Here’s a deeper dive into the earnings reports from U.S. airlines the past few weeks.
The general takeaway from airlines’ Q2 earnings performance can largely be summed up by noting mounting delays from severe weather systems, scheduling strife stemming from the continued grounding of the Boeing 737 MAX from the skies, and rising fuel costs.
So with all those points widely noted to even the most casual observer of commercial aviation, here’s a roundup of the other highs and lows that airlines noted during their Q2 earnings calls with analysts:
Delta Air Lines’ Q2 domestic load factor broke previous records for the carrier, as the name number came in at a whopping 89 percent. An extremely rare feat for a single quarter, suggesting that certain markets are constantly full and an impressive display of revenue management by an industry bellwether. (Earnings release; Seeking Alpha transcript)
And that strength showed particular in its premium products during the period.
“Demand for Delta remains strong, both our onboard products and our SkyMiles currency,” Glen Hauenstein told analysts during the carrier’s triumphant earnings call that focused heavily on “premium.”
Specifically, Delta’s premium product revenues were up 10 percent to more than $4 billion on a 7 percent increase in premium capacity. In all, premium paid load factors increased by 3 points year-over-year.
Loyalty revenues grew 19 percent to $1.2 billion including a roughly $100 million benefit from the American Express contract renewal announced in April.
“Our loyalty program and relationship with American Express are key drivers of our business and remain sources of true long-term competitive advantage,” Hauenstein said. “New acquisitions of SkyMiles members this year are on track to increase at a rate double that of just three years ago, and more and more of our members are signing up for the SkyMiles American Express cards. But most importantly, customer satisfaction among our loyalty members is at record levels.”
During the quarter, spending on Delta’s co-branded cards and mileage uses, both increased double digits. More Delta frequent fliers are using SkyMiles as currency to upgrade their experience after completing a reservation, as more than half-a-million rewards members have used this option since launching earlier this year.
Both leisure and business travel demand remained strong and gained strength as the shift in Easter to April and peak summer travel season contributed to strong leisure volumes and record load factors.
Total unit revenues were up 3.8 percent, above our guidance on 4.7 percent higher capacity. Passenger unit revenues were up 2.9 percent over prior year, sequentially improving 2 points compared to the March quarter, driven by strong demand.
Domestic revenues grew 8.8 percent with 3.6 percent higher PRASM. This is the best domestic performance in nearly five years with unit revenue growth in every half. Boston led the system with revenues up 25 percent over prior year on a 10 percent improvement in unit revenues. Now with over 140 departures a day, Delta is increasingly the airline of choice for Boston travelers.
Internationally, revenues grew by 5.3 percent as Delta offset a 1.5-point currency headwind to increase our unit revenues by 1.1 percent. While Pacific revenue performance was softer than our initial forecast, we were able to maintain our margin performance versus prior year. We see opportunity for profitability to improve as we continue to execute on our multi-year Pacific restructuring. Additional commentary on the entity performance for the June quarter may be found in this morning's press release.
Projecting out to Q3, total revenue is expected to increase 6- to 7 percent on a 1.5 percent to 3.5 percent improvement in unit revenues.
On a regional basis, Latin America is positioned to remain Delta’s best performing international area, as demand in both Brazil and Mexico rises.
For 2019 total, Delta has raised its revenue growth target to between 6- to 7 percent.
Hunter Keay, a senior analyst with Wolfe Research, asked CEO Ed Bastian if there was a point where Delta would consider its brand loyalty so strong that the carrier would fully remove itself from the online booking aggregators “that commoditize for look and feel of air travel, airfare,” like Southwest.
As Bastian characterized it, if Keay’s question is, “Do you want to do a more aggressive and say no to customers who might want to buy our product to a certain way or distributors?” then the answer is “we would never want to do that,” Bastian responded.
Still, Delta is going to try find ways to inspire more direct bookings.
