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Bad Weather? No Problem for Delta Air Lines, Inc.

By Adam Levine-Weinberg – Mar 5, 2014 at 10:29AM

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Delta Air Lines, Inc. is showing why having top-notch management is critical in the airline industry.

Last week, United Continental (UAL -0.72%) drastically revised its unit revenue guidance for the first quarter, blaming severe winter weather. United noted that by Feb. 27, it had already canceled more than 22,500 flights in 2014, nearly four times the number of flights canceled during the same period in 2013.

Delta Air Lines, (DAL -1.71%) has also seen its operations snarled by severe weather. The airline canceled nearly 20,000 flights in the first two months of the year, according to masFlight. However, the cancellations haven't hurt Delta's unit revenue at all -- in fact, the cancellations have actually helped a little bit.

Bad weather can't keep Delta down.

This stark discrepancy is yet another "proof point" that Delta is much better run than United. Delta's management team has reliably guided the company through every challenge it has faced, whereas United's management team has tried to explain away long stretches of underperformance with a litany of excuses.

Flying through storms
Last month, Delta reported that unit revenue rose about 5% in January. The carrier canceled around 10,000 flights in January, including nearly 4,000 in the span of a few days near the end of the month. Management estimated that these cancellations boosted unit revenue by about 0.5 percentage points.

On Tuesday, Delta reported its February unit revenue, which rose 4%. Delta canceled another 8,000 or so flights last month, and this again boosted unit revenue by about 0.5 percentage points.

United had only a slightly higher rate of cancellations in January and February, yet it saw a radically different effect on revenue. While Delta seems to be on pace to reach the upper part of its guidance for a 2%-4% increase in unit revenue in Q1, United now expects a 0.5%-2.5% year-over-year decline. That's significantly below its original guidance for a 0%-2% gain this quarter.

United is blaming bad weather for its weak unit revenue performance.

United's management claims that weather-related cancellations hurt unit revenue by 1.5 percentage points (representing more than half of the revision).

A case study in the value of management
How did Delta manage a 0.5 percentage-point-unit revenue benefit from bad weather while United saw a 1.5 percentage point unit revenue penalty? The number of cancellations does not explain the discrepancy -- United did cancel more flights, but the two carriers' cancellation numbers were in the same ballpark.

The most plausible explanation is that Delta has been better than United at recapturing revenue from canceled flights. To recapture revenue, an airline needs to have seats available on alternate itineraries that can get travelers from point A to point B. This way, the airline can proactively rebook customers from canceled flights onto other workable itineraries.

By contrast, if the airline can't get a particular passenger to her destination for several days, she is likely to cancel the ticket and request a refund.

Over the past two months, Delta appears to have done a good job of quickly getting its hubs up and running and planes in the right place after storms moved out. This allowed it to recapture much of the revenue lost through cancellations. United has not fared as well, and in some cases it canceled a high proportion of flights at particular hubs for several days in a row. That made it a lot harder to recapture revenue.

It's not just the weather
It's certainly possible that there were "objective" differences in the way that bad weather hit Delta's hubs compared to United's hubs. However, that alone cannot explain the magnitude of the difference in performance between United and Delta. Delta's operations team did a better job of navigating weather challenges while still getting most customers to their destinations within a reasonable period of time.

Delta's management team has demonstrated that Delta is the best-run major airline in the U.S. through superior earnings results in recent years. The company's ability to shake off the impact of severe weather in the first two months of 2014 provides further confirmation that top-notch management is a significant competitive advantage for Delta.

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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.

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