Delta Air Lines stock soared this morning on word that they’d beated analyst expectations for the second quarter and reinstated strong finanial projections for the rest of the year – when last quarter, with uncertainty around tariffs and their effect on the economy, the airline felt things were too uncertain to stand by any forecast.
The earnings call, though, was enlightening. Coach demand is down, premium demand continues to grow, and that’s shaping the airline’s strategy.
Here are (9) key takeaways. I’ll save a 10th for a separate post that speaks to Delta’s ticket pricing strategy.
- Delta is looking to add premium seats to existing aircraft. And this also reflects a renewed desire to offer upgrades. Delta’s President Glenn Hauenstein shared that they see premium business continuing to grow and that they want to add premium seats to planes in order to sell more premium seats but also to upgrade more.
I think there’s nothing in any of the forward bookings that would have us indicate that there’s a diminishing demand for premium cabins or services. And so as we continue to look reevaluate even now the LOPA is on the airplanes and put more and more premium, we are able to do two things. One is sell more of it and two is accommodate more of our heaviest frequent flyers with upgrades, which is something we wanna continue to do to provide additional value to them.
Hearing Hauenstein speak positively about upgrades is unusual. He’s led the charge against upgrades and to monetize every premium seat possible, even for small amounts of money. They’ve been willing to upsell long haul business class for as little as $299 instead of allowing upgrades.
In 2009, 81% of Delta’s first class seats were filled with awards, upgrades or employees. 11% of those seats were filled with paying passengers, and 8% were empty. Now about 12% of first class seats go to upgrades. Other airlines have largely followed Delta’s lead, preferring to sell seats to non-frequent flyers for tens of dollars domestically instead of offering upgrades on a complimentary basis to customers spending tens of thousands of dollars annually.
- Tariffs hurt U.S. aviation. and they’re seeing trouble in travel by the auto and manufacturing sectors, precisely areas of the economy that the administration ostensibly wants to help with their efforts – these are counterproductive.
CEO Ed Bastian offered,
We’re not planning on paying any tariffs for aircraft deliveries, and that’s a pretty strong point of view here on the Delta side. That said, we are encouraged by the progress that we see happening in the discussions in Washington.
We are heartened by The UK, US acknowledgment in the the recent trade agreement that the 1979 Aviation Act where there would be no tariffs and and on a a reciprocal basis would be honored, and we hope that template will continue in future negotiations. This is our industry is one that’s maybe unique in our country’s economy in which the size of the surplus that we throw off, given the strength of our industry for aviation and aerospace, is the largest in the world. And this is not an area where tariffs would do anything but hurt U. S. Companies and consumers.
Meanwhile, later in the call, Hauenstein shared:
[M]ost most of our, survey results indicate that [businesses] are going to spend the same or more, and they usually do that. So we’ll we’ll see as it materializes. But as far as the sectors go, really, the favorable sectors are banking, consultancies, and technology, and the laggards are autos and manufacturing, which is kind of surprising given the way the the government is trying to bring manufacturing back. So hopefully, will turn around here in the not too distant future.
- Declining travel to the U.S. by Europeans is partially offset by the tanking U.S. dollar. That makes foreign-source revenue more valuable. Peak travel periods have also spread out into shoulder seasons, helping to offset weeakness as well. Here’s Hauenstein:
I think there’s clearly less travel coming out of Europe, but currency changes have offset a lot of that in terms of the total revenue coming out of Europe. So lower customer accounts, but higher yields given the currency has appreciated more than 10% over the past few months here. And so those kind of balance each other out with just a slight negative.
And what’s really driving us in the peak being a little bit lighter than the shoulders is this change in demand set from the peak summer months when everybody’s on vacation, prices are really high, places are crowded, Europe’s hot, and to times where it’s a much more pleasurable, experience, cooler temperatures, lower, hotel rates. And so I think we’ve seen this systematic shift.
