Four Thoughts for Tuesday
On United’s safety issues, Delta’s stock price, Breeze's operating profit, and how airline CEOs reacted to Covid
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Dear readers,
I'm back from a wonderful daddy-daughter vacation with my 6-year-old, and I have four items to share about U.S. airlines before earnings season begins on Wednesday, when Delta reports first quarter results. The winter may have been so-so, but I suspect we'll hear optimism from the Big 4 (and maybe others) about the upcoming spring and summer travel season, even if the post-Covid surge is over. Consumers still want to travel — Delta keeps telling us they prefer experiences over goods — and with limited seat supply during peak periods (a silver lining of aircraft delivery delays) profits should rise.
Read on for my musings on United’s safety issues, a new analyst report that favorably compares Delta with Abercrombie & Fitch, Breeze’s operating profit (for one month) and a book I’m reading about how airlines (and other companies) handled the early days of the pandemic.
United is in the news for the wrong reasons
I flew United before Scott Kirby arrived, and I fly it now; it’s better in almost every area, and it flies me to more places I want to go than other airlines.1 Loyal readers know the improvement and expansion are big reasons why I like Kirby. So yes: United's recent issues with aircraft maintenance have caught me off guard and made me a bit defensive. When mainstream journalists have asked me for my analysis, I have downplayed the problems, noting that all airlines face operational issues every day, most of which reporters outside the industry never notice. You all know it’s not rare for an airplane to return to the field with a minor issue.2 Still, United has been in a rut recently, with some high profile incidents, and while it is probably just a string of bad luck, we can’t say that for certain.
The big concern is that the FAA is now involved, and it's clear this isn't a story that will go away in a week or two. The regulator is evaluating United's work processes, manuals and procedures, and though it’s not clear how rigorous this examination will be, it appears to be more thorough than the airline would like. Over the weekend, United cut its Newark-Faro flight completely and postponed Tokyo Narita to Cebu. Zach Griff of The Points Guy reported that the FAA had barred United from adding new outstations during the regulatory review.
As I read Griff’s story, I was reminded of CFO Mike Leskinen's presentation in February at Citi's 2024 Global Industrial Tech and Mobility Conference. I lauded his performance and I stand by that opinion, because I think he told investors (who ultimately own the company) what they wanted to hear. But Leskinen also spoke about the need to "sweat out" expenses in various parts of the operation, including maintenance. "We have to do a certain amount of our own maintenance, for sure, to run this airline optimally," he said in an answer to one question. In another, he said the airline should consider working with more MROs.
Nothing he said was unusual. But given that United is spooked about the bad press, I suspect we won’t hear much more about cuts in maintenance expenses, even if they’re a necessary part of running a business. It’s not that much of a stretch to envision how a tech ops union might argue that “more MROs” means “more outsourcing” the next time a contract is up. And as we have seen before, especially at American, unions can scare the public about the dangers of outsourcing. Unions love the leverage it gives them.
It’s possible we would have learned more about Leskinen’s plans at United’s May 1 investor day, but the airline postponed it, telling analysts last week: “right now, our entire team is focused on cooperating with the FAA to review our safety protocols and it would simply send the wrong message to our team to have an exciting investor day focused primarily on financial results.” So yes, I’d say United is taking this seriously.
I also found it interesting that United CEO Scott Kirby sent a letter to many customers on March 18. “Our team is reviewing the details of each case to understand what happened and using those insights to inform our safety training and procedures across all employee groups,” he wrote. United is the only airline with a former White House press secretary running communications, so I am sure the airline weighed the positives with the drawbacks when it sent this letter. One reason brands in similar trouble don’t mass-send a letter like this is because even though insiders may feel as though the whole world is focusing on aircraft incidents, a lot of people are just too busy and too scatterbrained to notice. But when the CEO emails them, then they notice. After she got the email, our children’s nanny asked me, “is United unsafe?” Despite being an elite frequent flyer, she wasn’t aware of United’s issues.
Delta is more than an airline, two analysts say
Delta has made a post-Covid pivot in how executives talk about what they sell. For a decade prior to the pandemic, the airline expected people to pay more because it offered a better product than the competition. That's still mostly true. But as United has caught up, Delta has changed its strategy slightly. Its secret sauce now is not just the product, but also the power of its brand — the strongest among U.S. airlines.
