The airline business is a tough one, and not all carriers survive the cyclical nature and geopolitical challenges. Delta Airlines (DAL +2.15%), an industry leader in 2020, was plunged into bankruptcy in 2005. Management was humbled and the company survived, eventually building itself into one of the most successful airlines of the past decade.
On January 14, Delta reported full-year 2019 results showing impressive gains, helped by its strategic partnership with American Express, fleet optimization, and a pending joint venture with South America's largest airline.
But the party's not over yet. Delta Airlines has put several strategic initiatives in place that will yield increased revenue and improved margins in the next few years.
Lucrative co-branding adds up
An important driver of future growth is the partnership between Delta and American Express. The co-branding contract was renewed for 11 years, running to 2029. The agreement increases income to Delta from $4.1 billion in 2019 to nearly $7 billion by 2023. Delta American Express cardholders increased by 1.1 million in 2019, notching the third consecutive year adding more than one million new card holders.
Plans are in the works for Delta and American Express to relaunch the credit card portfolio with new ways cardholders can earn miles, driving new cardmember growth and card usage.
Image source: Getty Images.
Updated equipment yields cost savings and efficiency
Delta Airlines plans to reduce maintenance costs and boost productivity by simplifying its diverse fleet. Management says the airline could eventually operate just eight fleet families, down from 12 next year. As Delta phases out old airplanes, it is replacing them with higher-capacity aircraft, capitalizing on the high passenger volumes the airline has attracted.
Fleet optimization reduces costs while increasing revenue per departure, making for enviable efficiency. Delta reported 2% fuel efficiency improvement through fleet renewal and other initiatives in 2019. Investment in new aircraft lays the groundwork for stability when the cyclical airline industry slows down.
Delta anticipates significant international growth, making a deal in September for 14 large wide-body Airbus A350s with new strategic partner LATAM Airlines (NYSE: LTM). CEO Ed Bastian said, "This gives us an opportunity to expand our A350 fleet, which we have a relatively sub-scale number of at 15 today."
A pivotal joint venture opens a lucrative market
Finally, Delta's pending joint venture with LATAM, Latin America's largest airline, promises to make Delta as competitive in South America as it is in other international markets.
At present, Delta lacks scale in South America. The partnership with LATAM changes that as Delta gains access to major South American hubs and connecting traffic it hasn't had access to before. This should drive strong revenue growth for Delta as it becomes more appealing to the lucrative business traveler flying between the U.S. and South America.
The joint venture must go through the regulatory review process, which can take a long time. The fact that Delta has such low market share in South America should smooth antitrust approval, though. In the meantime, they intend to start code-sharing this year.
