It's a well-known fact of the airline industry that business travelers are the key to profitability for legacy carriers. As a result, Delta Air Lines (NYSE: DAL), United Continental (NYSE: UAL), and American Airlines (NASDAQ: AAL) compete to provide the best travel experience for these high-value customers.
Two noticeable results of this competition are the standardization around full flat-bed seats in business class for international flights and the emergence of premium economy sections. However, these companies differ in how they balance the dual priorities of squeezing as many passengers onto the plane as possible and offering extra-legroom seats for corporate customers.
Delta has opted for smaller business class and premium economy sections in order to fit more seats on their planes. By contrast, United and American have chosen to devote more space to premium seating. So far, Delta's strategy seems to be more successful: the unit cost advantage of packing in extra passengers more than compensates for the lower unit revenue potential of economy-class seats.
The transcontinental battle
The legacy carriers' different choices can be best observed in their transcontinental fleets (used for flights from New York's JFK Airport to Los Angeles and San Francisco). All three airlines have recently rolled out new or updated transcontinental products, so these represent their current cabin configuration preferences.
Delta will operate most of its transcontinental service with Boeing (NYSE: BA) 757s -- although it will also use larger Boeing 767s for some flights. Delta's transcontinental 757s will have 168 seats: 16 full flat-bed business class seats, 44 Economy Comfort Seats, and 108 Economy seats.
United is also using the Boeing 757 for its transcontinental "p.s." service. However, United has configured these planes with only 142 seats. (That's actually an increase from the 110-seat setup that United had previously used on its p.s. 757s.) The main difference between the Delta and United configurations is that United will include 28 full-flat bed business class seats, leaving room for only 42 Economy Plus seats and 72 regular Economy seats.
American is introducing new Airbus A321s for its transcontinental flights. The A321 is somewhat smaller than the 757, but American is opting for the most spacious setup. As a result, its transcontinental planes will have just 102 seats. These will be divided into a 10-seat first class cabin, with only two seats per row, 20 full flat-bed business class seats, 36 main cabin extra seats, and just 36 main cabin seats.
At one extreme, economy class makes up nearly 65% of Delta's transcontinental seats. On the other hand, main cabin represents 35% of American's seats. United falls in between, but in terms of the absolute number of premium seats, its configuration is comparable to American's. The additional premium seating gives United and American a potential unit revenue advantage, but Delta's denser configuration gives it a clear lead on unit costs.
Battle of the 737s
Delta and United have also demonstrated their varying priorities in their configuration choices for new Boeing 737-900ERs. For several years, United has been using a standard configuration with 167 seats, consisting of 20 First Class seats, 51 Economy Plus seats, and 96 Economy seats.
By contrast, Delta has managed to squeeze on an additional 13 seats. Like United, Delta has 20 First Class seats on the 737-900ER. However, Delta's configuration includes just 21 economy comfort seats, but 139 economy seats. Opting for fewer "premium economy" seats allows Delta to add more rows. Delta's 737s also have slightly less legroom (about one inch per row) than United's.
Delta is also opting for denser configurations on its wide-body planes for international flights. For example, at the company's recent investor day, Delta executives talked about modifying their 767s and 777s to add more seats. On the 777s, Delta is removing 7 lie-flat business class seats in order to make room for 30 additional coach seats. For the 767s, Delta is putting flat beds in business class while adding seats to the plane by going from 36 business class seats to 22.
This decision to cut back on premium cabin seating is counterintuitive for a legacy carrier like Delta that makes its living by attracting corporate travelers. However, executives found that many business-class seats were flying empty on off-peak days. As a result, it makes more sense to have additional economy seats, which can be profitable even at low fares on off-peak days.
While the differences are less dramatic than for the domestic fleets, Delta will also have denser configurations for its international planes than United and American after these modifications.
In short, Delta is looking to aggressively combat cost pressures by adding economy seats at the expense of premium seating. By contrast, United and American are typically trying to maximize unit revenue by offering plenty of premium seating, even if that leads to higher unit costs.
So far, Delta's approach has proven itself, giving the company a big profit advantage over United and American. Delta has a very competitive cost structure despite paying among the highest wages in the industry -- yet it has also done remarkably well at boosting unit revenue despite having a lower proportion of premium seats.
This is not to say that the premium-focused strategies at American and United are doomed to fail. However, to win market share among high-fare corporate travelers, those companies have to do a lot of other things right as well; by contrast, Delta's unit cost advantage is a direct result of its cabin configurations. This makes Delta the safest bet among the legacy carriers from a long-term perspective.
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