Passport to the Future: Delta, still trying to solve its Asia dilemma, lays out its vision for long-term growth abroad
It’s as fickle as fashion: One moment they’re hot. One moment they’re not. And right now, international markets from the U.S. are decidedly cold, at least relative to booming U.S. domestic markets.
But for all the troubles in the world beyond U.S. borders—weak European economies, China’s slowdown, imploding production in emerging markets, plummeting currencies and so forth—Delta still sees international expansion as its long-term ticket to sustained success.
That doesn’t mean it’s expanding abroad right now. Quick to call the overseas landscape “choppy,” Delta’s international ASM capacity will be flat to down 2% this year—Brazil, Japan and the Middle East will see the steepest cuts. In the meantime, foreign carriers, facing domestic and shorthaul weakness—and for whom flights between the U.S. and elsewhere are their best opportunities, not (as for U.S. carriers right now) their worst—are shoveling capacity into U.S markets at a blazing pace. And it’s not exactly as if leading economists are forecasting a return to bullish worldwide growth for 2016—the IMF sees global GDP rising less than 4%.
There’s more to Delta’s international gloom. Think headwinds like an $800m hit from adverse foreign exchange trends last year, and a complete write-off of all the money it’s owed by the Venezuelan government—it will never see that money, Delta’s accountants concluded. Until recently, its Japan network lost money. Unsurprisingly, Brazil has been a growing challenge. And the Paris attacks indeed hurt demand, with France a much more important market for Delta than it is for either American or United.
But it’s also true that the U.S. domestic market is a mature market, whereas many aviation markets abroad that are struggling right now are still likely to grow more quickly over time. It’s also true that Delta—especially in recent years, as its reliability reached unprecedented levels and as its inflight product improved—already commands yield premiums in domestic markets: Delta executives claim passengers pay about 14% more on average per seat per mile to fly Delta than to fly its competitors, with the figure rising to as high as 20% more recently. But its revenue premiums internationally are less overwhelming. To Delta, that signals opportunity.
Make no mistake: Even right now, Delta’s vast international network is not losing money. Not with fuel so cheap. And not, to its great credit, with the masterful strategic steps it has taken in Europe. United and Lufthansa make no secret of the early difficulties they had in forming an effective joint venture, even just a revenue-sharing joint venture at that.
But Delta and…
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