And this is not a one year issue. This is multi years that the peak is getting less peaky and the shoulders are getting stronger. And that’s happened over a three, four, five year period since back to coming out of COVID.
- Delta expects $8 billion from American Express this year. Card spend – and revenue from American Express – were up 10% in the quarter, according to CFO Dan Jenke. And Hauenstein says they’re on track for $8 billion:
In the quarter, we saw a record level of spend on our card portfolio, highlighting both the strength of our customer and the appeal of our program. Renumeration from American Express was $2,000,000,000 up 10% over the prior year growth and momentum in new card acquisitions. We remain on track for full year remuneration of approximately $8,000,000,000 providing durability to both earnings and cash flow.
- They’re still planning to strip down business class benefits and charge extra for those. They call it ‘segmentation’ and they want to do to premium cabins what they did to economy (with basic economy, main cabin and Comfort+, or they’ve described it in the past ‘good, better, best’):
[S]o we’re highly focused on continuing to provide improved service to those customers and more segmentation. And I think the segmentation that we’ve done in main cabin is kind of the template that we’re going to bring to all of our premium cabins over time because different people have different needs.
And the more choices we can give customer with the more price points that provide value, the better I think the answer is gonna be for Delta and for our customers. So it’s all about giving people more choice, more pricing options and more products and services in every cabin.
In response to a question for CNBC’s Leslie Josephs, Hauenstein said that they won’t commen on specifics “until we roll it out” however they’re “testing it with customers today, and we’re doing a lot of surveys.” The delay in rollout has nothing to do with tech, which he says they’re ready on, “but we wanna make sure that customers understand what we’re putting in market and that they find value in it.”
- Business travel isn’t fully back. Ed Bastian acknowledges that flexible schedules – not having everyone in the office every day – and the ability to do some meetings virtually in ways we didn’t used to be able to – means that “15% or 20%” of business travel hasn’t returned. He frames this as an upside opportunity but really it’s a systemic change to the business.
We shouldn’t lose sight of the fact that business travel, while it has returned, is still very much in line with where it had been versus where the size of the economy is today, particularly the growth rate. On any true comp, have easily another 15% or 20% of business travel that isn’t being done, that used to be done. And I think with all the new tools and flexibility models and being in person is more important than ever in this turbulent world. I think there’s going to be a lot more opportunity yet to see business growth.
- Customers are starting to book farther in advance again – a little bit. Everyone holds off booking until the last minute in times of uncertainty. We saw last minute ticket purchases during Covid (is there going to be another outbreak? am I going to be allowed to travel where I want to go?) and there was a move to last-minute travel during peak uncertainty around tariffs in April. But consumer confidence is coming back, and earlier purchasing of tickets is normalizing.
According to Hauenstein,
So yes, the booking curve has shifted in. And generally, there’s a outside of a hundred and twenty days forward, it hasn’t deteriorated that much. Inside of a 120 down to 90, it has or actually down to 60, it has. So there’s a piece in there that’s moved closer in, and we tend to build a lot inside the month, which we didn’t do last year because a lot of those tickets were already sold.
So we have seen indications that it’s starting to move back out again, and I think this is very correlated to consumer confidence. As confidence returns, people will continue to book further out, which if that happens, have a very favorable impact to cash flow in the coming months.
- What flights are being cut with coach demand down 5%. They’re dropping early morning and night flights, and Tuesday and Wednesday flying, according to Hauenstein. And so is everyone else.
So how we’ve done with it, and I think a lot of the industry, you listen to what they’re all doing, is we’re all taking the weakest trips out, which is what you would expect airlines to do. And they tend to be on off peak days, so Tuesdays and Wednesdays, and they tend to be at off peak times pre 6AM or post-twenty-one hundred departures. So that’s really where we’ve concentrated in trying to eliminate those and consolidate that travel back onto the peak a little bit more.
- They’re working on ‘overflow’ space for clubs. In response to a question from the Wall Street Journal‘s Ali Sider, Hauenstein claimed that crowding in lounges is entirely the fault of weather but that they are doing contingency planning to address that, and that crowding will otherwise be eliminating in 18-24 months.
