1 Key Area Where Delta Air Lines, Inc. Trounces the Competition

Delta Air Lines, Inc. has become incredibly profitable by becoming incredibly reliable.

Apr 13, 2014 at 11:00AM

There are a lot of reasons why Delta Air Lines (NYSE:DAL) has been earning more money than any other airline in the world. For example, recent cost containment initiatives have helped Delta turn its revenue gains directly into profit growth.


Delta Air Lines has become incredibly reliable -- and profitable -- in the last few years. Source: The Motley Fool

However, for any global network carrier today, keeping business travelers coming back is critical to long-term success. One way to ensure that happens is to reliably deliver good service. Delta does just that -- and trounces other major carriers like American Airlines (NASDAQ:AAL), United Continental (NYSE:UAL), and even Southwest Airlines (NYSE:LUV) in terms of service quality.

Consistently good operations
Earlier this week, researchers at Wichita State University and Embry-Riddle Aeronautical University published the annual Airline Quality Rating report. The study measures airline quality through four measures that every airline must report to the Department of Transportation: on-time performance, mishandled baggage, involuntary denied boardings, and official customer complaints.

For the most part, smaller airlines dominate the top of the rankings. Smaller carriers tend to be less operationally complex, making it easier for them to deliver reliable, high-quality service. However, Delta Air Lines manages to stick right with these smaller carriers. For the last two years, Delta has landed in fourth place in the rankings. (This year, it nearly tied for third place.)

This performance put Delta way ahead of American (and its merger partner US Airways, which is still reported separately), United, and Southwest (and its merger partner AirTran). Those five airlines were scattered between seventh place and 12th place in the rankings.


Southwest Airlines has fallen behind Delta in terms of operational performance in the last few years. Source: The Motley Fool

Among this peer group of major mainline carriers, Delta's superiority was fairly consistent across the four performance categories in the most recent study. Delta's 84.5% on-time arrival rate gave it an easy victory -- US Airways came in second in this peer group with an 81.1% on-time rate. Delta also mishandled bags less frequently than these competitors, with US Airways again taking second place.

In terms of involuntary denied boardings, only American Airlines "bumped" passengers less often than Delta. Delta also took second place in terms of official customer complaints, beating American Airlines and United Continental by a wide margin, but still losing to Southwest.

Solid operational performance is worth a lot
Delta's higher reliability should have a big long-term reward, as profitable high-fare business travelers expect good service. If Delta can maintain its sizable advantage, it should gradually gain market share among business travelers. (Of course, business travelers also consider things like flight schedules in choosing between airlines.)

However, solid operational performance can also lead to big short-term rewards. Delta Air Lines handled last quarter's winter storms very well, which will allow it to post a 6.5%-7.5% operating margin -- in line with its original guidance.


United Airlines' weaker operational performance hurt its Q1 earnings. Source: The Motley Fool

Its less-reliable competitors weren't so lucky. American Airlines had to revise its Q1 operating margin guidance down by 1 percentage point, to a new range of 5%-7%. United Continental is in even worse shape for Q1 -- after initially projecting a 0%-2% increase in unit revenue, the company now expects a 1.5%-2.5% decline. That will lead to an even bigger Q1 loss than last year.

Foolish bottom line
It pays to deliver good service in the airline industry -- particularly if your key target market is high-paying business travelers. In the past few years, Delta Air Lines has consistently beaten the competition in most of the key service-related metrics. This should make Delta's recent success sustainable in the long run.

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