Through 2016, the U.S. will be the largest single market for domestic passengers (710.2 million) and international passengers (223 million). U.S. airline companies are adopting various measures to expand their presence in international markets and are adopting fuel efficient techniques to save fuel costs. Scouring the investment landscape, I have selected two such airline companies that are taking measures to reduce fuel cost, increase efficiency, and expand presence in the international market.
Eyeing Heathrow and operational improvements
Since Delta Air Lines (DAL) doesn't have many landing slots at London's Heathrow airport, it acquired 49% stake in Virgin Atlantic for $360 million. This will give Delta access to Virgin's landing slots at Heathrow. Heathrow airport is one of the world's busiest hub and a popular destination for corporate travelers between the U.S. and the U.K. This venture will strengthen Delta's overall position and develop its presence in the international business travel segment. Upon approval from U.S. authorities by first half of 2014, this venture will place second with 36% market share in the air travel market between the U.S. and the U.K. Currently, the American Airlines-British Airways alliance is the market leader with around 50% market share. The current market size of air travel between the U.S. and London Heathrow is valued at around $2 billion a year.
Also, Delta announced various cost saving initiatives to lower its operational cost through several measures.
First, it plans to replace its old 50-seat regional jets with fuel efficient larger regional jets. This capacity expansion will come in handy, considering the fact that Delta serves more than 160 million customers every year in the U.S.
Second, the company improved its maintenance process by using Frick's SmartMark RFID Oxygen Generator tags, which wasn't previously available to Delta. The technology reduces time and effort needed to check safety and maintenance, leading to significant cost savings.
Last, it is improving its delta.com site to increase online bookings, which will reduce its booking acquisition costs.
New winglet to save jet fuel cost
Last year, United Continental (UAL) saved 83 million gallons of fuel by fleet replacement and fuel-efficiency initiatives, reducing associated carbon emissions by 811,000 metric tons. It continues to focus on its goal to reduce fuel usage by 85 million gallons and related carbon emissions by 828,750 metric tons this year. To achieve this target, its unit United Airlines entered into a deal with Boeing (BA) to retrofit its 737-800 fleet and 737-900ER fleet with new 'Split Scimitar winglets'. Retrofitting means to add new features, or technology to outdated systems. The new winglets will replace existing blended winglet, which will provide approximately 2% fuel savings. Once Boeing installs the winglets, United Continental expects to save more than $200 million annually in jet fuel cost.
Boeing's "Split Scimitar Winglet" is a newly designed winglet tip cap that helps reduce wind drag, increasing fuel efficiency. This will result in 2% fuel savings and will reduce carbon emissions by 600 tons per aircraft per year. To date, United has installed new winglets on more than 330 aircraft and plans to retrofit its 737-900ER fleet in November. Additionally, Boeing builds around 85% of new 737s with the new winglet. The winglets cost around $725,000, and it takes about a week to install with an extra cost of $25,000-$80,000. Boeing plans to attract more airline companies; United Continental is the first company to install the new Split Scimitar Winglet.
United Continental is taking several measures to improve its customer experience with customer service training for employees as well as improving products and services. The airline has installed a satellite based WiFi, which is a good proposition for business travelers. Other airlines use a ground station network that doesn't work when the flight is above sea level. Corporate travelers contribute higher revenue per seat as they prefer to travel in business class or book last minute tickets compared to other passengers. The efforts seem to be paying off well so far, since United Continental expects passenger revenue per available seat mile, or PRASM, to rise from $0.1309 in 2012 to $0.1357 this year.
The joint venture will help Delta to take advantage of the air travel market between the U.S. and U.K and will drive higher revenue in the coming years. In addition, the cost saving initiative will benefit it this year as well as in the coming years.
By retrofitting 737-800 fleets with the new winglet, United Continental will save millions in jet fuel cost and accomplish its goal of reducing usage of fuel and carbon emissions. With the efforts taken to improve its customer experience, the company is likely to retain and acquire new customers. Boeing is likely to benefit from its new Split Scimitar Winglet and expects to attract more airline companies in the coming years, achieving good returns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.