Airline Weekly - February 1, 2016
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Airline Weekly - February 1, 2016

Clash of the Titans: American and Delta, successful with different approaches, turn their wrath on each other

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Clash of the Titans: American and Delta, successful with different approaches, turn their wrath on each other

They are the two largest airlines in the world and—in terms of total dollars—the two most profitable too. And they are at each other’s throats. American and Delta are at war.

Last week, you could even hear it during American’s conference call with investors and journalists. Executives made no mention of American’s longtime rival in Chicago, United. Nor did they talk much about low-cost carriers. Instead, they ripped Delta for losing billions of dollars from fuel hedging. They acknowledged Delta’s operational superiority but downplayed its extent. They noted how American’s pilots earn 7% more per hour than Delta’s pilots. They scoffed at Delta’s reliance on profit sharing to compensate workers. They alluded to Delta’s eventual need to spend heavily on fleet modernization, a process well underway at American. And they attributed Delta’s stronger underlying profits at the moment, excluding fuel hedges, to the simple fact that seven years have passed since the Delta-Northwest merger—it’s been just two since American merged with US Airways, implying lots of unharvested synergies yet to come.

American certainly isn’t alone in talking smack. If anything, it’s largely just responding to Delta, which is becoming the industry’s preeminent trash-talker. Delta mocks rivals for inferior service and reliability, never mind some of the things it says about aircraft manufacturers, governments, Gulf carriers, regional service providers and so on. Last fall, when Delta decided to cancel a standard interline ticketing and baggage agreement with American, it couldn’t resist telling the world why: because “American sent passengers to Delta for re-accommodation at a five-to-one ratio” during one recent month, Delta said. In other words, Delta was left carrying too many of American’s stranded passengers.

This escalating war, however, is about much more than just talk. It’s also about philosophy. Each carrier, for example, adopted diametrically opposed approaches to managing fuel risk. American abstained from hedging completely. Delta? Forget mere hedging. Sure, it did that. But it also bought itself an oil refinery! Their approach to fleet renewal is at least as contradictory. American’s pre-merger management team favored a big-bang strategy, placing massive orders for new planes with both Boeing and Airbus. Delta, on the contrary, has placed smaller but more frequent orders on an opportunistic basis. It also has a greater affinity for used airplanes and older models. Both carriers like joint ventures and alliances, but Delta buys ownership stakes in key partners. American doesn’t. When it comes to finance, Delta is eager to repay debt quickly to obtain an investment-grade credit rating. American doesn’t see the point, because it’s already borrowing at extremely low, investment grade-like interest rates. American supports handing U.S. air traffic control to... (459 of 1,836 words)

Also Inside this Issue:

Let’s talk about what everyone’s talking about. No, not Donald Trump. That’s a different discussion. For airlines, it’s cheap fuel, the immensely powerful hand behind almost every big change and trend now shaping the industry.

This includes the swelling tide of profits at U.S. carriers, a rags-to-riches story perhaps best embodied by American. It was bankrupt two years ago. But last year? It earned a larger operating profit than any other airline in the world, pushing Delta off that throne. But what about the many airlines elsewhere in the world that haven’t yet reported full-year 2015 operating profits? Rest assured, none will come close to American’s $7.3b.

American does, however, face greater revenue challenges than other U.S. airlines, explaining its relatively modest Q4 margin improvement y/y, even with its enormously advantageous decision not to hedge. American is victimized by deregulation in Dallas and economic catastrophe in South America.

JetBlue, on the other hand, was the most improved U.S. airline y/y last quarter. Well, other than Allegiant, anyway, whose fourth quarter heroics put Peyton Manning to shame.

Life is pretty good these days in Japan too, although Japan Airlines continues to greatly outperform All Nippon, a familiar pattern since JAL’s bankruptcy emergence at the start of the decade. The scene appears less cheerful in Europe, where Wizz Air did fine but without a big fuel bonanza.

Elsewhere, Cathay’s Dragon and Alaska’s Eskimo are getting makeovers. Iran bought a bunch of planes. And Boeing test flew its first B737-MAX.

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