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Delta Air Lines' Pacific transition will take time to bear fruit

The first half of 2020 is a key time for Delta Air Lines in its Asia Pacific operations as it moves operations from Tokyo Narita to Haneda and begins operating from Beijing’s new airport, Daxing. Although Delta believes those moves are critical for its long term success in the region, the airline is warning that the transition could create some short term uncertainty in its Pacific operations. 

Delta could get some reprieve from tough conditions in the Asia Pacific out of the first phase of a new trade truce between the US and China, but there is still uncertainty about the effect that the tenuous agreement will have on overall global economic activity. 

Concurrently, Delta appears to be indicating that it could take some time for the transitions occurring in its trans Pacific operations to reach their full potential. 

Summary

  • 2020 is a pivotal year for Delta in its trans Pacific strategy as it transitions its operations from Tokyo Narita to Tokyo Haneda and from Beijing Capital to Beijing Daxing.
  • Delta looks to be the big winner in the most recent Haneda slot contest, having secured five of the six slots it requested, and noting that in Mar-2020 it will become the largest US airline serving Haneda .  
  • Delta holds a positive outlook for its trans Pacific operations, even though there is uncertainty whether US-China trade tensions will ease over the medium to long term. 

Delta's impending move to Tokyo Haneda has been years in the making

Haneda has long been the preferred airport for most foreign airlines operating into Tokyo, given that Narita is more than 60km outside the city centre, whereas Haneda is a mere 20km from downtown Tokyo. 

During the course of the past decade the US and Japan have negotiated more access for US airlines to Haneda – mostly night slots at the airport. But in early 2019 the two countries reached a deal by which US carriers would receive 12 daytime slots at Haneda

Arguably, Delta was the big winner in the most recent Haneda slot contest, having secured five of the six slots it requested. The granting of those slots is essentially allowing Delta to shutter its connecting hub at Tokyo Narita – a move that has been years in the making.

The airline inherited the Narita hub through its 2008 merger with Northwest Airlines and has recently stated that Narita was “a ticking time bomb”, with airline executives remarking that passengers do not want stop in Narita on their way to Shanghai, Beijing or Seoul. 

See related report: Delta Air: trans Pacific transformation nearly complete 

Delta has noted that in Mar-2020 it will become the largest US airline serving Haneda, with seven daily flights between Haneda and Seattle, Detroit, Atlantic Honolulu, Minneapolis, Los Angeles and Portland

Data from CAPA and OAG show that as of late Jan-2020, before Delta’s shift from Narita to Haneda, it had approximately an 18% seat share between the US and Haneda, which was equal to Hawaiian’s 18% share.

United had a 10% share, followed by American’s 9% share. 

Weekly seat share of airlines serving Tokyo Haneda from the US, as of late Jan-2020 

Other pillars of Delta’s trans Pacific strategy include a JV with Korean that makes Seoul a major connecting hub in its Asian network.

Delta also has a 3% stake in China Eastern, and the two airlines are partners in the SkyTeam alliance. China Eastern is in the midst of moving its operating to the new Beijing Daxing airport, and Delta is moving its services to Detroit and Seattle from Beijing Capital International to Daxing in the first half of 2020. 

Delta has declared that the moves are strategically important and are the final steps in the airline’s multi-year restructuring in its Asia Pacific operations. 

The airline is cautioning that the transition to Haneda is a “big move”. There could be “…some ripples there that would be unique to us as we have the largest footprint in Haneda”, said Delta president Glen Hauenstein. “But I think ultimately we are very, very confident that Haneda is a better airport to serve Tokyo than Narita”, he said. 

Mr Hauenstein remarked that the move to Daxing might be a little bit of a headwind for a short period of time, adding: "But again, we think that's the right move for us because the connectivity at that airport is going to be far superior in the long run to what's at Capital.” 

Tough to predict whether the phase one US-China trade deal will benefit the industry 

Near the end of 2019 Delta calculated that the trans Pacific represented approximately 6% of its ticket revenue mix by geographic entity. Domestic was the airline’s largest with a 72% share, followed by the trans Atlantic at 15% and then by Latin America’s share of 7%. 

The trans Pacific has long been a challenge for US airlines, driven by overcapacity in the market, currency fluctuations and pressure created by the trade spat between the US and China. In the past, Delta executives have also concluded that the airline's stage length in the Pacific was also creating headwinds for the airline. 

During 4Q2019 Delta’s trans Pacific unit revenues fell by 4.4% year-on-year, on a 2.7% drop in yields. Its capacity during that period increased 4%, but the airline cited improving trends in Japan even as “China remained soft”. 

But Mr Hauenstein has said that he was encouraged by the first phase of a trade truce between the US and China. However, the agreement seems somewhat opaque, and there is still uncertainty about the effect that the tenuous agreement will have on trends in the global economy. 

One of the most succinct outlines of the phase one deal was offered by CNBC, the publication stating that the deal demands that China increase its purchases of US manufacturing, energy and agricultural goods and services by at least USD200 million over two years. The agreement also includes provisions to root out intellectual property thefts and forced technology transfers.

The publication released a report from the World Economic Forum in Davos, Switzerland, concluding that the phase one agreement will not necessarily result in a phase two pact coming to fruition.

Before the US-China reached their phase one agreement, American Express Global Business Travel in its Air Monitor 2020 calculated that fares on routes from the US to both Asia and South American in business and economy classes would drop by 1%. 

Delta attempts to temper initial expectations for its trans Pacific airport moves 

Delta seems to be publicly giving itself some breathing room in the early period after it makes significant airport moves in its trans Pacific network. 

There will obviously be some initial growing pains from the transitions, but beyond the potential short term hiccups, Delta will need to deliver a sustained, improved performance in the trans Pacific. 

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