The Simple Reason for an About Face: Why Delta and Korean Are About to Form a Joint Venture

In 2013 Delta eliminated SkyMiles elite qualifying miles earning when traveling on their SkyTeam partner Korean Air.

Scuttlebutt at the time was that this was Delta playing hardball with Korean — the Seoul-based carrier wouldn’t do a joint venture with Delta, at least on Delta’s terms, so they weren’t going to incentivize their customers to fly Korean Air.

Four years later, Delta and Korean are in talks to create a joint venture.

Korean Air Lines Co. is in talks with Delta Air Lines Inc. for a joint venture in a move that would give the second-largest U.S. carrier a bigger foothold in Asia where rising incomes are fueling a boom in air travel.

Details of the partnership would be disclosed later, the Asian airline’s President Walter Cho told reporters at a briefing in Seoul’s Incheon Airport Monday, declining to elaborate.


Seoul Incheon

This comes after having announced expanded codesharing between the two airlines in September.

So what’s different now? Quite simply, relative bargaining positions have changed. Delta now needs Korean more than they did before and that presumably shifts their bargaining position.

Delta operated a hub at Tokyo Narita. They acquired it as part of the Northwest Airlines merger. Beyond rights in Tokyo were a legacy of the spoils of World War II.

However with additional long haul flights being permitted at Tokyo Haneda airport, which is closer to Tokyo city center, a number of passengers originating and ending their journeys in Tokyo get peeled away from those Narita flights. And without the lucrative Tokyo business, Delta doesn’t believe connecting passengers are profitable enough to serve the hub and move people between the US and Southeast Asia. (In fact, Delta tried to stop the opening up of Haneda, insisting US government policy should be no one gets Haneda slots to the US unless Delta got to move its full hub there.)

Delta’s deal with China Eastern gives them connectivity into China. Instead of managing their own hub at Tokyo Narita, with a joint venture they can profitably move passengers through Korean’s Seoul Incheon hub to Southeast Asian destinations that are either too far for Delta to fly directly from the US or where there aren’t enough passengers for them to do so directly.

Four years ago Delta stood on its own with a hub operation in Asia. Now that they no longer believe their Tokyo Narita hub is viable, they need a replacement. They move passengers to Chinese destinations with China Eastern, and look to Korean for lift to Southeast Asia.

Update May 8, 2017: Two months after I wrote this post Cranky Flier interviewed Delta CEO Ed Bastian who confirms my explanation.

What I attribute it to is our business model in Japan has changed a lot. And so we need [Korean Air] and, by the way, they’re concerned, rightfully so with the growth of the Chinese carriers and their direct service into the US.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Their stupid MU @ PVG strategy completely backfired, and is now crawling back to KE begging for a JV, but this time would be on KE’s terms. (now watch all the DL apologists insist how it was KE playing hardball before even though it was DL who downgraded KE to Group 4 trash within their Skymiles)

    Funny watching the list of DL attempts across the Pacific :
    – SEA hub TPAC expansion is completely stalled (the “lack of gate” is just a convenient excuse)
    – MU @ PVG going nowhere, since there’s zero hope for JV on the horizon
    – Failed to win over JAL during their bankruptcy
    – Failed to win over Skymark during their bankruptcy
    – Failed to halt opening up of HND daytime
    – LAX hub will continue playing second fiddle to AA, including getting their LAX-PEK authority stolen

  2. @John
    Just like a good little marxist, breaking out the G word. Companies look out for their own best interests just like you look out for your own best interests. You don’t go out of your way to pay extra to airlines to help them out, or pay extra taxes to help out the government, do you? It can’t, and shouldn’t, be any other way. Sometimes strategies work out, sometimes they don’t. You can call it greed if it makes you feel morally superior. I just call it business.

  3. @Gary : infrastructure is just one component. VX has already shown at SFO that a brand new modern facility can only get you so far. The reality at LAX is that everyone wants a big share of that O&D pie, so practically every expansion one attempts at LAX will be met with some form of direct head-on competition.