We are continually working to eradicate the lines and crowding at Sky Clubs, whether or not that’s building new and better Sky Clubs. We didn’t mention, for example, that the D Sky Club last quarter in Atlanta opened up replacing 8,000 square feet with 26,000 square feet. So we have a lot of plans to continue to address the places where we are constrained. Now one of the issues with the constraint is, and particularly with the weather that’s been in New York this year with thunderstorms almost every day with flights being delayed, is that you can’t build a club big enough for lengthy delays. So I think we’re we’re trying to look at alternatives that we can use as overflow in those instances.
But I think generally by structurally non-IROP days, we should have almost all of our crowding issues solved in the next eighteen to twenty four months.
Delta’s latest earnings discussion revealed a major shift in attitude and planning around bringing back upgrades, slashing premium cabin perks that come from buying business class, and promising to eliminate Sky Club overcrowding within the next 18-24 months. There was a lot more packed into this earnigns call than there usually is!
The problem with their concept of “segmentation”, a euphemism for unbundling, is that the base fare will remain what it is today but they will remove the extras and charge more for them. That’s shrinkflation, not segmentation.
“they’d beated analyst expectations”
Really?
@Gary, you need to replace the person writing your posts 🙂
PS: Yes, sometimes spell check is a harsh mistress.
“Segmentation”, eh? What a nice euphemism for charging customers the same while offering less, something Delta excels at. Delta never ceases to amaze me over the past several years in their innovation at finding creative ways to screw over passengers – especially loyal ones.
More upgrades! More premium! @Tim Dunn, it’s happening! 100 more years!
OK, picking through this: DAL isn’t a share I seek to own, but I’m wondering what their EBITDA was (I’ll have to look) and see how much of that came from, Amex. Another airline profitable because of credit card spend? Free cash flow of $3-$4 this year…. coming from Amex.
“They’re still planning to strip down business class benefits and charge extra for those.” while at the same time saying they want to increase premium business. These two don’t jibe, unless it’s just another Bastion stab-in-the back for his better customers.
“They’re working on ‘overflow’ space for clubs.” Sky Clubs are a joke, still. On a recent AF trip to CDG both the MSP and SLC clubs were heaving. Hard to find a seat.
A premium experience you say? Hardly.
Was there anything about operations or customer service from the airline that doesn’t feel it needs a real, full-time COO? Maybe it is a just a vibe shift that operations seem increasingly no sense urgency to pick up the pace with things falling behind.
The collapse in customer service has been the most striking change over the past several years. Even with access to the Diamond Medallion agents, I now won’t call weekday evenings or weekends, and it is a crap shoot weekday daytimes to get even minimally competent agents. For instance, during IRROPs, many agents refuse, or say it is not allowed, to rebook on partner airlines, especially when booked on award tickets. Maybe 1 out of 3 calls on the Diamond line might find an agent who is able and willing to do that.
Most of the power has been taken away from front-line agents. They call departments called Global Ticketing Support (GTS) and Global Partner Support (GPS), and you play a game of telephone and holds, rather than transfer or speak directly to those departments. Things can and do go wrong. I usually request agents to not deal with those departments if they can avoid it, since the message gets mixed up and things get messed up.
For all the self-service tools Delta touts, the tools are too often ineffective. For example, award ticket cancels online are great except that they regularly get ” We are unable to process your request…” error message. This happens often enough on Delta metal itineraries, almost always the past year on WestJet metal itineraries.
The biggest news was that they are looking for overflow SkyjClub space and they confirmed what I have said which is that weather is by far the primary reason why they don’t have the space for when people need to stay longer in the SCs.
and it was notable that the need to keep upgrades coming was noted – it is a driver of the incentive to keep high value customers spending on their cards even outside of DL.
it also is notable the increase in cargo revenues – likely the result of making their TPAC network nearly exclusively A350s and that non-operating gains on their equity holdings are part of what drove their high net income which other airlines can’t match.
