Paul Jacobson, Delta’s Executive Vice President & Chief Financial Officer presented at yesterday’s Deutsche Bank 2018 Global Industrials and Materials Summit.
He laid the airline’s improvement in Net Promoter Score (willingness of its customers to recommend) with growth in its revenue premium — how much extra customers are willing to pay to fly Delta over its competitors.
Why Customers Like Delta
Delta runs a better airline operation than its peers. The key here is Delta TechOps, which keeps Delta’s older fleet running more reliably than newer planes at other airlines and has also become a significant profit center for the business.
Their flights are more likely to run on time. They rarely cancel flights. So they don’t need to spend as much marketing or enticing customers to fly their planes (SkyMiles). And their super operational performance has even encouraged customers to stick to the Delta brand for their credit card and mileage earning despite offering a less valuable currency.
Competitors Fail to Understand the Delta Lesson
Delta’s customers are happy, and as a result those customers are willing to spend more to stay with Delta. That’s a simple important lesson. And it’s the opposite one that Delta’s competitors seem to have learned as they copy Delta for all the wrong things.
Since Delta makes more money and provides greater return to shareholders, Delta executives must be smarter. So copying Delta executives must make sense. If Delta devalues SkyMiles, the way to make money must be devaluing a mileage program. But that confuses Delta’s ability to spend less with cutbacks as the reason for their success.
If Delta offered the first Basic Economy product reducing benefits available to customers, and Delta is profitable, then going further than Delta must make an airline even more profitable. And so United and American purposely made their basic product worse for customers, thinking that would lead to profit. (United initially lost $100 million on the effort.)
United Says Just Flying More Earns More Money
Last week United Airlines President Scott Kirby said that they offer a me-too product (“keeping up with the Joneses”), with the most important thing being schedule. Instead of saying they were focused on delivering customers what they want, he frequently explains that by growing their schedule they’ll earn more money because they receive their ‘natural share’ of passenger bookings — almost automatically and as if by right.
American Wants to Make More Money By Giving Customers Less
American is squeezing more seats onto their planes, increasing ‘density’ from 150 seats on a Boeing 737 five years ago to 172 seats on the same plane going forward. This increase in capacity in the domestic market comes right as fuel prices have been rising, and as additional Federal Reserve rate hikes are predicted this year potentially putting some brakes on the economy. That’s the wrong product for the wrong market at the wrong time.
Their new cabin with less legroom (even in first class), less recline, no seat back video and smaller lavatories.
As of a couple of weeks ago American’s CEO Parker still hadn’t flown the Project Oasis interior even though it’s the new standard American Airlines domestic product. Which shows, I think, that the product itself isn’t viewed as super important to the business. Yet they believe they, too, should be earning a revenue premium for their product.
You Can’t Cut Customers Out of the Reliability Equation
Delta’s unique selling proposition is its reliability (though they haven’t eliminated seat back video either). American’s strategy for reliability was ‘D0‘ — a focus on exactly on-time departures über alles — and now that Scott Kirby has moved from being American’s President to United’s that’s a strong focus for United as well.
But that’s a focus on having the operation go out without delays, not a focus on customers. Planes board early, they write up flight attendants who delay departure when international first class has no plates, and if last minute upgrades don’t get processed so be it. And it doesn’t actually get them on time departures.
Sometimes it seems like American and United, by focusing just on departures and not customers, would prefer if they could ‘cut out the middle man’ of passengers entirely.
Delta’s focus on the other hand is making sure aircraft themselves aren’t the cause of delays and cancellations. Delta’s mechanics aren’t unionized but are seen as well paid. At American there’s much bitterness with mechanics over failure to deliver a contract.
Delta Airlines TechOps and their customer service people do a great job in getting their aircraft to the destination on schedule. It is an extremely reliable airline to fly.
With few exceptions, airline managers are certainly increasing density: their own.
Delta does run a great operation but I wonder if there is more to it than that. UA has made great strides in operational performance and is generally within a few points of DL in spite of significant exposure to SFO and EWR, the most delay-prone airports in the country.
Is the revenue premium on DL a result of people paying more out of choice or DL’s ability to charge more at most of its hubs due to less exposure to LCCs, relative to UA and AA?
Could be both but more fortress hubs would also help the balance sheet. I think AA has two (PHL and CLT) but UA doesn’t have any (if you consider SFO and EWR part of a larger metro area with other airports).
This is a succinct description of how Delta has learned the meaning of “market positioning” to embrace and support its brand. (For further info, just refer to any number of books by the best authors on the topic: Ries and Trout.)
United”s approach to its failure in the market is to borrow one page from the failure of old People’s Express by simply expanding routes with the concept that it will increase revenues.