    AA, being the market share leader, is barely over the 20% mark … and they’re still pushing at LAX. In addition, the closing of the AS+VX merger means that the new Alaska is finally a formidable force at LAX instead of a footnote.

    In terms of foreign competitors, it’s a 2-fold scenario. There are ones like OZ QF NZ who treat LAX as the crown jewel on their network, and would defend it at all costs. Then there are ones like HU and various mainland Chinese carriers who are launching unrealistic subsidized routes left and right for the sake of route authority squatting.

  4. @WR : it’s totally acceptable for businesses to look for their own best interests, but it’s completely hypocritical when they cry foul over their competitors watching out for their own best interests instead.

    Since DL wants “America First”, don’t whine and bxxch when Emirates pull a “UAE First”. Protectionism begets protectionism.

  5. You forgot to mention one of the key reasons for Korean Air’s about-face: they are not doing well financially. They have been reporting losses of late, and with a debt-to-equity ratio of almost 1000% (KE is the most heavily indebted of Asia’s full service carriers) , a recent credit rating downgrade, increasing competition from the Chinese carriers, they have been trying to raise additional working capital through a rights issue (which recently turned out to be undersubscribed). Korean needs this as much as or even more than Delta. That’s why the quote about working on a JV is coming from the Korean Air side (see your quote from Walter Cho above) as one way of reassuring investors and others that some form of relief is coming.

  6. I am all for the JV
    Just allow me to use skymiles for KE F class and I will be happy forever
    I have a stash of pesos that cannot be used at all.
    When KE has seats in biz class, hopefully we can see them
    or (quite feasbile nightmare option)
    we night see the AA.BA scenario, where AA now has only economy award seats and BA has premium awards (with fees)
    on the DL side that may mean economy on KE is wide open and Premium with 1M pesos for a flight open on DL for KE seats

  7. I much prefer to see delta form a JV with Korean Air versus China Eastern regardless of the underlying business reasons which I think none of the commenters has a good handle on. My experiences with China Eastern ground staff and connections in Shanghai and Chengdu has been almost universally bad while my experiences with Korean Air staff at Incheon has been universally good.

    If the JV happens, I’m hopeful for three outcomes. First, movement of DL flights at Incheon from Concourse A to the Main Terminal where Korean Air flights arrive and depart from. Second, Korean Air is one of the few airlines operating 747-8s. It would be great to get a ride on one especially since DL is discontinuing its own 747 fleet in December. Third and most importantly, it may become possible to use DL Global Upgrades on Korean Air the way they are available for use on AF/KLM in that JV. With DL discontinuing service to a number of important Asian destinations (Bangkok and Taipei already having been axed), Global Upgrades TPAC have become less valuable.

    As far as using Stymiles for Korean Air first class travel, that ain’t gonna happen. Just like it hasn’t happened with AF or any other airline.

  8. @Gary DL does not have better growth infrastructure opportunities at LAX than AA does.

    At LAX, AA is well-positioned because it has assets which LAWA covets: the T4 Master Lease, the High Bay Hangar (on the site of the future MSC South), and even the Eagle Terminal (on the site of the future Terminal 9).

    When LAWA finally gets around to acquiring these assets, AA should get more terminal space in return.

  9. @WR agree, in principle, as i’m a true libertarian. however….

    when an airline is subsidized and bailed out by taxpayers, files bankruptcy and then has the nerve to pull the anti-competition crap delta (and the other big 3 US carriers) does, they no longer get the same rights as a REAL business does imo.

    delta runs to uncle sam when times are tough, and bends over their customers when times are good. the arrogance with which they run their FF program has harmed FFers well beyond their program in the race to teh bottom.

    they are the business equivalent of Zimbabwe- printing/issuing a currency with the plan knowing it will quickly devalue. the // ends in that Zimbabwe wasn’t backstopped by the US taxpayer, like delta. just as Hitler paved the way for other dictators, Delta paved the way for the likes of DUI Dougie Parker. ergo, Delta are nazis.

    yes, that’s right, it’s 2017, thus all stories must end with the villain being called a nazi!

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