For months, the mainstream media and the U.S. Dept. of Transportation (DOT) have been beating the drum about how bad airline service in the U.S. has become, esp. this summer. Just this past week, months of public scorn by Pete Buttigieg, Secretary of the DOT, led airlines to codify further passenger service commitments along with new DOT information that highlights those commitments. In order to determine the investor impact of these changes, we need to use a data-driven approach to understanding the current state of airline customer service as well as examine the customer service protections that airlines gave prior to the latest commitments and assess the financial impacts of these changes.
The U.S. airline industry was deregulated in 1978, ending decades of cooperation between airlines including Delta Air Lines (NYSE:DAL) that involved centralized route planning for the industry by the federal government which, more importantly, resulted in little fare competition and a common service offering. The airline industry cooperated at the government’s behest by providing interline fares and service to allow passengers to use multiple airlines on a single ticket to travel from one part of the country to another. Air travel was not accessible to the masses and components such as checked bags and meals on flights of sufficient length were the norm.
Deregulation brought the opportunity for legacy airlines (those that operated interstate routes prior to 1978) to spread their wings, resulting in many failures such as the flamboyant Braniff Airways which ceased operations early in the deregulated era. A new crop of airlines navigated the new environment more carefully including fellow Texas based carrier Southwest Airlines (LUV) which grew from an intrastate airline to expand eventually into a nationwide operator. Southwest brought a utilitarian approach to air travel and, with it, low fares driven by operational efficiency. Dozens of upstarts tried and failed to upend the dominance of the legacy carriers – but each managed to change the business model just enough for air travel customers to now realize that the industry is hardly a monolithic industry; service levels, route systems and fares differ markedly across the industry.
It is precisely the difference in service quality – and the attendant failures of basic standards – that has been the focus of the DOT. Without the ability to regulate service levels, the DOT has aggressively taken the centralized role of documenting service quality and pushing for voluntary standards among airlines. While many consumer advocates push for a more heavy-handed regulatory approach by the DOT, many avenues are simply not legal and would undercut the free market approach to aviation which deregulation was intended to provide. The DOT’s role, then, is to provide data that air travel consumers can and should use to make informed decisions about airline quality and services offered. Caveat emptor, indeed.
The DOT has produced its Air Travel Consumer Report – ATCR- on a monthly basis for decades, compiling airline-submitted data now covering more than a half-dozen performance metrics. While the U.S. airline industry generates enormous amounts of data, far more of it becomes public or accessible to the public that for any other industry. Investors and travelers should know how to use and interpret the data starting with the DOT’s ATCR.
The DOT defines a domestic flight as on-time if it arrives at the gate up to 14 minutes within scheduled arrival time. Based on the most recent ATCR which includes flights through June 2022, 73.5% of all U.S. domestic flights were on-time which is not only within the historic range of on-time performance for the industry but just one-tenth of one percent lower than in June 2019. There is a range of 17 percentage points between the performance of the best and worst U.S. airlines. June is typically the lowest month of the year for on-time performance and yet the difference between June 2022 and cumulative on-time year to date is just 2.5%.
The DOT has put a great deal of focus on the rate of cancellations but DOT data once again is insightful. The rate of cancellation for the industry for the first six months of 2022 is double what it was in 2021 but, more significantly, for June 2022, the first month of the summer travel season, the rate of cancellations was up just 1%. Notably, however, the rate of cancellation was higher for the big 3 – American, Delta and United – than it was for low-cost carriers. Industry followers know that low-cost carriers experienced operational disruptions earlier during the 2022 travel season and aggressively pulled down their schedules; the big 3 pulled down their domestic schedules but also restarted their transatlantic operations in force, resulting in lower system performance. Glancing back to the on-time chart above shows that the legacy carriers – including Alaska and Hawaiian – performed better with on-time in June than the low-cost carriers that had lower cancellation rates. Flight tracking services also compile on-time and cancellation rates and make it available much earlier than the DOT, although often on a subscription basis. Their data shows that the rate of cancellation and on-time in July and August has returned to historic levels indicating that the industry did take the necessary steps to reduce their schedules to match their available resources including labor.
