DL expands SEA further with SEA-SFO flights

[WorldTraveler]

Huh? Unsustainable NRT hub? Only in your dreams, young man.

You do realize that DL said that NRT was their highest margin hub in the most recent quarter. You did notice that DL's Pacific operation, the most heavily Japan-centric Pacific operation among US carriers was the ONLY one that was profitable in the winter quarter of 2013 as well as in the 2nd quarter as well. Meanwhile, you do realize that AA's Pacific operations had a negative 26% profit margin in the 1st quarter and down to about -14% or so in the 2nd quarter. Talk about strategic challenges.

DL's NRT hub is very viable, thank you very much. DL's growth in SEA to non-Japan Asia is to go after the regions that DL has been traditionally weak in and the timing couldn't be better since DL now has a 10% mainline CASM advantage against UA.

AS and DL do have minimum performance requirements in the contract - so DL does get the feed it needs or AS pays hefty bucks. And with the additional feed that DL is adding, it makes it harder for AS to meet those thresholds.

Try again... your perceived weaknesses of DL aren't even close to being rooted in reality.


BTW, what does goodwill have to with any of this?

 

[eolesen]

 

[WorldTraveler]

well if the A380 hasn't shown up.

and tell me again what THAT has to do with the topic.

Talk about hypocrisy.

 

[WorldTraveler]

http://airchive.com/blog/2013/09/24/analysis-dot-approves-delta-virgin-atlantic-north-atlantic-joint-venture/

"...Delta isnt terribly well represented in the popular NYC-London Heathrow market. Delta didnt even serve London Heathrow until March 2008 the Open Skies agreement was enacted, which allowed other airlines beyond American and United into the strained airport. They only fly three roundtrips between the two cities with their airplanes, representing about 10% of the market. You might think that they couldve simply added more flights to increase their presence, but thats not how it works at London Heathrow (LHR). Heathrow is slot constrained, which means that airlines have to purchase/swap/trade/barter/kill for landing and takeoff times. Since no one usually willfully gives up slots at one of the most lucrative routes on the planet, Delta was left with a problem: demand for London without the ability to create more supply...

...So lets recap: Delta has demand for NYC-London, but basically has zero leverage to increase supply. Delta also has the weakest Heathrow operation of the three major US carriers. Virgin has supply, but has been having trouble creating demand. A joint venture, simplified, allows any two carriers to merge operations under a limited and well defined scope. The table below shows carrier-wise market share in the USA London market."


Carrier --------------- Frequency Share ----------- Market Share
American--------------------18.2%-----------------------15.60%
British Airways--------------40.8% ----------------------45.20%
Delta --------------------------9.2%------------------------- 8.20%
United ------------------------17.2% ------------------------13.10%
Virgin Atlantic ---------------12.5% -----------------------15.00%
Other --------------------------2.1%-------------------------- 2.90%

I had to go back to this one again....

you do realize the complete irony of the airchive article you cite?

I'll give you 3 seconds...

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Now,
you do realize that they talked about:

"So let’s recap: Delta has demand for NYC-London, but basically has zero leverage to increase supply. Delta also has the weakest Heathrow operation of the three major US carriers. Virgin has supply, but has been having trouble creating demand. A joint venture, simplified, allows any two carriers to merge operations under a limited and well defined scope."

while the picture is of a Delta 747-400!

Apparently it didn't dawn on them that DL could SUBSTANTIALLY increase its capacity by using larger aircraft including the 333 and 744 since right now DL uses only the 763 and 764 on JFK-LHR?

Oh the sweet irony.

and for anyone who hasn't drawn the connection to SEA, DL could EASILY upgrade many of the flights it has recently added.... one LAX-SEA RT last year was on the 757. Most of the new flights that have been added are on CR9s or E175s... certainly in the summer, DL could easily convert many of those flights to mainline.

