Demand for air travel is on the rise. The only way a New York executive can attend a business meeting in Chicago and be back the same day is by flying. According to an estimate by the International Air Transport Association, the global airline industry is expected to earn $12.7 billion in profit this year, a whopping 67% rise over the previous year. New York and Los Angeles, two of the world's busiest cities in terms of air traffic, are seeing increasing competition among the airlines to gain market share. Delta Air Lines (DAL) is one company that has been very proactive in the New York and Los Angeles markets, increasing its efforts to increase the number of customers and improve its customer experience. In this article, I shed light on its current and future activities and the way these activities will shape the future of the company.
Boot on the other foot
New York is the most populated city in the U.S. New York has three airports: John F. Kennedy International Airport, or JFK, La Guardia Airport, and Newark Liberty International Airport, or EWR. More than 100 million travelers move through New York's airports every year, dominated by a heavy concentration of high-fare business travelers. This makes New York a very important market for the airline companies, and Delta and United Continental (UAL) have locked horns in an effort to win market share in the country's largest aviation market.
In May 2013, United's Terminal C hub at EWR turned 25. During the silver jubilee celebration of this terminal, the company highlighted new improvements to its terminal C facilities and emphasized its position as the largest airline in New York. United boasts over 400 daily flights from EWR to more than 150 destinations globally. The company announced that all its long-haul international flights from New York will have flat-bed seats and personal on-demand audio-video systems at every seat in the premium cabins. United also revealed plans for further investments to redesign its check-in facilities and have a new checked-baggage screening system.
However, Delta has positioned itself very well to answer United's upgrades. Delta has decided to replace its outdated Terminal 3 at JFK with new facilities. In May 2013, Delta opened a sprawling $1.4 billion Terminal 4 international hub with facilities and features suitable to high-fare business travelers. Although this terminal has already started handling passengers, construction won't be complete until 2015. Once completed, this terminal will have nine extra gates, adding capacity to handle an additional 5 million passengers annually, a 3% increase over current levels. This terminal offers modern amenities and is a huge improvement over Terminal 3. The new terminal thus represents more than 3% additional capacity to the current overall annual capacity of 160 million passengers for Delta.
EWR has not missed Delta's attention either. EWR is widely believed to be United's home turf. In May this year, Delta began nonstop service between EWR and Paris. Delta's joint venture with Air France (OTC:AFRAF) offers a large connecting network in Paris, which gives advantage to Delta. Hence, it can now serve Paris-bound customers from both JFK and EWR, allowing passengers to choose their preference.
Upper cut in rival's jaw
Los Angeles is the second most populous city in the U.S. and remains an important hub for business travelers. Delta is working to gain a larger market share in Los Angeles as well. In March this year, Delta announced eight new routes from Los Angeles and frequency expansion on six other routes. This includes nonstop flights all year to cities like Seattle, San Jose and Nashville, among others, as well as seasonal nonstop flights to Boston and Anchorage.
This month, Delta also announced Delta Shuttle service between Los Angeles and San Francisco, scheduled to begin next month. The shuttle is designed to appeal to high-fare business passengers, with 14 daily round trips scheduled on weekdays. Its competition, United, runs 15 daily flights each way between the two cities. Delta is also in the midst of a $229-million Terminal 5 upgrade at the Los Angeles Airport, which will be completed in 2015. Los Angeles and San Francisco are both United Continental hubs, and these moves are clear indications of Delta's attempts to win more business-class passengers from United.
Delta is also challenging its strategic partner Alaska Air (ALK). Delta has a code-sharing arrangement with Alaska on Alaska's flights from Los Angeles. The code-sharing arrangement allows airlines to share passenger capacity with other airlines on the same aircraft. Alaska has 12 flights daily on the Seattle-Los Angeles route and occupies 68% of the market on this route. In April 2013, Delta began flying three times daily between Seattle and Los Angeles, and it plans to increase the frequency to five flights on this route by next month. This route is one of the most patronized routes for Alaska. Delta's recent move to have flights on this route indicates its ambition to seize market share on the Seattle-Los Angeles route. Delta now has 8% market share on this route, which is higher than United's 5% market share on this route. With Delta having five flights on this route next month, Alaska's market share will drop to 55% whereas Delta's will increase.
Delta is aggressively increasing capacity at airports in New York and Los Angeles. These strategic moves are allowing Delta to challenge both United and Alaska at these locations. A larger presence in New York and Los Angeles will allow Delta to complement its traditional hubs in secondary cities.
While United and Alaska are no slouches in the aviation industry, Delta is clearly making efforts to gain significant market share from these two players, particularly in New York and Los Angeles. This might just be the airline stock to buy this summer. But investors need to be mindful of the fact that the stock price has already appreciated by more than 60% this year. While the stock was trading at $12.23 at the beginning of the year, proactive measures by management have raised investors' confidence in the company, which has helped Delta to cross the $20 mark.