A glossy Delta Air Lines terminal opening this month at New York’s Kennedy shows the industry’s new strategy for luring passengers.
As Delta Air Lines executives tell it, the carrier’s bright and spacious new terminal at John F. Kennedy International Airport in New York reflects the industry’s new priorities.
Rather than compete on the lowest fares — a race to the bottom over the past decade that just weakened them — the airlines are now seeking to lure passengers with better amenities and service. That new strategy points to the improving financial health of the industry, a turnaround that can be traced to both the string of megamergers among the big carriers and the industry’s single-minded emphasis on cutting excess capacity since the depths of the recession.
Delta, the first of the major carriers to go into a merger — with Northwest in 2008 — is also in the strongest position to reshape its goals. And the $1.2 billion investment in a new terminal in New York, which will replace two 50-year-old grim and woefully inadequate terminals at the end of the month, is the latest and most visible sign of its new approach.
The airline already has been flexing its muscles. In the past two years, it has focused on improving its balance sheet as well as its operations, expanded its global partnerships, invested in airlines like Virgin Atlantic and even bought an oil refinery. On Wednesday it said it would reward shareholders with $1 billion in quarterly dividends and share repurchases over the next three years.
“The airline industry has been broken for decades,” Ed Bastian, Delta’s president, said in a recent interview. “It was fragmented. People worried if the airlines were going to make it or if they were going to be bankrupt. Today, everybody has scale, customers have choices and people have seen that service matters.”
In this new world of fewer airlines and less capacity, airline executives hope to achieve a level of stability that has eluded them since U.S. air travel was deregulated in 1978. While Delta’s merger is complete, more work remains on United Airlines’ merger with Continental Airlines and Southwest Airlines’ tie-up with AirTran. American Airlines and US Airways, which announced in February that they would merge, are just starting the process.
At Kennedy, Delta will move most of its flights to Terminal 4, where it is completing a new extension. There will be more gates and security lanes, a large lounge for frequent fliers and an outdoor observation deck. The doughnut-shaped Terminal 3, which has a leaky roof and plastic buckets that collect rainwater, will be torn down.
The Kennedy expansion came after a deal that Delta engineered in 2011 to expand capacity at La Guardia Airport in New York by swapping takeoff and landing rights there with US Airways for some of its own slots at Washington’s Reagan National Airport. Delta now has nearly half of all departures at La Guardia.
Delta is also taking the offensive at London’s Heathrow, another congested airport with limited capacity. In December, Delta spent $360 million to buy a 49 percent stake in Virgin Atlantic. The partnership with Virgin will expand Delta’s daily flights to Heathrow to 23 from nine and increase its market share between New York and London — the world’s top business route — to 37 percent from 10 percent.
Delta surprised analysts last year, though, when it acquired the Trainer oil refinery near Philadelphia to provide steadier prices for its jet fuel supplies.
Operating a refinery has proved tricky. Hurricane Sandy disrupted supplies and its gasoline production unit, forcing a temporary shutdown. Delta took a $22 million loss on the plant in the first quarter. Still, executives remain optimistic about the refinery, on which Delta has so far spent $250 million. By contrast, the company’s fuel bill averages about $12 billion a year.
The investment, however, is based on the notion that oil prices are unlikely to fall much in the future. If that happened, Delta could pay more for its jet fuel than its competitors, analysts said.
The company also has remodeled its fleet substantially in recent years, shedding a number of its 474 smaller, 50-seat airplanes, which have become expensive to fly because of high fuel prices.
Delta also spent $140 million over two years to develop a new website, which it unveiled last year. The site allows the airline to sell more services to passengers, including upgrades to premium seats, or booking hotel rooms or cars. At a conference last year, one executive compared the company’s aims to something Amazon has on its website — the ability to bundle offers or suggest products based on a passenger’s history and preferences.
“We had to go through this dark period of elimination of the weaker carriers that was perhaps necessary,” said Glen Hauenstein, Delta’s head of network planning and revenue management. “You’ll find in the next few years an industry that is healthier and that is going through a bit of a renaissance.”