I'm thinking DL might decide to start rotating its int'l widebodies between LAX and SEA on domestic flights. Widebody twins work very well on domestic flights and man can they carry the passengers.... about twice as many as AS' 738s on the 333s.

besides you want to get those int'l flights off the gates as quickly as possible so more flights can be fit into the schedule.

 

[FrugalFlyerv2.0]

AS and DL do have minimum performance , in the contract - so DL does get the feed it needs or AS pays hefty bucks. And with the additional feed that DL is adding, it makes it harder for AS to meet those thresholds.

WT:  I think you should expand on this statement a little bit.  It sounds contradictory in a way.  Are you sure you meant to state this? 
What I mean is that:
i)  DL + AS have a contract, but you make it sound as if only AS has to meet certain minimum performance requirements.  Would not AS have guarentees in the contract to prevent DL from this kind of behavior - predatory behavior of setting up shop in a partner's hub.  I realize that AS is not a partner is the AFKL ATI/JV manner - but surely there must be some safeguards for AS in the contract?
ii)  I'm not entirely convinced that DL attempting to build a mini-hub or focus city at SEA to feed its Asia flights is the smartest move.  Afterall, doesn't AS have lower costs so it would be cheaper for AS to increase capacity from various markets to SEA for the DL flights? 
It seems to me that AS and DL agreed to share a slice of pie, but now DL is bringing in an additional fork, so to speak.  Or what am I missing here/

 

[FrugalFlyerv2.0]

IOW, you don't have the information to say that I am wrong so you will just resort to personal attacks

I guess my post #253 was not the most polite response, so I apologize.
However, you make it very easy to be ridiculed.  IMHO, you are way too sensitive to hear any criticism of DL, positive or negative.  You overreact to everything spin way too much to paint DL in the best picture.  Thats not necessary because I think many people here realize DL is a very good airline - definitely not perfect, it does have flaws, and for you to deny it and just attack / denigrate other airlines tarnishes your credibility, which is too bad because you do have positive comments / opinions to contribute. 

 

[FrugalFlyerv2.0]

You do realize that DL said that NRT was their highest margin hub in the most recent quarter. You did notice that DL's Pacific operation, the most heavily Japan-centric Pacific operation among US carriers was the ONLY one that was profitable in the winter quarter of 2013 as well as in the 2nd quarter as well. Meanwhile, you do realize that AA's Pacific operations had a negative 26% profit margin in the 1st quarter and down to about -14% or so in the 2nd quarter. Talk about strategic challenges.

DL's NRT hub is very viable, thank you very much. DL's growth in SEA to non-Japan Asia is to go after the regions that DL has been traditionally weak in and the timing couldn't be better since DL now has a 10% mainline CASM advantage against UA.

Could it be that DL is somewhat copying the UA strategy of serving the Pacific/Asia region:  overfly the NRT hub and serve more destinations directly from USA?  Siince LAX and SFO are 'taken' could this buildup at SEA eventually duplicate what UAL has at SFO?  If yes, then perhaps the NRT hub is not working so well for DL as it did for NW?

 

[Kev3188]

You do realize that DL said that NRT was their highest margin hub in the most recent quarter.

How many quarters in a row has NRT held that title?

 

[WorldTraveler]

first, it is VERY kind of you to apologize.

We could diffuse a lot of tension on this board if that type of response was more common.

You have gained a great deal of respect and I will do my best to respond with your kindness in mind.

Thank you.

People don't realize that the beyond NRT flying is precisely what gives DL the size it has over the Pacific to NRT. If DL pulled down its NRT hub, it would lose its size which is a big reason why NW before and DL now enjoys such a huge average fare advantage to NRT over its peers, including both AA and UA.

Thus, NW always treated the beyond NRT operation as "just keep it breakeven." DL appears to be more willing to say it has to be profitable which will probably mean using lower CASM aircraft like the 330s and shift the 747s to other parts of the network.

