Late last year, Delta Air Lines (NYSE:DAL) admitted to investors that it was likely to miss its long-term financial targets in 2017. Sure enough, analysts expect Delta's EPS to decline modestly this year.
On Thursday, Delta's management refined the company's long-term targets. While there are some changes -- most notably, Delta reduced its margin target range by 1 percentage point -- the airline giant is keeping most of its goals intact. That includes aiming for 15% annual EPS growth.
To drive this strong EPS growth going forward, Delta is leaning heavily on some tried-and-true strategies: slow growth, a move to larger planes, and increased customer segmentation efforts.
Even slower growth
The biggest piece of news that Delta Air Lines announced this week was another change in its fleet plan. A year ago, it postponed the delivery of four Airbus (NASDAQOTH:EADSY) A350-900s from 2018 to 2019 and 2020, to reduce its growth rate.
On Thursday, Delta revealed an even bigger order deferral. It will push back 10 A350 deliveries scheduled for 2019 and 2020 by two to three years. Delta also has "additional delivery flexibility," indicating that it could further defer or otherwise modify this order.
That reduces Delta's near-term Airbus A350 orders from 25 to 15. Delta is still set to receive five A350s this year and another six in 2018, though.
The latest deferral is hardly surprising. Delta ordered the A350s primarily as a replacement for its aging 747 fleet. However, while it operated 16 747s three years ago, Delta had just seven of the iconic jumbo jets left in its fleet by the beginning of 2017 -- and it plans to retire all of those by the end of the year.
Clearly, Delta doesn't need many A350s to meet its fleet replacement needs in the next few years. And with unit revenue under pressure in numerous international markets, it's not a good time to grow aggressively on long-haul routes.
Even more upgauging
In conjunction with the A350 deferral, Delta also ordered 30 more A321s from Airbus. This is the third time Delta has expanded its A321 order book since placing an initial order for 30 A321s in late 2013. It now plans to buy a total of 112 A321s.
The A321 has two main roles for Delta. First, with 192 seats, it serves as a fuel-efficient direct replacement for the company's aging fleet of Boeing 757s. Second, it allows the company to reduce its unit costs by "upgauging" from the smaller 149-seat MD-88. Despite its larger size, the A321 doesn't cost much more to operate than an MD-88.
The A321 is a good plane for Delta, since the company drives lots of traffic through its main hubs. In addition, Delta's willingness to buy lots of A321s helps Airbus. The European aerospace giant has been forced to keep selling its current-generation single-aisle planes because of ongoing delays related to the engines for its next-generation A320neo family of jets.
Maintaining a focus on customer segmentation
On the revenue front, Delta's strategy hasn't changed much, either. The company continues to see customer segmentation as its most important unit revenue growth driver for the next few years.
Delta has already rolled out basic economy fares across its domestic network. These fares don't include advance seat selection and have less flexibility than regular economy tickets. It's now expanding basic economy to international markets.
Meanwhile, Delta is getting ready to launch "Premium Select" seating on its new A350s later this year. This section -- which will be available only on Delta's longest-range planes -- aims to bridge the wide gap between economy and business class. Premium Select will feature wider seats, more legroom, and higher-touch service than traditional economy seats. It should drive unit revenue growth by acting as a more affordable upgrade option.
Delta expects to generate $300 million of incremental annual revenue from its segmentation efforts in 2017, and $1 billion by 2019.
Will it be enough?
In the past several years, Delta Air Lines has been the most successful of the legacy carriers by a wide margin. Thus, it makes sense that it would stick to the strategies that have worked in the past.
However, from a different perspective, one could say that these are the same things that have put Delta on pace for a subpar 2017 performance. Indeed, the company may need to make deeper changes to its business model to overcome the pricing pressure that's impacting the whole airline industry. Only time will tell if doubling down on the successful strategies of the recent past can propel Delta's earnings to new heights.