Wednesday, November 13, 2019

What's Fueling Delta's Georgia Increases?

On November 4th, I was befuddled. For those that know me, this is nothing new. But on that day Delta put out a press release announcing the carrier would be increasing frequencies from Atlanta to four relatively small Georgia communities: Albany; Brunswick; Columbus; and Valdosta. The total population of the cities totaled just over 343,000 living within the cities.

While I was not surprised by Delta making simple capacity decisions in these cities, it did shock me to see a national press release for roughly 200 daily seats (400 round trip seats). This equates to 0.0002% in increased daily seats in and out all Georgia cities on Delta. However, Delta did not just put out a press release, the carrier coordinated with the Governor's office for a quote. I would understand including statements from local mayoral offices about the 30% daily seat increase in the local community, but the Governor? It did not really make sense to me.  

Here's the governor's statement: 
"With roots in Georgia dating back to 1924, Delta Air Lines has helped put our state on the map as a gateway to the global economy. Delta serves 80 percent of key U.S. destinations within a two-hour flight from Atlanta, and as these new flights begin operating, they will open new doors for economic growth in every corner of our state. I am grateful for Delta's partnership and their continued investment in Georgia."
Delta's statements were also extremely pro-Georgia as well:
"The airline employs tens of thousands of Georgians – it's among the state's top private employers – and contributes millions of dollars and countless volunteer hours to charities and organizations throughout the metro area."
Now, I am not a public relations professional nor a professional writer (clearly), but I can think I can tease out Delta’s messaging with these routes. If I were to restatement the quotes, "Delta drives a massive amount of the economy in Georgia". But honestly, how do these four routes tie to Delta's economic drive within the state? I suspect, very little. But let's take a look at each of the route's performance and see if they warranted the extra capacity or if something else helped fuel these increases over the line.

A quick RASM curve review shows that each of the markets appears slightly above Delta's YE2Q2019 RASM curve. Generally, each route shows revenue performance is roughly 10-20% above the system curve. On is the surface, each of the routes does appear to be performing well. This does ignore any possible impacts of small city inefficiencies (cost spread) and CASM impact associated with a smaller gauge aircraft.

When we trend the service over time, each of the routes has shown improved revenue performance over the last three years. The graph below is annualized to remove volatility in seasonal performance.

Much of the increased route performance appears to come from the load factor side rather than prorated fares on the routes, however, what strikes me is none of the routes are particularly full.

While we do see loads peaking around the mid-80s for ATL-VLD, the other routes typically are performing below 80%. Anything below an 80% load factor should be able to pick up additional passengers should Delta want to carry them. It is possible the routes may be filling on a peak day, however, Delta should have the flexibility to add a flight or increase gauge on those specific days, rather than another full daily flight to each of the markets.

While the routes are performing slightly above the system revenue performance, given there is plenty of room to carry additional passengers, I suspect there might be more to the story here than just performance-based additions to Georgian cities. Why not swapping to a larger gauge aircraft during peak performance? To me, it is is too clean of a decision for all four cities to see flight increases all at the same time without another underlying theme.

What exactly do I mean? I suspect, but will never be able to prove, the state of Georgia's on-again, off-again battle with its aviation fuel tax may be the true focus. After Delta brokes ties with the NRA, Georgia senators rejected a bill which was backed by the governor and passed by the house. The bill would have suspended the aviation fuel tax for 20 years. I wonder if these capacity investments are part of a larger campaign to show Georgia legislators how Delta is deeply invested within the state even though the flights are really immaterial to the network.

Delta's press release took great pains to show the investments the carrier was made by adding roughly 200 seats into the state of Georgia. However, Delta frequently makes similar changes across their network which are never discussed, let alone with a press release. Further, the press release quotes the governor who has been actively championing the suspension of the jet fuel tax is really the cherry on top for me.

While I understand how important these additional flights were to the individual cities, they largely are immaterial to the state. These cities generated roughly $42M in O&D revenue into the Delta network, which ironically, is the estimated tax saving amount for Delta if the fuel tax was suspended.

I do want to be clear on these route additions. Each of the routes were performing above system unit revenue averages, however, a 30% increase in seats on a mid-70% load factor route does not always pan out. It is completely possible the new flights could create unique connections that the other flights did not generate. These new flights might be the best thing since sliced bread, however, they do not feel like route performance-based additions, rather it feels part of a campaign to get their fuel tax suspended.

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