Delta Air Lines (NYSE:DAL) reported a record Q3 profit last week with pre-tax income of more than $2 billion. The company also projected another record quarterly profit for Q4, which would put it on a strong trajectory entering 2016.
On Delta's earnings call last Wednesday, management confirmed that Delta is well-positioned to maintain its positive earnings momentum next year. Let's take a closer look at how Delta aims to continue its successful run.
Driving higher sales of premium seats
We are especially pleased with sales in Comfort+, which increased 42%; and First Class upsell, where we increased our paid first class load factor to 56%, up 8 points year-over-year on a base of 5% more first class seats.
-- Ed Bastian
For the past few years, Delta has made it a priority to sell more premium seats, particularly in the domestic market. Historically, airlines have often treated first class and premium economy seats as giveaways for loyal customers. Delta continues to offer complementary upgrades to its best customers, but it also sees a big opportunity to get people to pay for better seats.
As recently as 2011, Delta sold just 31% of its domestic first class seats, while giving away the rest as free upgrades. Last year, its paid first class load factor rose to 45%, and Delta's goal for 2015 is a 50% paid first class load factor. Delta is well on its way to meeting that objective.
Delta is also driving strong sales growth for its "Comfort+" premium economy seats, thanks to higher inventory and improved distribution. Delta's efforts to optimize revenue from premium seats are helping it offset some of the industrywide unit revenue pressure.
Slowing capacity growth
Our initial plan is for 2016 capacity to be in the range of flat to up 2%. We believe that this is an appropriate level of growth to balance capital investments, supply and demand, and ensure the momentum in our business continues.
-- Delta CEO Richard Anderson
Coming into 2015, Delta planned to grow its capacity by 2% this year, with most of the increase coming in the domestic market. Initially, the sharp drop in fuel prices encouraged Delta to grow a little faster than planned. Year-to-date, capacity is up 3.8% compared to 2014. (Some of that increase may have been unplanned, due to Delta canceling fewer flights than ever this year.)
However, deteriorating conditions -- particularly outside the U.S. -- prompted Delta to sharply cut back its international capacity for Q4. It currently intends to reduce international capacity by 4.5% year over year this quarter. International cutbacks will continue into 2016 as Delta works to keep supply in line with demand.
Unit revenue trajectory improving
We see strong demand through the winter and into the spring already. And our load factors are running ahead in every entity including domestic throughout the rest of the year. So ... it looks like it's shaping up to be a pretty good year in 2016.
-- Delta Chief Revenue Officer Glen Hauenstein
Delta's proactive efforts to cut excess capacity in weaker international markets is having the desired effect on unit revenue. For Q4, Delta expects unit revenue to decline 2.5%-4.5%, better than the 4.9% decline recorded last quarter.
Looking ahead, advance bookings are strong heading into 2016. It's still too early to know how quickly unit revenue will return to growth. Nevertheless, the combination of Delta's capacity adjustments and easier comparisons should drive steady improvements in the unit revenue trajectory in the next few quarters.
Lots of flexibility on capacity
I think the thing that people don't have a full appreciation for is how rapidly we adjust to markets. ... [C]urrencies got weak in Brazil, currency got weak in Japan, fuel surcharges ran off, sanctions in Russia and we responded very quickly.
-- Richard Anderson
One of Delta's biggest competitive advantages is the flexibility afforded by its older aircraft fleet. All airlines routinely adjust capacity in light of demand trends, but Delta can adapt more quickly because it always has lots of planes nearing retirement age that are fully paid for. When it needs to cut capacity quickly, it can simply accelerate the retirement of some of these planes.
It did just that this year, retiring several 747s ahead of schedule in order to cut international capacity. That's a big reason why Delta's international capacity will decline 4.5% year over year in Q4. By contrast, airlines with ultra-modern fleets often can't afford to cut capacity quickly, because they are stuck with heavy aircraft lease and debt payments.
Big plans for joint ventures
Ultimately, JVs will give us the foundation to build the leading U.S. gateways to China and Brazil, including hubs in Shanghai and Sao Paulo ...
-- Richard Anderson
Today, Delta arguably has the best position in Europe of any U.S. carrier. However, it lags both of its legacy carrier competitors in Latin America and it also has a smaller footprint than United Continental in Asia.
Delta is looking to remedy these deficiencies by aggressively pursuing joint ventures with foreign carriers around the world. In recent years, Delta has made strategic investments in partners in the U.K., Mexico, Brazil, and China.
In the U.K., Delta has already formed a successful joint venture with Virgin Atlantic. Investors should expect it to replicate that structure with its partners in Mexico and Brazil within the next year or two. Furthermore, in the long run, Delta wants to gain share in Asia through a tie-up with China Eastern: the top airline in Shanghai, China's top business market.