Ravi Shanker and Alex Straton, two analysts at Morgan Stanley, picked up on this. Last week, they published a report titled "A Model on the Runway: What Delta Air Lines Can Learn from Abercrombie & Fitch.” They argued that Delta has done most of the hard work already — it already has the right target demographic and best branding strategy, along with strong sales and earnings — and said now the airline needs the market to reward it for the transformation. The airline need investors to think of it more like Abercrombie and less like a transportation provider, the analysts suggested.
Abercrombie's stock is up more than 500 percent since 2020, they noted, while Delta’s is down about 20 percent, compared to pre-pandemic. No one is predicting a 500 percent gain, but the Morgan Stanley analysts are bullish on Delta’s stock. Morgan Stanley raised its target price from $77 to $85, or about $30-$38 more than the airline's closing share price on Monday. In a best-case scenario, the bank said the stock could trade between $90 and $110 per share.
"We believe [Delta]'s push into premium will not just allow them to outperform the rising tide of airlines demand growth, but will also be rewarded by investors in much the same way that Abercrombie & Fitch's recent reinvention as a more premium and relevant specialty retailer has been rewarded by investors," they wrote.
The two companies aren’t identical, but they have several things in common, the analysts said. Both have a loyal base of wealthy millennials3 and an "evolved product assortment" with a healthy inventory of premium offerings. They each eschew discounting more than competitors, and each has reduced its "footprint" in recent years — Abercrombie by closing stores, and Delta by retiring older airplanes, and by simplifying its network. In addition, the two companies spend more on digital advertising than they did before their turnarounds. Delta has just about doubled its advertising spend between 2019 and 2023, the report said, “with an increased focus on their mobile app.”
I suspect Delta executives liked the gist of the report, if not the comparison to Abercrombie, because I sense the airline prefers to be more like a Nike or a Starbucks, where the brand is so strong that it transcends the category. Abercrombie is less of a known brand outside its target demographic.4 But a bullish report from a big bank is always welcomed, no matter the comparison.
Breeze made an (operating) profit. In one month.
Breeze sent out a press release on Tuesday to promote what is, for the the airline, exciting news. Breeze recorded an operating profit in March — the best month in its short history.
We received no more details about the profit, including the size of it, or whether the airline recorded a net profit. The airline didn’t share much about the full first quarter, either. President Tom Doxey was quoted as saying Breeze doubled its quarterly revenue, year-over-year. And the airline shared one metric about unit revenue:
In the first quarter of 2024, the premium leisure, point-to-point carrier increased unit revenues by more than 30 percent year-over-year while generating more scheduled service revenue in March 2024 than in the entirety of the first quarter of 2023.
I ran this release by my podcast co-host Brett Snyder, who writes the Cranky Flier blog, expecting him to have something pithy to say about Breeze’s parsimonious release. But he told me it makes sense for the airline to want to control the narrative.
“I would have been surprised if they gave us more detail,” Snyder said. “They are just trying to prove they are a sustainable business, so they will release as little info as possible to make that case.”
Read this book to learn about how U.S. airlines got their bailout
If you like inside baseball, I have a book for you. It’s Crash Landing: The Inside Story of How the World's Biggest Companies Survived an Economy on the Brink and it’s by former Wall Street Journal reporter and and current Semafor editor Liz Hoffman. The juicy book tells stories about how a few industries, including airlines, navigated the the pandemic. It’s filled with nuggets about how CEOs, including Gary Kelly, Doug Parker, Ed Bastian, and Oscar Munoz, handled the crisis.
It confirms some of what I had thought, like how many CEOs didn't take the threat seriously early on. For example, "during the first few days of March,” an executive from Airlines for America polled the nine airline member CEOs about what they should discuss at an annual strategy meeting, planned for March 5, 2020. They had planned to focus on environmental and sustainability efforts. When the executive from the lobbying group inquired about whether they still wanted that agenda, "six had told him to make sure they didn't get thrown off topic by the coronavirus," Hoffman reported.
As the saga went on, the CEOs began to understand the severity of the situation, but the book suggests some were in denial about the depth of the calamity. First, the airlines said they wouldn't need money from the government. Then, they realized they would need some money. By March 18, many of them understood they would need a lot of money.
