Delta Air Lines Continues to Dismantle Its Tokyo Hub

By Markets Fool.com

Through its 2008 merger with Northwest Airlines, Delta Air Lines (NYSE: DAL) acquired a small hub at Tokyo's Narita International Airport.

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Delta still nominally considers Tokyo-Narita one of its "key hubs and markets," but it has been shrinking there for years. The carrier announced further cuts this week, which will diminish Delta's Narita operation to a pitiful remnant of its former glory by November.

A hub with a long history

Northwest Airlines' presence in Tokyo dated back to the 1940s. In 1952, a U.S.-Japan aviation agreement made it one of just two U.S. airlines permitted to fly from the U.S. to Japan and from Japan to several other key destinations in Asia. Northwest thus became a key player in Asia, offering ample connecting service via its hub in Tokyo.

In the first year or so after Delta merged with Northwest, it added flights in Tokyo to further solidify its Asian footprint. However, it soon began to cut capacity there -- at first, due to the after-effects of a major earthquake and tsunami that hit Japan in early 2011.

In time, Delta's Narita hub faced other pressures. High fuel prices made long-haul flights more expensive to operate. The Japanese yen fell significantly against the dollar beginning in late 2012, making flights to Japan less lucrative. But, most importantly, Delta discovered that it didn't need a hub in Asia anymore.

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Delta builds a new trans-Pacific hub

In the last few years, Delta Air Lines has built a hub for flights across the Pacific in Seattle, in competition with United Continental's (NYSE: UAL) larger hub in San Francisco. Since 2014, Delta has flown nonstop from Seattle to each of the top five business destinations in East Asia: Tokyo, Seoul, Beijing, Shanghai, and Hong Kong.

Delta's new hub in Seattle is filling the former role of its Tokyo operation. Image source: The Motley Fool.

With Delta offering nonstop flights from the U.S. to more Asian destinations than ever before, the Tokyo hub became somewhat superfluous. (Delta also has numerous codeshare partners in Asia to help connect customers to other destinations that Delta doesn't serve nonstop from the U.S.) As a result, Delta began shrinking even faster at Narita Airport.

For example, in early 2014, Delta dropped its nonstop San Francisco-Narita route upon starting a new San Francisco-Seattle route. Rather than fighting a losing battle against United Continental in the San Francisco-Tokyo market, Delta enabled customers to take a shorter flight to Seattle and connect there to other Asian destinations. (Not coincidentally, United dropped its Seattle-Tokyo route around the same time.)

More cutbacks coming

Delta now plans to drop several more routes at Narita Airport. This fall, Delta will end its flights from New York to Narita and intra-Asian service from Narita to Osaka and Bangkok. It had already announced plans to stop flying from Los Angeles to Narita.

The proximate cause of these cuts is the opening of Tokyo's Haneda Airport -- which is much closer to the city center than Narita -- for daytime flights to the U.S. Up until now, airlines have been limited to a handful of inconvenient overnight slots for their U.S.-Haneda flights. Delta recognizes that the availability of some daytime slots there will siphon away business traffic from Narita Airport.

Thus, Delta decided to drop its Los Angeles-Narita flight in late October, when it will move its existing Los Angeles-Haneda flight to a daytime slot. Japanese competitor ANA, which has a joint venture with United Airlines, will add nonstop flights from Haneda to New York's JFK Airport at the same time. This doomed Delta's own Narita-JFK service.

Delta's Minneapolis-Narita route is presumably also on the chopping block. Delta recently won preliminary approval from the DOT to begin flying from Minneapolis to Haneda this fall. As soon as that award is confirmed, Delta is likely to announce an end date for Minneapolis-Narita flights.

Delta will be down to about four nonstop routes between Narita and the continental U.S. by November. With less connecting traffic flowing through the Narita hub, fewer intra-Asian routes will be feasible. This explains the downfall of the Osaka and Bangkok routes.

Beginning of the end?

Going forward, Delta intends to maintain its existing routes from Tokyo to Manila, Shanghai, Singapore, and Taipei. But it wouldn't be surprising to see those routes disappear before long. Delta may lack the critical mass in Tokyo needed to make these intra-Asia flights sustainable.

Delta already flies nonstop from several U.S. cities to Shanghai. Nonstop flights from Seattle to Singapore and Taipei could potentially become feasible as Delta continues to build up its Seattle hub. Alternatively, it could serve those cities (and Manila) via connecting flights from Shanghai on codeshare partner China Eastern.

Improvements in jet technology, changes in Delta's hub structure, and the opening of Haneda Airport for daytime long-haul flights have made the Tokyo-Narita hub expendable. Delta's upcoming route cuts in Tokyo probably won't be the last.

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Adam Levine-Weinberg owns shares of United Continental Holdings and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.