Since the beginning of 2017, most U.S. airlines have returned to unit revenue growth. That said, they have struggled to boost revenue fast enough to keep up with surging fuel prices. (The market price of jet fuel has hovered around $2.10 per gallon for the past few months, up from $1.30 per gallon as recently as June 2017.)
However, the transatlantic market has been a bright spot for the largest U.S. airlines over the past year. As a result, Delta Air Lines (NYSE: DAL) recently revealed plans to expand its transatlantic service in 2019.
Strong unit revenue growth for transatlantic flights
Delta Air Lines, American Airlines (NASDAQ: AAL), and United Continental (NYSE: UAL) all posted solid unit revenue growth last quarter. Delta led the way, with passenger revenue per available seat mile (PRASM) up 4.4% year over year. United took the No. 2 spot, with a 3% PRASM increase, while American Airlines' PRASM inched up 1.5%.
Despite this industry-leading unit revenue growth, Delta's adjusted pre-tax margin fell by almost 3 percentage points last quarter. United posted a similar margin decline, while American Airlines' pre-tax margin plunged by 5.6 percentage points. In other words, low- to mid-single-digit PRASM growth isn't enough to offset rising costs right now.
However, all three airlines have been reporting stronger unit revenue growth in the transatlantic market (which mainly consists of flights between the U.S. and Europe). In the second quarter, transatlantic PRASM rose 6.2% at American Airlines, 7.9% at United Airlines, and 11.2% at Delta Air Lines.
During the same period, overcapacity weighed on unit revenue in the domestic and transpacific regions, while economic weakness in much of Latin America has hurt unit revenue there.
Delta is doubling down
Delta Air Lines' strong Q2 PRASM performance in the transatlantic market wasn't a flash in the pan. Unit revenue growth has been accelerating there over the past year. Transatlantic PRASM rose 2.4% in the third quarter of 2017, 7.4% in the fourth quarter, and 11.5% in Q1 2018. That's why Delta plans to expand its transatlantic service. Last week, it announced several capacity increases that will take effect next year.
First, Delta has been flying from Los Angeles to Amsterdam four times a week, and from Los Angeles to Paris three times a week since June. Next June, it will begin offering daily flights on both routes.
Second, Delta will begin a daily nonstop flight between Tampa and Amsterdam in late May. Finally, the carrier will add a second daily flight on its existing routes from New York to Paris and Tel Aviv in mid-June.
While most transatlantic flights have been very profitable recently, there are still some underperformers. In conjunction with its announcement of these new transatlantic routes, Delta revealed that its seasonal summer service between Pittsburgh and Paris won't return in 2019.
Focusing on strategic advantages
Delta's 2019 transatlantic expansion is primarily aimed at adding capacity in markets where the carrier has a strategic advantage. Three of the four existing routes for which Delta is adding flights (Los Angeles-Amsterdam, Los Angeles-Paris, and New York-Paris) connect Delta hubs to the European hubs of its joint venture partner Air France-KLM.
The second daily flight to Tel Aviv takes advantage of a strong local market, but it also represents a defensive move. Today, United Airlines offers two daily flights between Newark (just outside of New York City) and Tel Aviv, including daytime and overnight return trips to the U.S. Delta will now be able to match United's schedule options between New York and Tel Aviv.
By contrast, Delta's new Tampa-Amsterdam route appears more opportunistic. Tampa is a major metro area without a dominant airline. Delta will use joint venture partner KLM's strong hub in Amsterdam to funnel traffic between Tampa and dozens of destinations in Europe and beyond.
Delta is playing to its strengths with the transatlantic capacity additions it announced last week. Thus, these routes should be able to reach peak profitability relatively quickly, rather than requiring a multiyear period of investment. That should help Delta Air Lines in its efforts to get its pre-tax profit growing again in 2019.
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