“I’d say, 10 years ago, about one-third of our tickets were sold over the online agencies,” Bastian said. “Today, we're down to somewhere around 10 percent to 15 percent. As we look forward, delta.com is going to take more and more of that traffic. So, I don't think we need to put a stake in the ground and say that we won't sell over those channels. But at the same time, the online agencies are aware that they need to provide a differentiated experience to our customers in order for us to continue to invest in them and together have our content on their sites.”
President and COO Joanna Geraghty rightfully described JetBlue’s “revenue framework as one of the momentum.” The carrier expects between $350 million and $400 million in revenue by 2020, which Geraghty believes will come from a number of network changes. (Earnings release; Seeking Alpha transcript)
For example, the airline’s been adjusting flights to Long Beach with the expectation of that destination being as profitable as its respective Boston and Fort Lauderdale transcontinental service. JetBlue also has high hopes for “Fare Options 2.0,” which is aimed at giving additional options for customers who either are “extremely price sensitive” or someone who is more willing to pay for a more inclusive offering.
As Geraghty noted, JetBlue is facing increasing competition in markets with ultra-low cost carriers. “We think [Fare Options 2.0] will provide options to some customers that might not have necessarily considered JetBlue because on an OTA when the fares are displayed, our fare shows up as higher because it's an all-inclusive offering,” she said.
As ancillaries increasingly make up a significant portion of revenues for low-cost carriers like JetBlue, Geraghty naturally sought to highlight ancillary changes that were made last year. In Q2 alone, ancillary revenue was up 15 percent year-over-year. The airline’s ancillary revenues now averages $33 a customer, “an all-time high for JetBlue,” she told analysts.
The primary driver behind JetBlue’s ancillary growth is clearly baggage fees, which rose 15 percent over Q2 2018. Change fees are also continuing to grow into the double-digits.
Elsewhere, JetBlue is attempting to advance its loyalty program, with membership growing at a rate of 24 percent annually, thanks in large part to promotions from its affiliate rewards card partner Barclays.
JetBlue’s capacity grew 5.9 percent during the quarter, squarely within previously projected range of 4.5- to 6.5 percent. Geraghty cited “a solid completion factor in the quarter despite runway construction in Fort Lauderdale and JFK, and smaller projects elsewhere in our network.”
Looking to Q3, Geraghty warned that capacity growth should be between 3- and 5 percent, which she described as “unusually low for JetBlue.” The slower capacity growth reflects “tactical cuts we announced earlier this year to mitigate softer RASM trends in trough periods” as well as the additional neo A321 delays communicated by Airbus.
For the full year, JetBlue’s capacity growth is expected to land between 5.5- and 6.5 percent. “We are taking actions to mitigate the delays by adjusting utilization of our existing fleet and the timing of our A320 restyling program,” Geraghty said. “Our delivery stream remains fluid, and we expect to continue adjusting our schedules as needed.”
And as JetBlue works toward transatlantic flights in 2021, the carrier’s expanding its network internationally in the western hemisphere with plans to fly non-stop between JFK and Guadeloupe, Mexico, and San José, Costa Rica. These new routes adds to our JFK Guayaquil, Ecuador service announced earlier this year as we further build on its VFR and leisure strength.
In response to feedback from Boston and NYC business fliers, JetBlue is in the process of relocating its Houston operation from Hobby to Intercontinental Airport in October. On the leisure side, JetBlue is also adding capacity in strong vacation markets such as Northeast to Florida.
Lastly, Q2 RASM was up 3.1, above the mid-point projections of 1- to 4 percent. RASM trends accelerated over the quarter, recovering from a soft first half of April. Both in booking trends in particular improved and peaks were strong. The impact of lower demand in Punta Cana was a RASM headwind of approximately 0.1 points to the second quarter. As a reminder, the holiday calendar placement was a tailwind of 2.25 points to RASM.
Heading into Q3, JetBlue is calling for RASM gains between 0.5 and positive 0.35 percent year-over-year.
