Major US airlines are playing the long game with their Asia strategies
US Airlines generally adopt a long term view in their trans Pacific strategies, often enduring short term pain for what they believe will be higher returns in the mid to long term.
The North America-Asia market is tough. It was plagued by overcapacity and low yields even before the US-China trade spat and political unrest in Hong Kong.
US airlines have long complained that securing favourable slot times at China's airports is a challenge, and American cut its service from Chicago to China last year, being eventually forced to return slots covering those flights that its rivals are looking to use.
There is no clarity on whether the trans Pacific fortunes of American, United and Delta will get worse before they get better, and there is no lack of scrambling by some of those airlines to gain coveted slots to ensure that they will be a competitive force in the trans Pacific for years to come.
- US airlines, such as United and Delta, are facing short-term challenges in the trans-Pacific market but remain focused on the long-term value of the region.
- American Airlines has benefited from its decision to cut flights from Chicago to Beijing and Shanghai, resulting in improved trans-Pacific performance.
- United and Delta are competing to secure slots previously held by American for flights to China, highlighting the importance of the rapidly growing Chinese aviation market.
- United is experiencing a decline in trans-Pacific unit revenue, but expects improvement in the fourth quarter by targeting higher-yielding business passengers.
- Delta is undergoing a transformation of its trans-Pacific operations, including de-hubbing Tokyo Narita and launching a joint venture with Korean Air.
- US airlines are adopting a patient approach in the challenging US-China aviation market, recognizing the long-term potential and playing the waiting game for higher returns.
Summary
- United and Delta battle short term trans Pacific headwinds but keep their focus on the region's long term value.
- American is reaping some benefit in its trans Pacific performance from its decision to cut flights from Chicago O'Hare to Beijing and Shanghai during 2018.
- Delta and United aim to secure those slots that American used to hold for its Chicago-China flights, jockeying for position in the world's fastest growing aviation market.
United and Delta take the long view on Asia, enduring short term headwinds
United is the largest airline operating to Northeast Asia, with an approximately 15% seat share, and to China with a 21% share, as of early Dec-2019. Its trans Pacific unit revenue fell 3.4% year-on-year in 3Q2019 and yields dropped 4% year-on-year on a 2.3% increase in capacity. Due to political unrest, United has suspended service from its hub at Chicago O'Hare to Hong Kong and has also scaled back service between Newark and Hong Kong.
As 4Q2019 began, the company's management concluded that while demand to Hong Kong remained weak, it had stabilised. United expects an improved unit revenue performance in the trans Pacific during 4Q as it pushes its booking curve closer to the date of departure to save more seats for higher yielding business passengers.
The trans Pacific was the only geographical entity where Delta Air Lines posted a revenue decline in 3Q2019. Its yields in the region fell 7.2% and unit revenue decreased by 7.6% on a 3.3% increase in capacity. Delta's performance was affected by the impacts of US tariffs in the automotive and manufacturing sectors and lower leisure demand to and from China.
Delta is in the midst of a years-long overhaul of it trans Pacific operations, de-hubbing Tokyo Narita and launching an immunised JV with Korean Air that leverages Korean's hub in Seoul. It has also secured five slots at Haneda essentially to shift flights from Atlanta, Detroit, Portland, Seattle and Honolulu to Haneda from Narita.
Taking a broad view of the trans Pacific, Delta president Glen Hauenstein recently explained that "our stage length is really working against us and I think as we transition through to Haneda next year, we told our investors we're on a multiyear transformation".
American cites China cuts to trans Pacific unit revenue growth in 3Q2019
American's capacity in the trans Pacific fell nearly 15% year-on-year, which reflects its decision to end service from its hub at Chicago O'Hare to Beijing and Shanghai in 2018. The company's management attributed a 1.6% rise in trans Pacific unit revenue to its China restructuring, but American appears to be trading in yields for loads as yields fell 3% year-on-year and load factor grew by approximately 4ppt, to 84%.
The airline believes its new immunised JV with Qantas should help improve its trans Pacific performance, and during 2Q2020 Qantas is planning to launch service from Brisbane to Chicago and San Francisco, with there likely being more service announcements to follow by both airlines.
United and Delta want more China service as American pulls back from O'Hare
At the time American decided to cut its flights from Chicago to Beijing and Shanghai, the airline didn't mince words about the performance of those routes, characterising them as "colossal loss makers".
American waited as long as legally acceptable to return those China slots to a coveted pool, and both United and Delta have asked US regulators for additional rights to serve Shanghai. United aims to add a second daily Newark-Shanghai flight and Delta wants to launch new service to Shanghai from its hub in Minneapolis.
The slot grab is a testament to US airlines positioning themselves to remain competitive in the China market, even as point of sale has shifted from the US to China. There are caps on the US-China bilateral, and given the recent trade tensions - no open skies agreement between the two countries is imminent.
Essentially, United and Delta are attempting to stockpile some Chinese slots as the stature of the country in the global aviation industry is unmatched.
IATA has determined that China will replace the US as the world's largest aviation market by the mid 2020s. There is some conjecture about how US regulators will navigate United and Delta's requests to add service to Shanghai - they have asked to launch service later than the typical 90-day grace period, targeting a Jun-2020 launch.
US Airlines adopt a patient stance for China and the broader Asia market
US to Asia, and US to China in particular, has always been complex, and the intricacies governing the US and China's bilateral aviation agreement will not change any time in the immediate future.
As the game of shifting slot demonstrates, US airlines are playing the long game when it comes to China and their broader strategies for Asia, adopting a position of patience to attain higher returns in the future.