Earnings – Delta and United Solidly on Top

Delta

and United, two of the major carriers in the US, have successfully differentiated themselves from the pack by focusing on premium customers and service. Both carriers have been pursuing similar strategies and have found them to remain successful, even as industry dynamics have changed amid high fuel prices resulting from the Iran conflict.

With the war beginning near the end of the first quarter, this quarter is the first in which we are seeing the full impact on the industry. Due to higher costs, airlines have been forced to raise prices significantly. Fortunately, airfares had been increasing at a lower rate than overall inflation, allowing the industry to raise prices without a major loss of demand momentum. Both airlines reported strength in their premium and economy cabins, and a stronger-than-expected recovery from fuel cost increases in a shorter period than in previous high-fuel-cost environments.

As LCCs face longer advance bookings, given their customer mix that favors leisure travel, their ability to quickly recover increased fuel costs has placed them at a competitive disadvantage vis-à-vis carriers like Delta and United, which have more late-booking premium and business customers. As a result, Delta and United have recovered a substantial portion of their fuel cost increase in the second quarter, despite being approximately 70% booked in advance. With revenues for new bookings incorporating fuel increases at higher prices as older bookings are used, the ratios of new to old bookings will become more favorable through the remainder of the year. As a result, expectations for the summer season are positive for the big two.