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The Delta CEO takes issue with the view that aviation growth opportunities “inert.”
Delta Air Lines executives offered annual big picture view of its 2019 performance as it sought to frame expectations for 2020 for investors skeptical that this past year’s historic growth can continue.
Many of the themes uttered by Delta CEO Ed Bastian and the airline’s other executives have been made before during quarterly earnings calls and at industry conferences throughout 2019.
Delta’s growth strategy is founded on three pillars: the first is on international expansion through equity stakes that will allow it to competitively price its service in more places is the hard-nosed pledge.
The second pillar was intended to showcase Delta’s “softer side” by highlighting its drive to become a “brand that is loved” by fliers, who will then be incentivized to pay a premium for more quality, personalized customer experience.
Lastly, the third pillar ties the other two together: an emphasis on using technology to promote more efficient revenue management programs and personalized passenger service via online bookings and mobile interaction.
“In January, Delta and I will be doing the lead keynote for CES, the Consumer Electronics Show in Las Vegas,” Bastian boasted to let investors know how well-regarded Delta’s digital transformation has become in the eyes of the wider tech world. “That whole hour's presentation is first presentation is focused on where we're going and our vision for travel. We'll have some really exciting new partnerships to announce, as well as new technologies to show. A lot of it will be focused on the ground experience, how we're changing that ground experience.”
Growth Is Not A Dirty Word
The other main point Bastian and Delta executives wanted to drive home: the historic growth in load factor and its consistent revenue gains still have plenty of space to rise.
At the start of the presentation, Bastian noted that Delta had its “largest revenue day in our history” on the Sunday right after Thanksgiving, as almost $200 million in revenue was captured by the airline that day.
Putting that number into further perspective: That was $20 million higher than the previous high-revenue day in Delta’s history, Bastian said.
“The U.S. consumer is healthy and is responding well,” the CEO said. “And we see that revenue growth going into 2020.”
In 2020, Delta is forecasting growth between 4- to 6 percent.
“I know that 2020 has a couple of unique challenges,” Bastian said. “Every year has unique challenges to itself. One of the things we’ll certainly be watching carefully is the return and the induction, reinduction of the MAX into the system.
“Growth in our industry historically has been a dirty word,” he continued. “People imply undisciplined behaviors and market share battles and skirmishes, rather than the opportunity to continue to invest in the business and grow the whole business, not just the top line of the business. This year we're continuing to see that, we've grown our business by 15 percent over the last two years because of the consumer demand. As the best-performing airline in a market where consumers want to be invested in, and want to experience, we're in a great place to be.”
International Is The Only Place To Go
During the Q&A period, Goldman Sachs analyst Catie O’Brien questioned Bastian about Delta’s growth strategies generally, and in international.
“I'd start with the premise of your question that the growth opportunities are inert,” Bastian responded. “Growth opportunities are domestic. In the medium term, we have great opportunities. I think the best opportunities for growth still for us are in the domestic system for easily the next five plus years.”
Still, it’s the length of the arc for domestic growth that has analysts uncertain about airlines.
As Bastian noted earlier in his presentation, “We’re not building new places to fly. We’re building bigger airports. We’re building bigger aircraft. But we’re not building new places to go.”
So what’s going to happen a decade from now? Two decades from now?
Despite global trade fears from the U.S. and China to Brexit and Europe, Bastian said that the future growth depends on international.
“No airline out there is taking that approach to thinking about the true globalization of an industry and having a hands-on impact in where we’re going and where we’re building,” Bastian said. “So we’re building for the future at the time when the marketplace will become more saturated. The airways already are saturated. We don’t have the technologies in the sky to enable that much more travel. That’s why we’re building the bigger planes and the bigger airports. But if someday, we’re going to reach the point where international is going to become the focus for growth, and we’re going to be very well positioned there.”
A Stake In The Ground (And The Air)
Delta’s international growth strategy also dovetails with its financial strategy, primarily when it comes to taking investment positions in partner airlines, not just co-equal agreements.
Delta’s September news that it was taking a 20 percent stake in Chile’s LATAM Airlines Group S.A. represented a major shakeup in the dominance of North and South America air travel, as the combination of the two airlines is effectively in a leading position in five of the top six Latin American markets from the U.S.
It also showcased Delta’s evolving view of the importance of international deals – and its somewhat diminished view of typical network alliances, such as its membership in SkyTeam.
The deal had Delta displacing American Airlines and the oneworld Alliance as LATAM’s partner. American, which has had a decades-long partnership with LATAM, had been attempting to form its own strategic partnership with the Santiago-based carrier.
“The other thing I want to talk about international is, I would say, to be self-reflective, is that we’ve been a very good commercial investor,” Bastian said. “And we’ve got ownership stakes in Air France and KLM and Virgin and Aeromexico and coming to LATAM and Korean and China Eastern. But we haven’t been as good and active equity investor in these airlines.
“When the LATAM deal closes, that will be worth $4 billion,” he added. “If you think about Delta, and you think about being inside the boardrooms and having a significant equity stake in those companies and the power of Delta as well. There’s no one that has a better view of what’s going on across the world in our industry than Delta, which is not even close. And we have the ability to lean into that and to invest.”