They also continue to increase labor costs via their fuel cost reductions which puts put pressure on other airlines; they grew capacity on both their domestic and total system which puts pressure on low cost carriers.
what wasn’t said – likely because DL doesn’t make big announcements on earnings day – is news about a new widebody order which is likely to go to Boeing for the 787-10 and options conversions for more A350s.
They also have not committed to a restart date for India
D/L projects $8B for the year from credit cards.
And for this quarter, they netted $2.0 B.
D/L would better off just buying AMEX.
Reading between the lines, Delta had Q2 GAAP operating income of $2.0B and OCF of $1.9B, essentially the same amount it received from American Express ($2.0B). So AMEX is the real customer.
Boeing is desperate to sell some 787-10s to Delta, which will demand a huge discount ($~150M each). Hard to believe that Delta hasn’t had a Boeing widebody delivered since the 777-200LR in 2008.
In order for Delta to plus up Delta One, it has to address the huge disparity in the offering. Yes, we know, the 333/332 fleet will get mods, but this is going to take a while. The 767-400 experience is subpar, the 763s still run a lot of D1 routes and are awful, and the 359/339 experience is a mixed bag.
Delta’s lack of uniformity in the air is its biggest problem with premium cabins.
My upgrade percentage as a DL plat this year is much higher than DL Diamond the last several years. Either lower demand or they are not holding upgrades to the gate as much.
It has always seemed insane to me to offer cheap cash upgrades rather than to give upgrades to frequent flier elites who spend tens of thousands of dollars per year flying the airline. It is business malpractice. It reduces price expectations of non-elites (why buy a first class ticket or redeem points for it when you can just buy a cheap main cabin ticket and then upgrade) while rightfully infuriating elites who feel bait-and-switched and will eventually stop being loyal to the airline, costing it many thousands of dollars when they eventually find a new airline to be loyal to.
It also reduces service quality by nearly guaranteeing a full first class cabin, reducing the value of first class. Airlines need to better integrate their revenue management and loyalty teams to align incentives (revenue management team executives should not be rewarded for increasing revenue marginally if they do so by cannibalizing elite loyalty). Perhaps rename the combined team “profit management” to drive the point home and set a high minimum price for cash upgrades (ensuring they are only used when needed by customers rather than strategically).
@ Gary — So, basically more hot air….Don’t think for a second that this greedy executive ever intends to give away a single upgrade. Same goes for all airlines. WFBF.
@Gene — Want first, buy first? Bah!
@ 1990 — I haven’t watched an upgrade list for about 10 years now. Too much stress. Just find a way to use the best tools in your toolbox to get the best deal sitting up front.
Freedom,
You can absolutely guarantee that Delta will buy 78 710s as replacements for the 764s and the last of the 763s and Boeing will discount, and GE will throw in engine overhaul rights to Delta. It was never realistic to believe that Delta would have a 100% widebody fleet by Airbus at any point.
Larry
It is laughable that people talk about the inconsistency of Delta‘s premium cabins when United flies 737s and 757s on flights as long or longer than Delta 767s
Gene
No, Delta isn’t giving anything away for free. It is part of the revenue they get from American Express and they know they have to include upgrades as part of that package. You just can’t accept that they know better what that percentage is than you
UA’s entire 204 aircraft international wide body fleet has had Polaris Suites, Premium Plus and Economy Plus for years. Delta started installing Delta One Suites in 2017 and is hoping to have it installed in only 80 international wide bodies or well less than 50% by the end of the year. UA is introducing its upgraded Polaris Suites and Studios this year and should have 25 of them before Delta introduces its first A350-1000 with its new Delta One Suites in late 2026 or 2027. Glad to hear Glenn Hauenstein say they are finally surveying customers to see what they want in the new Delta One Suites. Sounds like 2027 might be ambitious.