United Airlines’ health in Q2 can be glimpsed by reviewing its Passenger Revenue per Available Seat Mile (PRASM), which grew 9.1 percent, which the carrier said was “at the high end of our unit revenue expectations at the start of the quarter.” Passenger revenue growth was up 6.1 percent. (Earnings release; Seeking Alpha transcript)
As with Delta, Latin America was United’s best-performing region in Q2.
Demand was high across most of the region and United expects continued strong performance in the third quarter, albeit at a more moderate level.
By the end of 2019, Delta expects that overall capacity growth will result in approximately two points less growth than its original plan – which executives primarily pinned on the grounding of the 737 MAX, along with the closure of two routes in India.
As far as Delta’s products, the Premium Plus offering currently represents about 2 percent of its wide-body flights. The carrier expects those reservations to increase to 8 percent when fully rolled out. Revenue per seat mile gains for Premium Plus flights range between 4- and 6 percent “after accounting for all buy-ups and buy-downs.”
“The first set of CRJ-550s are being prepared to enter service later this year with client focus on Chicago and New York,” said United’s Chief Commercial Officer Andrew Nocella. “We expect the 550 will begin to close the structural gap with Premium customers that we have in smaller communities across the United States. In 2020, we expect to begin service from New York, Los Angeles, Chicago and Washington to Tokyo's downtown, Haneda Airport complemented and extended upon our existing flight from San Francisco and building on our industry-leading service to Japan.”
Lastly, the number of new United flyers in early 2019 were up 11 percent, with growth among the increasingly important Millennial demographic characterized by Nocella as “especially strong.” That young cohort is viewed as “critical to securing our next-generation of loyal repeat customers,” he said.
One area designed to appeal to Millennials especially is wifi service. United claimed to have seen a 20 percent improvement in customer satisfaction for in-flight connectivity over the past year. Executives also said that compensation refund rates are down roughly two-thirds “because the system is just more reliable.”
As United works towards ensuring its wifi system has enough reliability and bandwidth, it’ll make connecting to the internet free for all its fliers. For the Q3 call, United Chief Digital Officer Linda Jojo is expected to be available to provide analysts with more detail on progress on wifi and other interactive initiatives.
Despite challenges from American Airlines’ ongoing labor dispute, weather-related disruptions, and the industrywide setbacks associated with the 737 MAX grounding, the carrier exceeded analysts’ expectations in Q2 with a record group revenues of $12 billion, up 2.7 percent versus the same period in 2018. Total revenue per seat mile also grew for the 13th consecutive quarter by 3.5 percent to $16.54 – also a record for the second quarter, the company said. (Earnings release; Seeking Alpha transcript)
One particularly notable area of growth was in American’s loyalty program, which drove “other” revenues up by 2.9 percent to $728 million. This growth was primarily due to new card acquisitions as access to the world's largest program and best network continues to be a strong incentive for new customers.
Total operating expenses during the quarter were 1.6 percent higher at $10.8 billion, not including fuel and special items.
“We remain focused on strengthening our network by expanding operations at our most profitable hubs,” said American’s President Robert Isom. “With the addition of a 100 departures in the second quarter, our DFW hub now offers more than 900 daily flights. This important milestone enables more than 9,000 one-stop travel possibilities through DFW more than any other airline hub in the world. As part of that growth, we had started service from DFW to 23 new markets including service to Dublin and Munich, and increased service to more than 80 existing markets. This growth marks the largest expansion at any hub in the United States in more than a decade.”
During the analysts’ call, Isom sought to highlight that over the past year, American has made a number of changes to our International network eliminating “chronically underperforming flights” and starting services to unserved markets across the world. “Most of these new flights started in the middle of the second quarter and they are already producing margins at or above the system average,” he said.
Looking ahead, American has received final approval from the U.S. Department of Transportation for a proposed joint business agreement with Qantas. The deal “allows American to better capture business between the United States and Australia as well as New Zealand.
