Delta CFO Paul Jacobson spoke at the Baird 2019 Industrial Conference this morning, throwing shade at American’s CEO Doug Parker and talking up how his airline has transformed the way it sells elements of the flight experience that used to be available for no charge for passengers often on a first-come, first-served basis.
Throwing Shade at Doug Parker
American’s Doug Parker consistently tells investors their debt is high, because they’ve already purchased planes, and everyone else is going to have to do that to catch up.
Jacobson pointed out that Delta has the best reliability and lowest maintenance costs with its older fleet, it’s putting its MD88 fleet to bed next year, MD90s by 2022, they’re buying new planes without taking on American’s levels of debt. He later said, “we invest within our means.”
Monetizing What Used To Be a Commodity Product
Jacobson talked about how “historically airline seats were commodity.” People purchased on schedule and price because the experience was seen to be the same.
- If you bought early you’d pick your preferred seat, probably an aisle seat close to the front
- If you bought an expensive last minute ticket you probably wound up in a middle seat in the back because that’s what was left.
Now Delta sells seats, they sell upgrades, they sell priority airport services – and they do it both when a customer books and after a customer books.
I’d point out that frequent flyer programs were originally the way that airlines differentiated their commodity product. Delta now differentiates product by selling everything piecemeal or incrementally. That makes the loyalty program less relevant.
An airline can’t simultaneously monetize everything and have the loyalty program be a differentiator. Delta thinks that they have a currency you can use to spend for those monetized products, but the currency is worth less than other currencies. Ultimately the mystery is why Delta generates so much revenue from American Express, when customers would be better off spending on a cash back card. What does that say about consumers?
Why Airlines Make So Much From Credit Card Deals While Delivering Less Value Than Before
Jacobson offers, “historically airlines would chase credit cards because we wanted the loyalty to card providers to translate to our brands” [get American Express cardholders to fly Delta] and “the number one currency consumers want is airline miles, so American Express wants Delta customers as much as Delta wants American Express customers.”
This is really because of:
- Consolidation in the airline industry, there are fewer airlines for big banks to partner with. That’s help shift negotiating leverage – the bulk of benefit from co-brand deals used to be captured by the banks, now it’s captured by the airlines.
- Aggressive competition by banks to capture co-brand busienesses, the margins for airlines began to shoot up with Citi taking the Costco business from American Express causing Amex to agree to a rush deal to shore up their second biggest co-brand (Delta) which set off a chain reaction of more expensive deals.
Even with the margin shift to airlines, it remains perplexing why so much spend is on Delta cards – it points to an irrational consumer when they can get the benefits of the cards, if they need them, without spend – and earn more points and more valuable points using other products.
Indeed, even the consumer who oddly prefers collecting Delta miles would earn more of those through American Express’ other products whose points transfer to Delta (thanks to more generous category bonuses) while maintaining the flexibility to transfer to other airline programs as well.