any tarnish from the Jul-2024 'Crowdstrike outage', which forced the airline to cancel approximately 5,000 flights, was quickly wiped clean, as the airline's executives have previously explained that the book-away from the airline was short-lived.
Delta's President Ed Bastian recently explained that the company expected to grow 4Q2024 earnings 30% year-over-year, with pre-tax income of USD1.4 billion, "which would mark one of the best, if not the best[,] fourth quarters in our history".
A lot of that is driven by Delta's premium products - the airline's management explained at the end of 3Q2024 that (year-to-date) 57% of its revenue had been generated outside main cabin seat sales. Additionally, loyalty revenue grew 6% year-over-year, and remunerations from its American Express co-branded credit card also increased 6%, to USD1.8 billion.
United posted an 11% rise in its loyalty revenues year-over year, and spend from its co-branded credit card increased by 9%.
...and corporate demand
Both airlines see upside from a recovery in corporate travel.
Delta President Glen Hauenstein explained that the company's recent corporate survey had indicated that 85% of respondents expected their travel to grow in 2025.
United's management stated that contracted corporate revenues had increased by 13% in Sep-2024, which equated to 95% of 2019 revenues, and was 13 points higher than Jul-2024 and Aug-2024.
The airline's Chief Operating Officer Andrew Nocella explained: "We see corporate traffic accelerating, that's United's bread and butter. We've been waiting for that to happen for a while. It's particularly important in Q1…"
Delta and United are working to seize on positive corporate travel trends, at the same time as their rival American Airlines has calculated that unpopular changes to its distribution strategy has created headwinds in its corporate revenue performance.
During 2Q2024 American's revenue from its large managed corporations increased by approximately 3% year-over-year, and that performance was "not reflective of our fair share of corporate revenue", the company's CEO Robert Isom said earlier in 2024.
Overall, American expects to take an approximately USD1 billion revenue hit in 2024 from those changes, and is working to restore positive relations with corporate customers to regain lost ground.
At the time this report was prepared, American had not reported 3Q2024 financial results.
Both airlines benefit from capacity rationalisation in the US domestic market
Delta, United, and presumably American, are also benefitting from a pull-down in US domestic capacity, largely from ultra-low cost airlines that have been struggling in the marketplace.
Data from CAPA - Centre for Aviation and OAG show that US domestic seats are moderating somewhat as 2024 comes to a close.
United States of America: weekly total domestic seats, from 2019 to year-end 2024
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During 3Q2024 Delta's premium revenue growth outperformed its main cabin by nine points, said Mr Hauenstein. For airlines that only have essentially an economy class offering, "You need to fix supply so you can get your unit revenues moving in the right direction", he explained.
"I think we've seen that occurring right now[,] and through the end of the year[,] as those incremental…capacity cuts come into play…I would assume that main cabin as we exit this year is starting to improve on the margin, but we also think there's more to go on premium products", he added.
Revenues from United's Basic Economy offering grew 20% year-over-year in 3Q2024. The airline's executives stated that fare category represented approximately 15%-16% of its current domestic passenger volumes.
"We have come to the firm conclusion that offering basic - and offered in a substantial amount of volume - is good to United, is profitable for United, and is bad for our competitors, so we are going to continue to do what's good for United", said Mr Nocella.
"As we grow our gauge with lower marginal costs, I think it could go higher as we go forward, but we'll pivot and do what's right for the bottom line at the end of the day", he added.
But make no mistake - United's goal is to offer a full product range from basic economy to business class, and "will pivot the amount of capacity we offer in all those categories based on expanding our margins", Mr Nocella said.
Other US airlines are attempting to offer premium-like offerings. Is it an uphill climb?
As Delta and United continue to mature and evolve their range of product offerings, lower cost competitors are attempting to move up-market. Both Frontier Airlines and Spirit Airlines are adding premium-type seating and bundled fare options, and they are eliminating change and cancellation fees.
Southwest Airlines - which is in the midst of a battle with the activist investor Elliott Management - plans to introduce assigned seating, to offer an extended legroom offering, and to revamp its network to produce USD4 billion in cumulative EBIT by 2027.
As part of its stand-alone plan, after a failed pursuit of Spirit, JetBlue Airways is also revamping its network, and it recently unveiled plans to open airport lounges at New York JFK and Boston in late 2025.
See related CAPA - Centre for Aviation related report: Southwest and JetBlue undertake turnarounds - activist investors use different strategies
But those product pivots take time to implement, and aren't novel in the US market. Additionally, Spirit is in tough negotiations with creditors, and has extended the deadline to renegotiate some debt payments, perhaps staving off speculation that a Chapter 11 bankruptcy filing could ensue.
"I understand how others are now looking to adapt. It's really hard to change course and try to catch a plane...that's moving at a pretty good speed", said Delta CEO Ed Bastian. He ticked off the airline's investments in "Delta One" and its free Wi-Fi offering. "We're not going to change course, if anything we're going to continue to accelerate," Mr Bastian said.
Delta's President Mr Hauenstein believes the company can continue to improve its premium product offering over the medium and long term, and noted that the airline would reveal more about its vision at its investor day in Nov-2024.
United's management team fielded a question regarding any opportunities arising in the US domestic market that would be due to the moves by the airline's competitors. The response was that United is aiming to continue to building up its mid-continent hubs in Chicago O'Hare, Denver and Houston Intercontinental, and to continue to invest in the customer by developing products that passengers choose more often.
United is the dominant airline in Denver and Houston, and has a commanding share of 48% of Chicago O'Hare's departing frequencies, compared with 34% for American, which also uses the airport as a hub.
Chicago O'Hare International airport: departing frequencies by airline, as of mid-Oct-2024
It is difficult to match the product and network breadth offered by Delta and United
Many US airlines are making what are, arguably, necessary product pivots to remain relevant in the market. But the reality is that Delta and United already have more competitive products in place to lure passengers into their respective eco-systems.
"As brand preference continues to grow, we are driving deeper levels of engagement[,] and our SkyMiles membership is attracting a younger consumer", Mr Bastian noted. "We have seen a significant evolution in our active member base post-COVID[,] with three million more active members under 40 years of age, more than doubling our engagement with non-air partnerships, [and] allowing us to earn a higher share of wallet."
United's basic economy performance also shows that it can cast a wider net to capture passengers who are likely to buy more premium products on future trips.
And even as the move up-market by other airlines continues, Delta and United's more vast networks are an inherent advantage in continued customer retention.