“The joint business agreement allows for commercial integration between American and Qantas delivering new routes and significant customer benefits.,” Isom said. “It will also allow an expanded coacher relationship, optimized schedules on South Pacific services, better access the T20 business carrier's network -- on each carrier's networks additional frequent flier benefits and co-location at airports. All of this is designed to better serve our customers. And just yesterday, Qantas announced new services to Chicago and San Francisco from Brisbane. We are thrilled with this news to our customers and stay tuned for more route announcements from us later this year.”
The airline also received approval from the DoT for additional service from DFW and Los Angeles to Tokyo Haneda airport.
As for its co-branded credit cards, Isom pointed to record-setting results here too. American executives expect that growth will continue throughout 2019. Overall, passenger unit revenue increased by 4.8 percent in Q2, “two points better than our legacy competitors,” Isom claimed.
“We delivered improved unit revenue, unit revenue across every entity. As we mentioned on previous calls, we believe we have a unique opportunity to improve load factors without eroding yields and we have been successful in that effort to execute against that opportunity,” he added.
Total load factors were up 3.2 points in the quarter on flat yields. “Higher loads without compromising yields is a winning combination,” Isom said. “We're proud of our revenue management team for their hard work and results.”
In line with its competitors who serve Latin America, Isom said that American had the highest quarter-to-quarter improvement with unit revenue growing by 4.4 percent year-over-year. “Brazil and Mexico were particularly strong while we faced headwinds in Argentina and the Dominican Republic,” he said. “Looking forward, we expect domestic demand to remain robust. And Latin again to be the best performing international entity. We expect our third quarter year-over-year TRASM to be up 1- to 3 percent, and our passenger revenue per ASM to be about a point better than TRASM.”
During Q&A portion of the earnings call, JP Morgan analyst Jamie Baker asked whether American is “whether there is some IP investment that does need to be made” to improve reliability.
American CFO Derek Kerr responded by saying, “While we are dealing with the mechanic slowdown and weather anomalies, and you name it, we're finally getting the chance to run an integrated airline. And as we do that with all of our systems, we're able to move past the point of just integration to taking a look at what the next generation of systems are.”
Among the tech issues American is look at include ways to enhance scheduling practices.
“We know that for our pilots and flight attendants that there are ways that we can meet their needs in actually creating more lifestyle, improved schedules that should also reduce the impact of redundancies and reserve levels,” Kerr said. “And we know that there's a lot more work that we can do on aircraft routing as well now that we have the system all in one place.”
“Our ancillary products also performed very well in Q2 with other revenue being up 11 percent year-over-year,” Tom Nealon, President of Southwest Airlines, told analysts during the company’s Q2 earnings call. Nealon pointed to “a lot of success” with Southwest’s EarlyBird variable pricing product, which was launched last fall and which was enabled by the carrier’s new reservation system. (Earnings release; Seeking Alpha transcript)
As the race to make the most out of loyalty heats up among airlines of all levels, Southwest has also introduced a new business-oriented credit card last month. Southwest detailed its plans to target small to medium-sized business customers.
The company hopes to build the 15 percent revenue gains Southwest’s Rapid Rewards program saw this past quarter.
Looking to Q3, RASM is expected to rise 3- to 5 percent from Q3 2018.
On the negative side, Nealon did note that Southwest is experiencing “a slight negative impact” to Rapid Reward redemptions and ancillary revenue as a result of 737 MAX-related flight cancellations, “but we still expect another strong year-over-year performance of both categories,” he added.
Southwest’s biggest news during Q2 was its addition of Hawaii service.
“Hawaii is off to a fantastic start,” Nealon told analysts. “Although we're early on in our expansion, our results so far are exceeding our expectations in every category. So, we're now up to 14 daily flights, six in California two Hawaii, and eight inter-island round-trip flights. Demand for our service to Hawaii is very, very strong and our load factors are far exceeding our system average.
On the ancillaries front, Spirit Airlines Chief Commercial Officer Matt Klein says the company is “just beginning” to figure out who to classify “clusters of customer segmentation” when it comes to revenue management practices. (Earnings release; Seeking Alpha transcript)
From there, ensuring that Spirit’s fliers aren’t blindsided by the costs is a high priority as the company refines its strategies.
