The competition between the two largest global airlines, United Continental (NYSE:UAL) and Delta Air Lines (NYSE:DAL), has escalated rapidly this year. Delta has enjoyed record profitability recently, and now it is starting to invade United's turf. Many of the flights Delta has added in 2013 have targeted markets where United is the dominant carrier.
It seems clear that Delta is looking to exploit United's merger integration woes to gain market share. Yet United is not willing to accept a diminished status within the airline industry. The carrier has been emphasizing its business travel amenities all year. Now, it's going one step further and adding flights into Delta's strongholds. If anything, this strategy will put even more pressure on United's unit revenue next year.
Delta moves in
This spring, Delta worked to improve its presence in New York, where it competes extensively with United. The carrier opened a new modern wing for its international flights at JFK Airport's Terminal 4. It also began nonstop flights between Newark Airport (a large hub for United) and Paris in June.
In Los Angeles -- one of United's smaller hubs -- Delta is growing very aggressively. It has expanded capacity in Los Angeles twice this year. Most gallingly, it brought its popular Delta Shuttle product to the West Coast last month. In the eastern U.S., the Delta Shuttle provides hourly flights from New York to Boston, Washington, D.C., and Chicago. Its new West Coast shuttle operates 14 daily round-trips between San Francisco and Los Angeles, both of which are United hubs.
Just last week, Delta announced even more new flights into United hubs. Next spring, it will start service between San Francisco and Seattle and increase its capacity between Los Angeles and Seattle. It is building a major international gateway in Seattle, and these new flights will give the carrier a chance to pull traffic away from United's trans-Pacific hubs in San Francisco and Los Angeles.
In other words, where Delta is expanding, it is attempting to do so at United's expense. Clearly, its executives see United's recent customer service struggles as a big opportunity. As Delta grows its presence in key United hubs, it will be able to compete more effectively for lucrative corporate contracts in those markets.
United strikes back
This week, United made it clear that it's not going to go down without a fight. On Monday, the carrier announced two new routes that will begin on April 1. First, it will fly two daily round-trips between its San Francisco hub and Atlanta, where Delta operates the largest airline hub in the world. Second, United will introduce two daily round-trips between Los Angeles and Minneapolis-St. Paul, another large Delta hub.
Additionally, United announced that it will upgrade its service between San Francisco and Seattle in April by adding one daily round-trip and moving to all-mainline service. This will increase its capacity on the route by more than 50%. This is clearly a competitive response to Delta's recent announcement that it will start flying that route on March 29.
A sign of desperation
United's move into key Delta markets looks more like a desperate move than a show of strength. Rather than solidifying United's financial position, these new flights are likely to lose money.
For instance, United will operate its flights between Los Angeles and Minneapolis-St. Paul with regional jets, whereas Delta offers frequent mainline service on that route. As a result, United will face higher unit costs. Delta's strong presence in the Twin Cities and its growth in L.A. will make it hard for United to achieve a revenue premium to offset these higher costs.
United's new San Francisco-Seattle service could be equally problematic for the bottom line. With Delta adding six daily round-trips to the market, United's decision to increase capacity by more than 50% seems dubious at best. United will have to drop fares dramatically to fill this extra capacity, especially as Delta's new international flights from Seattle will reduce the number of passengers connecting from Seattle to United's international flights in San Francisco.
There's a clear winner
United may edge out Delta for the title of world's largest airline, but Delta is clearly the top dog in today's airline industry. That's why Delta's market cap is nearly double that of United. Delta is now using its margin advantage to move in for the kill by adding numerous routes into United's hubs.
United is attempting to counter Delta's aggression by invading Delta's turf. However, this move is likely to backfire, as United does not have a competitive advantage that would entice many travelers to choose it over Delta. Instead, United will need to cut ticket prices to fill its planes, keeping its profit margin well below the industry average.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.