Delta: A One Time Operational Opportunity
Delta provides insight into the post-pandemic recovery.
The pandemic’s impact on airline demand has been catastrophic. But it has also created a once in a life-time opportunity for airlines to re-shape corporate economics.
The pandemic differed from a normal recession. Rather than being behind the supply curve, shutting capacity after demand has already declined, airlines were able to shut capacity immediately. This had two key advantages; drip capacity into the market as demand returned, and start afresh from a structural perspective. For Delta, this means higher ticket prices and a transformed cost base.
The focus of Delta and other airlines has been on the most profitable routes (domestic and transatlantic) and limiting capacity (closed transpacific routes)elsewhere. Even as capacity remains at 79% of 2019 , the airline is already enjoying PRASM above that of 2019.
Delta also spoke directly about the opportunities the pandemic has created for structural improvements, aside from retiring expensive capacity. As demand returns, these improvements will prove their worth. For instance, Delta had plans to improve efficiency in its network by flattening seasonal operational peaks. Pre-pandemic, seasonal peaks meant 20% higher utilisation of wide-bodied aircraft, as an example. They’ve used the pandemic to put these plans into place. Bastian also remarked that airport services have been brough in-house with an improvement in the cost base and customer service levels.
As Delta returns towards full capacity, it does so as a more profitable airline. As CEO Ed Bastian said:
At 12% to 14% operating profit, we are only four points behind our June 2019 quarterly operating margin, and that's despite fuel prices being up 50% from that time period and our capacity only 85% restored.
From a demand perspective, Delta highlighted a number of important trends in the travel market. First, at the moment, higher fuel prices are not denting demand. Consumers are prioritising travel, have the savings to afford it, and are comfortable paying higher prices as a result. Second, corporate demand is returning. The premium cabin is operating at 100% of 2019 levels and corporate demand is being led by meetings travel and group bookings. This likely is a WFH driven trend. Third, as capacity opens up, demand returns quickly. Korea and Australia have been the first transpacific markets to open up. In both cases, capacity has filled quickly.
Not only does the Delta result point to some consumer resilience and positivity, it also highlights that the airline industry is in a period of structural improvement with better corporate economics. I’m comfortable owning Delta in the portfolio.