UA also has far more Polaris and premium seats in its international aircraft. Glad to hear Delta will finally be adding more too. Got to have seats to get the upgrades one way or another.
don’t bring your inferiority complex here.
Polaris was not competitive when it was introduced because Delta One Suites came out at virtually the same time. The Delta One Suite is a superior product and there is plenty of support for that statement from legitimate industry observers and analysts including Gary.
There is no way that United will catch up to the number of aircraft with Delta One Suites in the next 5 years – when DL will have over 80% of its fleet w/ D1 Suites.
and United still can’t make as much money from its international network as Delta gets despite flying much more capacity.
take your inferiority complex elsewhere.
@ Tim — Of course you see that IAs stock lead the market today, not DLs. Obviously the market sees United pulling further ahead of Delta, as Delta tries desperately to rip off its customers more.
except UA is not leading the industry.
They have been ripping off their employees since covid; that is the only reason why UA’s earnings have been as high as they have been – and still trailed DL.
let’s see how well UA’s earnings go w/ the cuts to EWR capacity; you can’t chop 20% of the flights from your highest revenue hub w/o taking a haircut.
and, UA will take a haircut when their FAs adopt their contract proposal – unless the FAs reject them, in which case AA’s FA shenanigans will seem like child’s play
@ Tim — Well, Delta has been ripping off its customers for decades!
You can’t stand that there are people that will pay for what you expect them to give away.
DL has grown more in the nearly 50 years of deregulation than either AA or UA
@ Tim — You can’t stand that Delta is #2. I pay for my F seats, with cash or instruments, which you know are not remotely close to free.
I can’t wait for this Delta One segmentation on their 76K – 76L product…
Gene.
there are all kinds of stats we can quote but on the ones that UA fans love to talk about the most, the only real place they lead is burning the most fuel and emitting the most pollution
JCW,
the 76Ls are supposed to be gone by the first of the year.
and as 1990 often notes, not everyone gets Delta One and even when they do, the 767 serves as a far better solution on a summer seasonal basis than other aircraft.
Let’s remember that United has 757s and 737s flying the Atlantic while AA and UA’s 777s have 10 abreast in coach and 787s have 9 abreast despite a narrower cabin than the A350.
I sure do enjoy ‘often note’-ing. *wink*
Premium seats sales are up and coach seats sales are down so the campaign to make coach travel worse is paying off.
6 wide narrow bodies are better for flying coach than 10 wide 777s or 9 wide 787s as long as the pitch is ok. I have no plans to fly on 10 wide 777s or 9 wide 787s ever.
No one really cares about my $.02 but since I read yours:
1. The unbundling of fares is how you gaslight customers into thinking price increases are actually price decreases.
2. DL’s hard product is VERY inconsistent. 71s have no IFE, no free WiFi. 76s are an embarrassment. That what happens when your fleet isn’t harmonized.
3. AMEX is 100% the customer and DL is polishing their knob. That’s what $8B gets you.
4. While the SCs excel in food offerings, they are quickly losing their lead over UA clubs. More of their clubs have been modernized. They are FAR less crowded. They somehow feel more dignified and less frat house.
5. While DL is still in the lead, UA is most improved and right on DL’s heels. UA excels in tech. *A is a better global alliance than ST. Reach, airlines, first class lounges.
DL is still on top, but it’s getting a little too comfortable in the pole position. Meanwhile, UA is hungry and becoming quite nimble.
With every airline adding premium seating it’s feeling like there may be an over-index beginning to develop. By the time every US airline is done adding premium seats the number of those seats is going to jump by somewhere around 70% on narrowbodies. That’s a lot of supply.
Having personally flown Spirit First four times this year I see no reason to ever pay $1 more than Spirit is charging to any airline when I’m looking to pay for a first class seat. Seat’s comfy. I’m fed and boozed up. Flights leave on-time. They hub here in FLL so my nonstop route network increases 10-fold.
I’ve been a DM since the level launched and am starting to shift some of my spend from DL and to UA, and…I can’t believe I’m saying this without laughing…Spirit