“We’re looking at specifically how groups or parties think about bags, where they’re flying to and then making sure that that pricing is very transparent for everyone is extremely important,” Klein said in response to a question from Goldman Sachs analyst Catherine O’Brien. “I want to make sure that there's no surprises in how that pricing works, so that it's very clear on our website as to how that works. We've taken a lot of time to do that and be thoughtful about that.”
Spirit is still prepping its loyalty program as the airline is making sure it has “all the technology lined up” for flawless launch. While Spirit executives had hoped to introduce the program this year, it’s now looking for 2020 for a full rollout.
Meanwhile, Spirit’s Big Front Seat offering is viewed as both a revenue and merchandising opportunity. Sized with a 36" pitch and 18.5" width – “a full 6" of additional legroom” compared to Spirit’s standard Deluxe Leather seats – is not likely to experience any major changes any time soon.
But here too, Klein sought to manage expectations for analysts on the immediate upside of the Big Front Seat’s revenue generating capabilities.
“In terms of revenue production we’re happy with what we’re doing there,” Klein said. “It’s continuing to improve at a very, very strong levels and we’re really probably only in the fourth or fifth inning at best of being able to truly optimize the revenue.”
In its Q3 outlook, Spirit said capacity growth will rise 13 percent while estimating 14.5-to-15.5 percent in Q4.
Will a new law cracking down on the estimated 10,000 illegally Airbnbs on Oahu curtail demand for flights to Hawaii?
Peter Ingram, Hawaiian’s president and CEO, said that airline didn’t have a “real precise assessment” on what the impact might be aside from that natural expectation that lodgings will become more expensive than it generally has been for many Hawaiian visitors.
“And that may manifest itself in some pressure on demand from North America,” said. “It's really hard for us because this is a fairly opaque market to understand exactly how big that is. But I think we're optimistic that, based on our strong position in the market and our revenue premium and the breadth of our service and how strong our brand is, we will be able to withstand any of that pressure better than any one of our competitors.”
Meanwhile, the domestic revenue per seat ticket result is roughly 2 points lower than each of the subentities due to Hawaiian’s growing average domestic stage length (the length of a flight from take-off to landing), which increased more than 8 percent year-over-year on an ASM-weighted basis, said Brent Overbeek, SVP of Revenue Management & Network Planning. That difficulty was offset by international tickets, which up nearly 6 percent year-over-year in the second quarter.
“Premium Cabin PRASM in international routes posted near double-digit growth, with year-over-year improvements in both load factor and yield as we continue to monetize the investments we've made in the Premium Cabin on our A330 fleet. We continue to perform well in Japan, buoyed by our JAL relationship. Notable on this period was improved performance in Sapporo, Osaka and Tokyo to Kona markets,” Overbeek added.
“Value-added revenue per passenger” was also up 15 percent year-over-year, he said. Extra Comfort and Preferred Seat revenue performance broke new records for Hawaiian, as the airline is on track to “comfortably surpass” the $100 million mark for 2019, Overbeek said.
“Similarly, revenue from the sale of HawaiianMiles set a new quarterly record and helped contribute to the record value-added revenue per passenger result in the second quarter,” Overbeek noted.
Heading into Q3, Hawaiian expects revenue per seat mile to be down between 1.5- to 4.5 percent year-over-year; capacity appears uncertain, as it could be up between 0.5 percent to down 1.5 percent year-over-year.
“The third quarter year-over-year capacity comparison is lower than our second quarter and what we anticipate our fourth quarter growth will be,” Overbeek said. “This is largely a function of the timing of deliveries of A321neos in both 2018 and 2019, as well as the timing of maintenance events this year.”
For the most part, North America summer bookings are on track
“On the product front, we are on track to launch our Main Cabin Basic product in our North America routes in the fourth quarter. Given our product segmentation success to date, we're confident that this new offering will more effectively tap an important segment of potential Hawaiian travelers and alleviate some of the downward pressure we've seen in our Main Cabin yields,” Overbeek said.