DL's focus on Haneda is because the more HND flights DL operates, the fewer competitors can operate. DL has apparently been successful at convincing the US government from agreeing to any improvements to HND flights between the US and Japan. DL would rather be stuck with 2 less than ideal HND flights than to allow JAL or ANA (by themselves or with AA or UA) to be able to fly better-timed flights to HND where ANA and JAL have much larger hubs.

DL has said NRT generates 10% of DL's revenue - or about $4 billion/year, probably the largest foreign city for any US airline.

DL will fight hard to protect that revenue and to not walk away from it. By cutting off the beyond-NRT flights, DL would automatically be cutting off a huge amount of its TPAC traffic to Japan.

WT:  I think you should expand on this statement a little bit.  It sounds contradictory in a way.  Are you sure you meant to state this? 
What I mean is that:
i)  DL + AS have a contract, but you make it sound as if only AS has to meet certain minimum performance requirements.  Would not AS have guarentees in the contract to prevent DL from this kind of behavior - predatory behavior of setting up shop in a partner's hub.  I realize that AS is not a partner is the AFKL ATI/JV manner - but surely there must be some safeguards for AS in the contract?
ii)  I'm not entirely convinced that DL attempting to build a mini-hub or focus city at SEA to feed its Asia flights is the smartest move.  Afterall, doesn't AS have lower costs so it would be cheaper for AS to increase capacity from various markets to SEA for the DL flights? 
It seems to me that AS and DL agreed to share a slice of pie, but now DL is bringing in an additional fork, so to speak.  Or what am I missing here/

Two US carriers can't agree not to add service to each other's domestic markets; they can't coordinate any schedules or fares.

The AS-DL contract according to what both have said on earnings conference calls contains minimum performance requirements in a long-term contract. IOW, AS and DL both have to deliver a certain number of connecting passengers to each other. Both have customer service, frequent flyer, and operational standards.

The contract is long-term and supposedly has substantial penalties.

Thus, if DL adds flights of its own to/from SEA to ensure DL's own feed to/from int'l flights, then AS will have to still provide the same number of seats... either meaning they will have to feed some of DL's own domestic flights from SEA or DL can add even more int'l flights and AS will have to feed them using the cities that DL does not serve from SEA.


AS' gets its feed for AS flights into DL's hubs... but apparently DL has already told AS that DL will not codeshare on AS flights that duplicate DL flights... IOW DL is not going to allow AS to add flights to DL hubs that duplicate DL flights.
DL wants to provide AS with feed into markets that DL does not serve... such as to the PNW to Alaska, Hawaii, and Mexico.

DL can very much build its own domestic mini-hub in SEA and force AS by the contract to either provide DL with feed or pay the penalties or breakup fees.

DL apparently has no problem providing AS with enough feed to meet DL's requirement but is trying to force AS to feed DL onto at SEA, a task that gets harder for AS to do if DL is also operating in some of those same routes that DL relied solely on AS.

 

How many quarters in a row has NRT held that title?

I haven't heard DL make too many comments about specific hub profitability but for the latest quarter they said that NRT was the highest margin hub and that ATL's profit margin improved by 3 points because of WN's pullback.

The NRT comment seemed to be to quell ideas that DL's pulldown of SFO-NRT meant the NRT hub as a whole is in trouble... and I don't think it is. DL needs to regauage it but NRT is still a viable hub.

 

[Force Majeure]

first, it is VERY kind of you to apologize

Good advice (for other people of course) when being proved wrong, over and over again.

...I haven't heard DL make too many comments about specific hub profitability

You can not tell that from your posting of dominance in that category.

 

[WorldTraveler]

You can not tell that from your posting of dominance in that category.

DL’s overall profitability means they have to be profitable in their hubs whether they say so or not.
How much information to you have about other airlines’ profit margins in their hubs? Parker has commented that DCA is one of their highest margin hubs and AS’ overall profitability implies SEA is quite profitable for them since it is their largest hub but there isn’t a whole lot of information out there on the subject.

Good advice (for other people of course) when being proved wrong, over and over again.