While every customer wants to get to their destination as scheduled, a smaller percentage of passengers check bags and yet baggage mishandling can be one of the more difficult experiences for airline passengers. DOT data for June 2022 shows that nearly every U.S. airline has offered worse baggage handling than a year ago but not by as dramatic of a change as other metrics.
The DOT also measures denied boarding, handling of personal wheelchairs and scooters, and consumer complaints as shown below with the comparison periods that the DOT uses.
The biggest takeaway that consumers and investors should note is that the US airline industry for YTD 2022 carried just 90% of the passengers it carried in 2019 and just 2% more than for the second quarter which includes the period in 2022 when travel began to return post-covid. Even more significantly, airlines operated 15% fewer domestic flights in June 2022 than in June 2019 but still operated more than 20,000 flights/day. Given the current level of flight activity, it is within the range of historical performance for the U.S. airline industry to have approximately 700 cancelled and 5000 delayed flights/day. While flight tracking sites such as Flightaware provide publicly accessible, real-time data on airline flight performance, the DOT’s focus on airline performance has caused many media outlets to track these statistics and then produce headlines touting “Airline passengers face thousands of delays and cancellations” when that statement is quite within the “normal” performance for the U.S. airline industry. While we can debate how well airline operations can run, the simple fact is that much of the media hype about airline performance is inaccurate and/or without context. Investors that allow that noise to influence their investment decisions could be missing significant opportunities.
With a good understanding of the service the airline industry is currently offering from a data perspective, we will look at the new tools that the DOT has just released to airline passengers. Although the DOT’s own data shows that there is not a significant degradation in airline service, the DOT has been pushing airlines to improve their customer service. The DOT won a round with the airline industry as the airlines agreed to provide better documentation of the amenities they offer even as a number of airlines enhanced the policies which they had previously not been willing to put in writing. The DOT’s new dashboard provides an industry-spanning chart that covers the primary amenities that airlines might offer for both delays and cancellations as noted in the chart below. In addition, the DOT has encouraged U.S. airlines to document their amenities during irregular operations (flights not operating on schedule) which the DOT has aggregated and linked to its site. To a great degree, these new tools provide airline consumers with another element of data they can use as they shop. The general theme in the comparison is that the legacy airlines offer the most complete group of amenities while ultra low-cost carriers offer the least.
An important caveat is in order in assessing the impact of these tools on airline customer service and on the financial impact to airlines. First, the DOT is simply documenting the commitments that airlines say they make to their passengers but is not dictating the minimum levels of service that all U.S. airlines must offer. The DOT does say they will take action against airlines that do not live up to the standards they set for themselves. Even more significantly, though, the DOT allows airlines to distinguish between airline-controlled events and those that they cannot control – including weather and air traffic delays. Airlines self-report the reason for each delayed flight and some customers might believe airline will simply absolve themselves of responsibility by blaming delays on factors such as weather and air traffic control delay. In reality, airlines take responsibility for more than two-thirds of the delays in categories such as air carrier delays (such as maintenance or crew etc) or late arriving aircraft.
In assessing the impact of the newly documented commitments by airlines, it is clear that legacy carriers have an advantage not just in terms of their ability to offer more types of amenities but also based on their experience in providing amenities under an array of unwanted circumstances that are part of the fabric of air travel. Many of the legacy airlines have carts with snacks similar to what they offer onboard their aircraft ready to deploy to gate areas when flights are delayed. Several of the legacy airlines have automated the issuance of hotel and meal vouchers and a few keystrokes by a central control center can authorize a planeload of passengers to receive amenities which passengers can receive via kiosks or boarding pass printers at gates. One of the key features of the regulated airline industry was the interchange of tickets; while airlines are not required to maintain that capability, most legacy carriers maintain that capability which gives them the ability to transfer passengers to other airlines which many low-cost airlines including Southwest cannot offer.
Even obtaining basic information is not the same between different airlines. While Alaska and Delta allow any passenger to obtain flight status notifications via email or text message, American and United only provide that information to passengers enrolled in their loyalty program and/or passengers that use their app. Alaska and Delta also provide maximum times for checked bags to reach the baggage claim belts or else they will provide compensation in the form of loyalty program points.