Than there is American which also seeks to take a page from the failure of People’s Express to emulate its failed marketing philosophy by turning its planes into a physically unacceptable insufferable tube in order to squeeze out a few more seats-in coach; ironically now, even at the expense of in first.
The only way to end this money-losing insanity is to create competition by embracing cabotage and fifth freedom flying rights to encourage the better operated Asian and European carriers to serve our devastated and poorly managed domestic market.
In essence, this is no different than dealing with the state-owned enterprise, Amtrak. The only way we can successfully fight and neutralize these in-American impositions of monopoly is to encourage and create meaningful competition.
To understand the lemming actions of the US3-and Amtrak, we cannot continue to accept the imposition of anti-market forces.
Those bar charts are comical.
Setting aside whether NPS is actually something worth measuring, if Delta is really calculating NPS it should show a range from -100 to 100, not a percentage. And what’s with two bar charts that have no axis labels for the vertical axis? Just showing two charts side by side with similar bars in them doesn’t in any way mean one causes the other. Good grief Delta.
If a Delta flight attendant delays a flight (for any reason) and it’s coded as a flight attendant delay, they automatically get a call from their Manager (or an inflight Manager on duty)before the plane lands at it’s destination requesting a report on why he/she delayed the flight. This has been the policy for many years. In addition, there is a policy that they always attempt a beverage service in F on the ground regardless of the issue (ie late arriving equipment) for on time departure. This is a non-union group and they work for an “fire at will” employer based in Georgia!
I loved Peoples Express. I remember not being able to afford to fly. Peoples Express was offering tickets I could afford. Expanded too fast. Then collapsed. Dilly Dilly.
United’s expertise is having a screwed up culture that thinks they can make tons of money by eliminating things like ketchup and pillows. (And they repeat that same exercise every few years.)
That’s the message they send their customers on a daily basis.
And all of a sudden they realized they screwed up royally when they pulled out of JFK?
Sure, adding more flights will fix all that.
-David
Right on: Delta gives customers more in the hope that they’ll pay a premium for the product.
On the positive side, Delta offered Biscoff cookies and United countered with Stroopwafels.
The onboard product is a part of the picture here though. What Delta has done with its cabins on ancient aircraft is frankly incredible — though also in part thanks to TechOps.
DL has also densitied, btw, though with video screens, big overhead bins and other treats it doesn’t hurt as much.
I belive a lot comes down to culture and empowerment. I remember once a friend accidentally booked the wrong day on a ticket (via our company OTA), Delta changed it no charge.(he is Plat) Meanwhile at American (I am Plat pro) one day I had a ticket agent look at my insane itinerary and asked if I had the time he would try to clean it up. 20 mins later, he apologized said there was nothing he could do, it would cost my $450.. It would even cost me if I wanted to just drop one flight entirely (rent my car at DFW instead of Waco), or they would cancel my return.
I thought how awful it must be to work for a company that even when you want to help someone, go out of your way to do something nice – something the guest didn’t ask for or expect, you can’t bc your company literally forbids you even though financially it would have cost them nothing and given them the opportunity to sell potentially 2-3 more seats that day that were already sold. It actually made me think of the Soviet Union, indifference was institutionalized and maintained better than anything else.
On average, Delta gets more per seat (unit revenue).
But on average, American gets more per ticket sold (yield).
See the last earnings report for both. Delta’s yield was $17.79 per passenger mile. American’s yield was $17.90.
Actual customers pay more to fly American. According to your reasoning, that must mean actual customers like American more. What lessons could you and Delta draw from that?
@brteacher Biscoff cookies are amazing. I remember being on an almost empty Delta flight and being given so many extra Biscoff cookies. It was awesome!
Feels like a bit of chicken-and-egg here. Delta has built their domestic hub network to be reasonably free from competition, much more so than United and American can do with theirs. Less competition nearly always means higher prices. So is the extra service and better airport hub experience a result of being able to keep higher prices on non-competitive routes, or are the higher prices Delta can charge a result of the extra service and better hub experience?
I recently switched most of my flights to Delta. I fly 3-4 times per month. Why did I do this? More direct flight options from DAL for the places I’m going. AA is usually cheaper than DAL, but seldom offers direct flights. If AA offered more direct flights, I would choose them over DAL.
Delta blows chunks. I think they just get lucky, maybe its the ATL hub. Their planes are super dense. They have the worst elite program, the worst at upgrades, the worst (by far) at customer service, even when I call the Diamond line. The worst alliance, the worst onboard catering, the smelliest planes (did you realize their entire planes smell like whatever they put in the lavatory) recently the dirtiest planes. Ill give United the win on cleanliness. Delta has the least amount of Comfort + seats and the most confusing way to get customers into them. The worst Buy on board in coach ( every time I’ve had inedible sandwiches that were served freezing cold and soggy) The worst value per mile earned. The worst CEO (Have you seen his smug face on the safety video?) Have you seen him talk about the ME3 and how he claims victory? PROPAGANDA. Delta is not a better airline, they are better at marketing. Its the crappiest of the US3 in every single category except video screens which I do not care so much about
2KU- Awesome..hell no! NEVER works and it costs $40 per flight if you want to use the higher speeds
Operational performance? – NOPE! Delayed 7/8 flights in Q1. They will also skip upgrades WAY more than the other guys in order to get a flight out on-time , and the flight will still end up late.
