Why is Delta Going Down Under?

Posted by: Justin Bachman on April 16

On April 14, Qantas Airways sent a shiver through the international airline community with a startling profit warning: Income for the second half of this year could plunge more than 90%. Qantas’ chief financial officer conceded that the airline is not even profitable on its international flying, a stunning bit of news given how highly the company is rated on travel surveys and how broadly its global network reaches. Qantas is offering a 2-for-1 sale on its business and premium economy classes for travel this summer (Australia’s winter) from the U.S. because demand is so weak at the front of the planes. Half off return fares just to move some seats.

At the same time, the world’s largest carrier, Atlanta-based Delta (DAL), is forging ahead with plans to commence daily service from Los Angeles to Sydney on July 1. It will become the fourth airline on that route, joining Qantas, United (UAUA) and V Australia, the upstart Richard Branson’s Virgin Group launched in late February. In a release last week, Virgin Blue (V’s parent) CEO Brett Godfrey boasted that trans-Pacific fares have dropped 54% over the same period of 2008, “a direct result of competition and a new player in the game.”

Branson has the stomach to subsidize losses on such ventures as this and Virgin America for some time. Do Delta shareholders? What is the thinking from Atlanta? It seems to make little sense amid recession and a steep drop in the kind of business travel that sustains such routes. Given the heavy concentration of traffic from the U.S. coasts, I first thought that perhaps Delta sees an unserved market in other areas.

Being puzzled on this issue, I queried a few very smart airline people about this. Bill Swelbar, an airline industry consultant, director of Hawaiian Airlines (HA) and a blogger at Swelblog, sees the effort as mostly strategic. “I am thinking that this is a Delta/SkyTeam competitive strategy,” he wrote in an email.

At this point, the US - Australia market is dominated by STAR and oneworld. Delta has a distinct advantage to deliver Southeast US traffic to Australia which is certainly a weakness for each AA and UA. Also, it was a pool of traffic that Northwest did not fully access because of its network. So, yes Delta must be thinking that it is important to put a marker down and establish the advantage of its network before someone else. My guess is this loses money in the short to medium term, but Australia is too big a market to ignore.

Tad Hutcheson, a fellow who has had an up-close and personal view of Delta through his various sales and marketing positions over the years at hub rival AirTran (AAI), speculates that Australia offers Delta a place to deploy large jets and furthers the company's large international bet.

Jim Corridore, an analyst with Standard & Poor's Equity Research (which, like BusinessWeek, is owned by McGraw-Hill) says the capacity being scheduled for Australia is modest in the larger Delta scheme. “I think that given the difficult economic environment, further international expansion is not likely, and it's more likely that Delta and others will reduce international capacity after the summer travel season if we don’t start to see the global economy and air travel demand start to improve by then,” he wrote.

“Since they already have LAX-Sydney in the schedule, I don’t think they will cancel it, but I don’t expect to see a lot more international expansion like that.”