Being willing to admit someone else is right is not something that goes one way. I have admitted I have said something wrong when I have and will continue to do so.
I haven’t seen anyone yet tell me what major strategic things that I have incorrectly predicted. I have incorrectly transcribed some data here or there which people have caught – as they should – but more of the discussions about data are which data should be used for what point. The whole discussion about which CASM number to use is an example. People like FWAAA have opinions and have correctly cited the data he uses to make his argument but that doesn’t mean that the data he uses is the correct one to tell the story. Same type of thing regarding the recent DAL/DFW share discussion.
The real test with any argument and any use of data is whether someone correctly used the data to predict what would happen regarding the strategic objective they tried to make; history does indeed answer some of those questions and tomorrow’s history will validate whether today’s assessment of the world (the airline industry in this case) was correct.


Regarding the discussions of strategic weaknesses and strengths which seem to be hot button topics, let me summarize the strategic weaknesses which DL has since Commavia raised the question – which is absolutely valid.
1. DL does have to build its Asian network outside of Japan. The yen devaluation showed that having the majority of one’s eggs in any strategy leads to being vulnerable. Because DL is building SEA - Asia which incidentally isn’t much different from what DL successfully did from DTW but with a whole lot less fanfare – doesn’t mean DL’s Japan operation is losing money. It just means DL needs to diversify. Unlike DTW, DL’s need to build its west coast – Asia network requires bumping up against other carriers who are stronger in west coast domestic markets.
As has been confirmed by top dawg, DL’s SEA – China expansion has been successful and Skyteam does provide DL with stronger alliance possibilities within China, whether that is being fully developed now or not. The new 333s will be able to fly very cost-effectively deep into Asia from SEA and probably from LAX as well. As top dawg also notes, DL undoubtedly has sites on JFK and LAX-Asia outside of Japan which could make it much harder on AA and UA but for now DL is focusing on SEA. HKG is a necessary market which CX and UA have both defended but UA is probably now most exposed by DL’s growth not just in HKG but to China because DL has a 10% mainline CASM advantage which is huge when operating long int’l flights.
2. DL has to develop its west coast domestic network because it takes domestic feed to make any int’l flight work. DL’s west coast network is very likely profitable but it is much less focused to the east where DL is strong. DL knows it needs to increase its presence up and down the west coast as well as from the mountain and west coast states which will not naturally connect over DTW to DL’s existing Asian network. Further, there is valuable business travel with the west coast. DL does have facility limitations at LAX and SEA, but that also makes it much easier for DL’s growth efforts to become profitable because other airlines face the same limitations. DL’s ability to focus on the west coast is now much greater given its success in building NYC. In fact, many of DL’s LGA and JFK markets are ripe for upgrades to mainline aircraft, freeing up large RJs for the west coast. Some markets like LAX-SFO are probably also good candidates for the 717.
3. LHR. DL is using its own limited LHR slots to serve LHR from BOS, JFK, and its interior hubs. It is obviously at a disadvantage to LHR overall and AA/BA are still larger and combined command revenue premiums in BOS and JFK to LHR. However, DL + VS combined have enough capacity to vie for a good portion of AA/BA’s local LHR traffic because AA/BA use LHR as a connecting hub to the rest of the world while both DL and VS are largely point to point operators at LHR. DL also has the strongest relationship between DL and VS compared to any other large US airline partner because of having a Joint Venture and a 49% ownership stake. It is certain that DL will be taking a very hands-on approach to maximizing not only VS’ overall franchise but also in key markets where DL knows it must move lucrative corporate contracts in NYC and LHR to DL and JV. Further cooperation could easily include DL and Skyteam networks in Europe and Asia, including Japan.
4. Latin America, esp. from MIA. DL has freely acknowledged that its revenues to Latin America are not at levels it wants. Latin America is the only global region, including domestic, where DL does not get industry average or better yields. Still, DL is largely profitable in Latin America due to its lower costs. DL’s average fare levels are attributable to AA’s dominance of the market as well as its presence in key local markets to Latin America, esp. MIA and to a lesser extent Texas. The fact that most of Latin America has just become Open Skies does not mean that DL is failing because it hasn’t immediately jumped in to start service. Latin America, while important, is DL’s and the industry’s smallest region.
DL’s failure at MIA-LHR is a whole lot less indicative of DL’s ability or not to succeed at MIA-Latin America than it is about DL picking up a route to LHR via the AA/BA divestiture process. Latin America is a whole lot closer to MIA than is LHR, much of Latin America can be served by narrowbodies which create lower risks, and of course the MIA-Latin America market is much larger and is more heavily concentrated in AA’s hands among US carriers.
5. Presence in Texas and the South Central/southwest US. While DL’s hub at DFW was losing more money because of flights that contributed very little to the local market, DL did give up a presence in some of the top DFW local markets. DL’s performance from DFW now in the markets in which DL does serve is stronger relative to AA than it has ever been. DL is now the largest carrier in the local market to DL’s interior hubs of ATL, DFW, and MSP from DFW even though DL only used to hold that title to ATL. DL is now approaching 25% market share in DFW-LGA which is better than what DL had when it had a hub. DL is also strengthening its position in MSY and other non-hub southwest/south central cities. DL will likely never operate a hub in Texas but the markets are large enough that a key presence in large markets is possible.