Most passengers do not appreciate the interlinked nature of air transportation between airlines and various agencies of both the federal as well as state and local governments. Even fewer passengers appreciate that virtually every commercial airline flight requires the approval of Air Traffic Control which is operated by the Federal Aviation Administration in the U.S. It is not usually an airline’s decision to decide if weather will delay a flight but rather ATC’s decision to manage the thousands of aircraft – not just commercial but also general aviation – that are in the skies over the U.S. at any one time. ATC must consider not just actual weather at a flight’s origin and destination but also predicted weather at both ends of a flight as well as enroute conditions. Nearly all U.S. airports are owned and operated by local governments that are responsible for ensuring that runways and taxiways are open. Passengers or the media that whip out their cell phones and argue that there is no weather on their cell phone radar fall far short of understanding the complexity of the national airspace system. Sites such as flightaware should be bookmarked and used as often, if not more, during travel than weather sites.
Air traffic controllers have a maximum age beyond which they must retire -and that age is currently lower than for commercial airline pilots. The FAA had employees retire during the pandemic which they are replacing; in addition, demand within the U.S. is in different locations than existed pre-covid, esp. to/from Florida, requiring moving staff. Passengers that aren’t sure that airlines are telling the truth about the reasons for delays would do well to track the FAA’s aviation system status page and see where enroute route restrictions are impacting air traffic.
The Transportation Security Administration is responsible for screening all passengers and baggage that board flights within the U.S. among other responsibilities. It is noteworthy that the TSA had a higher rate of complaints than any airline, predominantly regarding passenger screening.
As with all sectors of the economy, all facets of the federal and local governments are regaining their footing after the pandemic and are facing the same labor shortage and inflationary pressures that private businesses are facing. Airline investors should understand the interlinkage between airlines and governments but should not make judgments based on government performance during the early days of pandemic recovery – just as they should do for airlines.
An increased focus on customer service protections will cost some airlines more than others. Not only are labor costs certain to rise, favoring the largest, most established airlines, but increased customer service costs will cost those airlines that have not been accustomed to providing service which will increasingly become the standard in the industry. Further, fuel will continue to be elevated above levels that have existed for much of the past five years; airlines that have mechanisms to actively manage fuel costs will have a financial advantage.
Delta has long had a reputation for providing above average levels of service in the U.S. airline industry. While its operational performance took a hit along with the rest of the industry during the second quarter, Delta’s operational performance has returned to historically strong levels during the past two months. European airports continue to struggle with issues that U.S. airlines and airports have been able to resolve which impacts all of the big three global carriers, including Delta. Delta has historically been more generous with providing meal and hotel vouchers than other airlines so its costs should grow less than other airlines not just because Delta runs a more reliable operation but also because it will need to add fewer costs above its historic costs. The transparency of the DOT’s efforts, at least for the near term, the quality of service that Delta provides which will help the company’s efforts to grow its base of higher value passengers; Delta has long maintained a revenue premium to the U.S. airline industry.
Customer service metrics and the focus on them are just one part of Delta’s ongoing covid recovery plan that will continue to propel the company.
Delta is expected to refresh its third quarter guidance as early as this week along with many other airlines. It is likely to meet or exceed its margin guidance that was issued seven weeks ago.
Delta stock is stuck in the same range it has been in for most of the summer below its levels for most of the year. While macroeconomic threats are stronger than they were earlier in the year, Delta has proven that is can deliver financial performance that is stronger than virtually every other legacy/global carrier anywhere in the world and higher than most of the low-cost carriers in the United States. Delta’s financial quality fits hand-in-hand with its customer service quality.
The DOT’s latest focus on customer service quality not only provides an opportunity for consumers to better understand the levels of service that airlines provide, that there are significant differences in service quality between different airlines, and that Delta looks good when compared side by side. Add in Delta’s financial performance which is returning to its pre-covid position of leadership and Delta stock is certain to appreciate.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of DAL either through stock ownership, options, or other derivatives. 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.