Last month, American Airlines (NASDAQ:AAL) announced that it will drop its daily flights between Philadelphia and Tel Aviv in January. That will leave the world's largest airline with no flights to Israel.
Just a month later, American's rival Delta Air Lines (NYSE:DAL) announced that it will expand its flight schedule to Tel Aviv. Delta currently offers daily service to Tel Aviv from New York's JFK Airport, and as of May, it will add four weekly flights on that route, bringing it to 11 weekly flights.
Why is Delta so interested in growing in a foreign market where American Airlines faced persistent losses? It all comes down to Delta's position as the No. 1 international airline in New York, the top business destination in the U.S. and the epicenter of the U.S. Jewish community.
American Airlines struggles in Israel
American Airlines' merger partner, US Airways, began the Philadelphia-Tel Aviv flights in 2009 as part of a push to make Philadelphia its primary international gateway. However, the flights consistently lost money, including more than $20 million just this year.
US Airways had hoped that merging with American Airlines -- and thus expanding the airline's route network -- would improve results for the Tel Aviv flights. It later hoped that lower fuel prices would be the difference-maker.
Yet neither of these factors had the desired impact because more than 70% of passengers on the flights were connecting from elsewhere. Connecting traffic is far less lucrative for airlines. First, customers have lots of choices of where (and on what airline) to connect, keeping a lid on fares. Second, the airline has to cover the extra cost of the connecting flight.
This was a perennial issue at US Airways. The company acknowledged that its hub markets had lower travel demand than competitors' hubs -- and it offset this weakness by paying its workers less. The merger with American Airlines allowed US Airways employees to get pay more in line with industry standards. But this magnified the problems of some legacy US Airways routes that continued to suffer from weak local demand.
No such problems for Delta
By contrast, Delta Air Lines benefits from its strong position in New York. The airline offers 207 peak-day departures at JFK Airport to 92 destinations, and it also operates a sizable domestic hub 10 miles away at LaGuardia Airport. That's not nearly as big as American Airlines' hub in Philadelphia, but it's enough to provide connections to most major cities in the U.S.
More importantly, the Jewish population of New York City, Long Island, and Westchester County -- JFK Airport's approximate target market -- is more than 1.5 million. That's many times larger than Philadelphia's Jewish community. New York is also the most important business market in the U.S.
All of this means there is tons of local demand for New York-Tel Aviv flights. That provides a large base of relatively high-fare traffic that can make Delta's flights profitable.
With more flights, Delta should be able to gain share -- particularly in the lucrative corporate market -- on the New York-Tel Aviv route. Delta's current New York-Tel Aviv flight departs in the late evening and arrives the following day in the late afternoon. On the other hand, the new flight will leave New York in the afternoon, arriving in Tel Aviv in the morning.
The current schedule may work for leisure travelers, but the extra flights will be more convenient for most business travelers, since they won't lose a full business day traveling to Israel. Delta's potential ability to poach some of American Airlines' Tel Aviv traffic is an added bonus.
The power of New York
This example showcases the immense value of having a big global hub in New York. While the large Jewish population in the New York area adds to demand for flights to Israel, New York is a massive travel market -- period. With strong local demand there, airlines can get a good mix of local and connecting traffic on long-haul routes.
Other cities can't offer as favorable a mix of traffic. Philadelphia is not a small city by any means -- it is the sixth-largest metro area in the U.S., with a population of about 6 million -- but its local demand can only support flights on a handful of the busiest international routes. Tel Aviv simply didn't make the cut.