Do eyourself a favor and do not fly Delta.
Left a few out!
WORST Business class– I have not had one good flight in Delta One. Seats are bad, old, uncomfortable.
WORST Business class catering — have you eaten a meal on Delta ONE to Asia? If so and you like the food.. more power to you!
RUBBER CHICKEN- I am actually not that picky believe it or not. I hear people rave about Skyclub catering. This is proof frequent flyers will eat whatever horse shit is put on a plate since its free. If you eat and like the rubber chicken served in the Skyclubs ( and sometimes on the planes) then I can see why you like Delta.
Skyclubs are awesome right? Atlanta B – TRASHED last 3 visits with LONG ques to get it.
Atlanta F – TRASHED last Sunday
Salt Lake City – Overcrowded like every other airline club
Nothing special about the DL experience folks. Its all in your head
Sounds like Ryan is a tad upset. Must have tried to scam Delta and got caught.
lol Jr… huh? Not at all.
for the 2nd time in 4 flights… they left me #1 on the upgrade list with 4 empty F class seats (or more) . Either way I am not loyal to 1 airline. Im just saying, DL in my opinion (and i guess mine only) does not really do much right. Its all marketing. Net Promoter score when is that high, with Medallion members pretty constantly pissed off and DL leading the nickel and diming in the industry does not make sense. Who comes up with these studies?
They should but they won’t.
Generally speaking, whatever airline we fly the most we hate the most. You can’t avoid issues if you fly with any kind of frequency.
The overwhelming feedback does seem to be that Delta has less issues and does more to fix them with they do arise, though.
I’d move over to Delta, but for their SkyMiles program and truly third-tier airline alliance in the Pacific. AAdvantage miles may not be as good as they used to be, but they’re still solid gold compared to Delta’s Sky Pesos. And while American and United have a truly respectable network of allied carriers, Delta only has AirFrance/KLM and Korean.
Having the fortress hub at ATL and mini-fortresses at DTW/MSP/SLC are the the primary reason for Delta’s financial boost over their competition. AA has DFW (but with DAL you can argue that it is not a true fortress) and CLT. MIA is not a real domestic fortress due to FLL. UA only has DEN and maybe IAH. As a resident of ATL I am an AA guy. As an ExP I have gotten upgraded 26/27 times in the last 18 months out of ATL. But I guess I am just more willing to hop through CLT/MIA/DFW to get where I am going.
SLC has a very heavy WN presence yet DL is still the king.
One must wonder about WN’s ability to act like a LCC yet price tickets like the US3…I’d say it’s no different than what DL is doing. It’s all customer service. Sure, on time matters, but if customer service is good then people are willing to put up with delays. Just one example from my flying habits…a flight on UAI asked for the can of soda and a cup of ice and was told sorry, can’t do that. On AA the FA didn’t even say no but just handed me a cup of soda and not the can. DL said sure and handed me what I’d asked for. Another DL flight FA told me they were limited on that soda and if they had more at the end of the service they’d bring me some…and then they returned with a can for me along with extra cookies. Or WN one flight FA stopped at our row and asked my 9 year old if she’d like to walk the aisle with the treat basket…holy cow, business for life right there!
It’s not rocket science yet somehow other airlines mess it up. AA might pay similarly to DL but somehow AA has disgruntled and impolite FAs while DL doesn’t. Customer service is king, good things happen when customers are happy enough to return and to even pay a premium to be treated well. In the end this is what customers want…I worry less about what I’m getting from Skymiles (especially compared to others or to past iterations of the program)
What part of retrofitting all of its aircraft to have built-in screens are American or United copying from Delta? Isn’t American actively doing the OPPOSITE of what Delta is doing? Your article’s premise is quite wrong.
The presence of onboard bult-in entertainment has a direct link to higher net promoter scores. Delta knows this and soon 100% of the fleet will have screens. Incidentally, Singapore is doing the same as it is incorporating screen-less SilkAir aircraft into its main brand. They also know.
@jake – i think you are misunderstanding my post.
I think some of the airlines are in for a rude awakening in the next year or so in a climate of rising interest rates & a cooling economy. They think they’re brilliant now — but most people make money in a hot, rising market.
Great article. Best one I have seen from Gary! Well done.
Too much analysis. It really boils down to Biscoff.