Delta's Long-Haul Dreams

With the airline facing a saturated (but still very profitable) domestic market, Delta is looking far away for its next growth stage.

Dear readers,

I don't have much to quibble about from Delta’s second quarter earnings report. Despite very high fuel prices, Delta produced an adjusted operating income of $1.6 billion with an operating margin of 8.8 percent.

Executives promised continued momentum in the third quarter, predicting an operating margin of 11-13 percent, and teased investors with the prospect of even better future results if fuel prices drop and fares remain high. Ed Bastian called sustaining the high fares an “important step towards improving the industry's financial health and earning sustainable returns over time.”

Maybe so, but we won’t know if airlines can keep prices high for some time, because as the old saying goes, you’re only as strong as your weakest competitor.

So today, let’s examine some of the commercial strategies that Delta executives highlighted on their earnings call last Friday, including their future international growth plans, their interest in Los Angeles, and their bullishness on new basic fares for premium cabins.

Oh, and I’ll hit Bastian for some overly patriotic comments.

Growth mostly will come in growing economies. And that’s not the United States.

Even in the best of times, U.S. GDP typically grows in the low single digits per year. Because well-run airlines don't seek to grow capacity faster than GDP in a mature market (unless they have a strategic reason), Delta is looking for other places to put airplanes.

"We think longer term, the domestic market will move with the economy," chief commercial officer Joe Esposito said. "International for us will grow faster than average just because there's a lot of economies that we still don't serve."

One new route will be Atlanta-to-Riyadh, beginning in October. Another should be the long-teased Los Angeles-to-Manila service. There will be others, too.