This is one of those books in which the author has spoken to many CEOs but does not name the individuals she interviewed. As with most books like these, you can guess who spoke because they end up as the story’s heroes. (If you're going to spill to a reporter, you might as well make yourself look good.) Predictably, Doug Parker ends up as our protagonist. He’s the guy who sneaked off for a meeting with Treasury Secretary Steve Mnuchin after a meeting all the CEOs held with President Trump on March 4, apparently to the surprise of his fellow CEOs, who didn’t yet understand the gravity of the potential problem. “What are you meeting with Mnuchin for?” Gary Kelly asked him, according to the book.
In this telling, Parker may have understood the issues earlier than his competitors, but the real savior is Sara Nelson, president of the Association of Flight Attendants. I have wondered how influential she really was during the bailout talks because she also has a knack for attracting positive media attention. (She’s very approachable and has an ace PR flack.) But the anecdotes in the book suggest her lobbying efforts were the real deal. According to the story, the CEOs had little rapport with Democrats in Congress — so little that then-House Speaker Nancy Pelosi never responded to a text that Parker sent her. Yet Democrats wanted to speak to Nelson, who helped the CEOs craft the final aid deal. In one amusing anecdote, the CEOs heard Nelson barking orders on the phone to someone they assumed was a union underling. Instead, it was Peter DeFazio, the then-chairman of the House Transportation and Infrastructure Committee.
And a couple of notes to finish.
First, I want to remind you about The Air Show, my weekly podcast with Jon Ostrower of The Air Current and Brett Snyder of Cranky Flier. Many of you have started listening and have written us kind notes, and we are grateful for your support. In last week's episode, Jon and I discussed the evolution of India’s market, after my interviews with Air India's Campbell Wilson and IndiGo's Pieter Elbers. In our next episode coming out Thursday, we will talk about how Alaska successfully defended its Seattle hub despite an incursion from Delta, while JetBlue ceded its market position when Delta did the same thing in Boston. Brett has pulled some compelling data from Cirium to make the case. You can find and follow the show on all podcast apps.
Second, I love to hear from readers, even when they point out mistakes. One of you noted that while Philippine Airlines may soon fly to eight destinations in Canada and the United States, it will not fly to eight destinations in North America, as its press release stated, and as I wrote. Honolulu and Guam are not in North America. The Airline Observer regrets the error.
That’s all for today. I’ll be back later this week with some thoughts on Delta’s first quarter earnings.
I love exploring Asia. Apparently, so does Patrick Quayle.
Years ago, I had a source at United who would send me internal bulletins about aircraft that made unscheduled landings. At first, I enjoyed knowing about them, since most journalists don’t get that stuff. But over time, I realized it was no big deal. There were so many alerts about maintenance issues, and most of them were a big nothing.
Delta got there by moving its target demographic younger. Abercrombie went the other way, reducing its reliance on teenagers and early 20s shoppers and instead targeting older customers, according to the report.
My editor, Sara Fay, reminds us of the A&F’s history. “If you were a teen or pre-teen in the ‘90s and ‘00s, the brand was *it*,” she said. “But a lot about the company and its vision were truly ugly. They were famous for shirts that had racist jokes on them. All — or virtually all — of the models were white; the dress code for employees was kind of comically particular and insidious, and discriminatory in practice, according to many lawsuits, one of which made it to the Supreme Court.” It took a long time for the brand to recover and go through the turnaround cited by the Morgan Stanley analysts. And the brand turnaround has been remarkable, Sara tells me, a near 180-pivot from pure exclusion to inclusion. “There’s a Netflix documentary about that period in Abercrombie’s history, if you’re interested and possibly still a bit scarred by it, like I am.”
Your insights into the aviation industry are always enlightening! It's fascinating how you connect the dots between airlines' operational strategies and their financial outlooks, especially with such clarity and depth. I particularly enjoyed your perspective on Delta’s branding evolution. It really makes one think about the power of a strong brand identity in the corporate world. Just curious, what are your thoughts on how emerging technologies might further impact airline operations and customer experiences in the near future?
Hey Brian - regarding f/n 4, I watched that Netflix documentary when it came out. It was very disturbing. Glad to hear they’ve turned things around!