Why Delta Loves its Focus Cities

It's only partially related to flying airplanes. Also in today's edition: Delta executives shared veiled criticism of United and American.

Dear readers,

It’s no secret that many insiders think Ed Bastian may be too invested in his public persona and perhaps not enough in airline management. The public bromance with Tom Brady, the leadership podcast, the CES keynote — maybe it’s all a bit cringeworthy, but you cannot dispute that Delta has been rolling during Bastian’s nine years as CEO, including the very nice third quarter it reported last week (with pre-tax margin of 10.7 precent). I think he’s both an adept leader who deserves credit for maintaining Delta’s advantages, and he is someone who really likes the spotlight.

But isn’t it telling that many of you have lukewarm feelings for Bastian, yet deep reverence for his deputy, Delta president Glen Hauenstein? So many readers of this newsletter have told me they consider Hauenstein a once-in-a-lifetime genius for his network and revenue moves. Some of you (including people who work at Delta’s many partners) curse him for being a dogged competitor who knows how to mess with another airline’s profits and win market share, yet you relish chances to meet or have a meal with Hauenstein to learn from him about where the industry will go next.¹

I agree with you. When I listen to Delta’s earnings calls, I’m looking for as many Hauenstein-isms as possible, because if Hauenstein says something is a trend, it probably is. On last Thursday’s third quarter earnings call, I heard an interesting one in response to a question about why Delta is so bullish about its smallest coastal hubs (like Boston) and its even smaller focus cities in Austin and Raleigh. As you know, network airlines often struggle with smaller operations outside their spheres of influence — the biggest profits are made at their largest hubs, with their low unit costs and huge passenger throughput. Small hubs and larger focus cities typically are the first to see cuts in a pullback; during the pandemic, as Brett Snyder wrote in 2021, Delta hacked these markets more than its larger hubs.

But Hauenstein told analysts last week that the pendulum again has swung, this time in favor of maintaining and investing in smaller hubs. And the reason is simple: airlines now make a lot of money doing things other than flying, and Hauenstein said the best markets for credit card applications often track a region’s economic output.

“We used to look at the airline at a route level, but that wasn’t really thinking about what’s inside the minds of customers,” Hauenstein told analysts. “What makes customers choose Delta over a different carrier? I think the answer is relevance, right? If we’re not relevant, we cannot acquire the SkyMiles [members], and we cannot acquire the credit card [applicants].”

Hauenstein promised more investment at airports like Raleigh and Austin, saying those markets have been “quite profitable for us” — sometimes more profitable than hubs. If you study hub economics (bigger is better), you might wonder how that can be, but it’s clear that Hauenstein is not just looking at the route-by-route performance.

“These are high-income growth areas,” he said. “These are places where we’ve acquired a lot of cards. [We are] trying to understand the interaction between the airline and the card and how to maximize both of those together, as opposed to just looking at an individual route.”

Hauenstein mentioned another reason focus cities are important. Before Delta merged with Northwest, beginning the push that created today’s consolidated industry, network airlines could compete only in markets where they were the strongest. Now, with only three full-service domestic airlines, Delta can’t afford to concede Texas to United and American — it needs to at least be there, even if Austin will never have the same scale as Houston or DFW.

“Austin, we’ve chosen because we don’t have a Texas hub,” he said. “Everybody else has a Texas hub except Delta. As you know, Texas, in and of itself, is a huge revenue market. So [it’s about] seeing those opportunities, looking at the demographics, looking at the GDP generation for these cities and saying, ‘where do we need to have a relevant offer?’”

I’m interested to see if United and American copy this focus city approach. American tried during Covid, when former chief commercial officer Vasu Raja built up a robust focus city in Austin. But load factors were paltry, and American mostly has been hub-focused since then.

United is similar. Other than Cleveland, a former hub, United doesn’t have focus cities. This came up last month at the APEX Expo in Long Beach, when I asked Scott Kirby whether United might want to acquire Spirit’s assets in Fort Lauderdale to build a focus city or small hub. He said Spirit didn’t have enough gates there to make it worthwhile for United. “What we do is we fight battles from the high ground,” Kirby said. “Everything we’re doing is in our seven hubs.”

Kirby’s assertion made sense, but I wonder about it in light of Hauenstein’s comments. If it does not make a play for Spirit’s assets (if Spirit makes them available), is United OK being irrelevant in the South Florida market, for both travelers and credit card applicants? Perhaps for now it is, but if the reason for having focus cities has changed, as Hauenstein suggested, I wonder if United will find a way to get into Florida, just as Delta re-entered Texas.

What do you think? Will more airlines invest in focus cities now that credit card applications are so important, or is this a Delta-specific strategy? (Leave your thoughts in the comments section or respond to this email and it’ll come directly to me.)

Now to a few other Hauenstein-isms from the earnings call (plus one Bastian zinger).