I am more than open to hear others perceptions of where DL’s strategic weaknesses are but what should be clear is that DL does know where they are, do have plans in place to address them, and generally DL’s strategic weaknesses are far smaller than those for other carriers.
With the successful DL/NW merger behind it, DL is methodically working thru its strategic to-do list. Some of them like NYC and SEA international have been relatively easy to achieve competitively while others such as the domestic west coast expansion is evoking stronger competitive responses.

DL’s strong profitability and success in key strategic markets like NYC provides a lot of momentum which can be used in other key regions. And it is also worth noting that DL is the largest carrier in all of its key interior hubs, ATL, DTW, MSP, and SLC; CVG and MEM as former hubs; as well as at LGA and at JFK in terms of revenue, even though B6 boards more passengers. It is also worth noting that the LGA markets which DL expanded into are far more valuable markets than most on the west coast and yet DL has achieved 20%+ market share in a little over a year in the key LGA markets which include to other carriers’ hubs.
DL does have work to do (it would be boring if they did not) but it is well-positioned to achieve those objectives.

 

[Kev3188]

Good advice (for other people of course) when being proved wrong, over and over again.

Do as I say, not as I do?

 

[WorldTraveler]

Kev,
you are more than welcome to begin the list with 1. what I have said that is strategically wrong and 2. an acknowledgement that you have miscalled some pretty major strategic aspects about the industry.

 

[eolesen]

Do as I say, not as I do?

Something like that...
 

i)  DL + AS have a contract, but you make it sound as if only AS has to meet certain minimum performance requirements.  Would not AS have guarentees in the contract to prevent DL from this kind of behavior - predatory behavior of setting up shop in a partner's hub.  I realize that AS is not a partner is the AFKL ATI/JV manner - but surely there must be some safeguards for AS in the contract?
........
It seems to me that AS and DL agreed to share a slice of pie, but now DL is bringing in an additional fork, so to speak.  Or what am I missing here/

I'm sure there are performance guarantees in the AS/DL agreement, but the lack of ATI would prevent having a guarantee from DL setting up shop in AS's key markets.

That said, most contracts also have out clauses for bad faith dealings with each other. That would be an easy argument to make here.

If DL tried to sue AS, I suspect the lawyers and the courts would have a field day with it.

It's almost as unenforceable as non-compete clauses in an employment contract.

 

[Kev3188]

Kev,
you are more than welcome to begin the list with 1. what I have said that is strategically wrong and 2. an acknowledgement that you have miscalled some pretty major strategic aspects about the industry.

Who said I was talking about you?