Bastian wants Delta to be thought of as not just as a commercial partner, but as an equity owner that is directing resources and talent around the globe to generate and satisfy customer demand.
“We carry 200 million customers a year across Delta, making us the largest airline in the world,” Bastian claimed. “When you factor in just the companies that we have investments in, not SkyTeam, just the companies we have investments in, that’s over 500 million customers that we serve this year alone. That’s 500 million customers that we directly touch. Scale matters in this business and the opportunities for the future are in that pipeline.”
Airline Pricing And Brand Affinity
In his presentation, Eric Phillips, Delta’s SVP for Pricing & Revenue Management, took a different turn from the expected with an emphasis on empathy – and even a little poetry.
Specifically, Phillips’ talk was charged with addressing the issue of trust.
“People can’t quite figure out – and do they really trust you that – to give them a fair and honest deal when they can see if they delay their flight by three hours, they could save $1,000?” Bastian said in his preview of Phillips’ remarks. “What does that communicate to your customers in terms of what you think about them? And how do we build trust in there? There’s a lot of interesting work we’re doing in that space.”
It was Phillips’ job to demonstrate that work on building brand affinity.
“We've invested a lot in data, systems and tools, all with the goal of helping us to create what we thought was the optimal or maybe even what we thought was the perfect offer for our customers,” Phillips began. “But what we completely missed was talking to them, listening to them and learning from them about what their actual expectations or needs were when they traveled with us.”
Still, Phillips did note what has been learned and how it’s working: “unit revenue premium to the industry sits above 110 percent. And two, we have carried more than 200 million customers in 2019, more than we have ever carried before. And three, in 2019, and more people have joined the SkyMiles loyalty program, and we have acquired more members in the Amex card than we have ever acquired before.”
That success has come from learning new ways of approaching pricing and marketing. Looking back to when he started with Delta more than 20 years ago, Philips noted that the old adage was that 75 percent of a customer's purchase decision was driven by three things: schedule, price and frequent flyer program.
“When you think back to when schedule, price and frequent flyer program were the main drivers of the purchase decision for a customer, what it forced all of us in this industry to do is to think of two things as a commodity,” Phillips said. “One was the seat and, two, was your time. It led us to believe that every seat was equal, regardless of where it was in the aircraft or what the experience might have been with it. But importantly, it made us think that your time was of equal value regardless of who you were or why you were traveling with us. And when you have those two things thought of as commodities, it forces us to then say that lowest fare becomes really, really important.”
By thinking of the relationship to the flier as being primarily about providing the lowest fares, you spend a lot of time figuring out how you're going to optimize the individual transaction, he said. You want to maximize that transaction rather than thinking about who is the individual that is actually making the transaction.
“A few years ago, we decided that one of the most important ways that we can value your time as an individual is to be very good with operational reliability and always provide excellent service, and that focus for us will never end,” Phillips said. “But what we also learned was that you all don't think about the experience on board the aircraft, the same. This matters to customers. They wanted to have a choice in the products or the experiences that they would have when they were on board Delta aircraft. So it was an important turning point for us to think about now providing choice for our customers.”
The Social Science of Revenue Management
That has led Delta’s pricing and revenue management team to move out of the “hard science” of economics and instead look at pricing through the prism of behaviorists.
“We've learned a lot about what customer behavior is, and it's led us to move towards evolving the model even further towards our ultimate goal of really understanding what customer preferences are, creating offers for them that meet their needs and always striving to improve their experience on us. It tells us, importantly, where we need to focus next,” Phillips said. “Ultimately, tailoring our products, our programs and our services to meet or exceed our customers' needs and expectations and really value your time is the best way for us to earn your trust.”
In terms of building trust, Phillips’ discussion then become more rooted in practicalities. On-time performance and reducing cancellations is a key measure of the implicit promise of a Delta ticket.
While that is a bit tougher to control, Phillips acknowledged one area that is within his realm: figuring out how to better display the airline’s products within a tighter digital retailing framework.
The Maya Angelou Method
And in Phillips’ mind, that all comes down to delivering the message that Delta can be trusted – not just a provider of a commodified experience of getting from Point A to Point B.
“Improving the ways that we are consistent, clear and fair and transparent, above all getting better at empathy, these are great opportunities for us,” Phillips said. And I know you'd never thought that a pricing person would quote Maya Angelou, but I'm going to. Maya Angelou had a great quote, and she said, ‘I've learned that people will forget what you said, people will forget what you did, but they will never forget how you made them feel.’”
In attempting to quantify how Delta wants its passengers to feel, Phillips said that 70 percent of those who utilize a premium product on Delta, buy a product of equal or higher value on future travel. For domestic first class, that ratio is even higher: 90 percent of customers who sit in domestic first class buy the premium product on future travel.
“And the other thing is that margin improvement in the premium products in the domestic entity has improved – premium product margins have improved three times more than the margin improvement we've seen in Main Cabin,” Phillips said. “When customers come back to a brand time and time again, that's always good for revenue. Combining Delta's brand affinity with product affinity has been a very important part of our strategy not just for revenue growth but for margin improvement, and we have absolutely seen that over the last years.”
