MIAMI — United Airlines and Delta Air Lines reported their earnings for the second quarter (Q2) of 2017 over the past two weeks, providing earnings updates before several of their peer airlines next week.

Both airlines were profitable in Q2, with Delta reporting a $1.2 billion (GAAP) net profit ($1.85 billion adjusted for special items). In contrast, United reported a $818 million net profit for Q2 or $846 million excluding special items. Both carriers also hosted quarterly earnings calls, and these were our five biggest takeaways:

“Skypesos” Still Drive Incremental $$$

Delta’s frequent flyer points, also known as SkyMiles, are poorly regarded amongst in the know frequent fliers. Amongst peer airlines like United and American, and even compared to lesser carriers like Alaska, Delta has by far the worst award availability at the saver (most cost-efficient) level and the offers the least value regarding aspirational redemptions like international business class. This has led frequent flyers to dub SkyMiles “Skypesos” for their relative lack of value.

But despite poor value, Delta’s co-branded credit cards with American Express continue to drive substantial incremental revenue according to Delta President Glen Hauenstein:

Our partnership with American Express produced $70 million of incremental value this quarter and we are on pace to deliver $300 million of incremental value in 2017, including another record year for card acquisitions. This tremendous demand for our co-brand card is a testament to the strength of our brand and great partnership with American Express.

In fact, Delta projects that the Amex partnership will generate $4 billion in cash by 2021. And Delta has a response to the people that decry the low saver value offered by SkyMiles: Delta offers more mid-tier pricing availability via dynamic award pricing. As Hauenstein notes:

I think, the way that we look at this is the hard acquisitions continued to achieve record results without significant change to the program.

And I think there’s been a lot of talk at other carriers who have announced fare increases, but we have been in a dynamic pricing environment now for multiple years. And I think that’s one of the successes of our card in the marketplace is that there are incredible value propositions for customers out there who acquire and use our cards, and we have no intention to degrade the total value proposition.

We may adjust on the margin the valuation of peak seats versus off peak seats or particular days versus, but the value we’re creating seems to be greater and greater and I think that’s being recognized on the marketplace by — really when you would think that the market was probably saturated with airline revenue cards that we have posted three acquisition record years in a row and we’re on track to produce another this year.

So consumers are enjoying the products and services that we buy and they’re continuing to apply at record numbers. And our team’s done a great job and we have lots of innovation space coming in that space in the last half of the year.


Delta’s Pacific Reconfiguration is Nearly Complete

Over the last five years, Delta has completely remade its Pacific network, shifting its focus away from pre-merger Northwest’s Tokyo Narita to its trans-Pacific gateways at Detroit, Seattle, and Los Angeles.

In the same period, it also struck partnerships with China Eastern (via an investment) and Korean Air (via a joint venture), which will eventually give Delta Pacific hubs to feed at Seoul Incheon, Shanghai, and Beijing (the new Daxing airport where China Eastern is planning a massive hub).

Delta is now seeing the results of those moves. In Q2, Pacific revenue performance moderated to a very manageable 2% dip in unit revenues, with Tokyo Narita and Haneda (off a weak base) improving outright and China improving sequentially (seeing a smaller year-over-year [YOY] drop in unit revenue). As Hauenstein notes:

This [2018] is the last real year of a multiyear transition and thanks to our Pacific team and Ed’s direction, we’ve got what we need in place now with the Korean joint venture to really produce a competitive and an improving Pacific operation over the next couple years.

So it was — when you think about the merger with Northwest, 100% of our capacity was routed through Tokyo and Narita at the time of the merger. And now as you think forward is, we have a very diversified portfolio, we have multiple hubs and we’re really at the endpoints of the restructuring and looking forward to very much improved 2018 in the Pacific.

United Shifts Aircraft Delivery Dates

United may never take delivery of its A350s but the 737 MAX is coming on property faster

As part of the news released around United’s earnings call, it was announced that the delivery of United’s first four A350-1000s (it has 35 on order) would be pushed out of 2018 while 12 737 MAX 9 deliveries would be pulled forward into 2019.

The duality of these two moves is interesting, in that they push up against each other from a capital expenditure perspective in 2019. At this point, we are skeptical that United will ever take delivery of the A350-1000 order (our view is that it will likely convert them to the A350-900 or cancel the order outright with the former being slightly more likely).

The 737 MAX meanwhile, can’t get here fast enough for United. But at least initially it won’t play much of a role as a 757 replacement on trans-Atlantic missions. As United’s Andrew Nocella outlines:

Yeah. I think right now, Mike, we have plenty of 757s in our European configuration that are flying around in the domestic system. So I don’t think we have any rush to move into flying 737s across the Atlantic. But it’s something we’re going to look at for the medium to long term. But it’s not something we plan to do in the short term at all.


United and Frontier clash in Denver

The evolution of United’s Denver hub over the past 4-5 years has been fascinating. During the Smisek era, United was focused on international growth and so Denver as a primarily domestic hub was a bit of a red-headed stepchild.

In contrast over the last couple of years, United has increasingly seen Denver as a profit center. In today’s era of currency weakness and international over expansion, being a solely domestic hub is actually a plus.

This makes Frontier Airlines’ expansion announced earlier this week particularly troublesome for United, as Frontier will be adding service to close to 20 new nonstop destinations from Denver, encroaching on United’s turf. In response, United President Scott Kirby did not mince his words:

Sure, thanks Hunter. In the near to medium term, anytime we have capacity growth from anyone but particular a low cost carrier it’s going to lead to some pricing pressure. Over the longer term however I view this really having watched the ULCC growth over the last decade this is the best news that I’ve heard in the last ten years. I have known and look, what they said is, they’re going to run a connecting hub-and-spoke network in Denver. The model that they used to have which led them to bankruptcy, but they’re pivoting from what has been the most successful models, point to point ULCC strategy around the world to going back to trying to copy what the network carriers do and run it connecting business model.

And the reason I view that is that best thing that has happened in the last decade is because I believe for many years that the ULCC business model can’t work when a network carrier decides to compete on price and particularly once we’ve been able to roll out based economy. And while I believe that for a long time this is the first I guess public validation that one of the ULCCs is throwing in the towel on the point-to-point business model and switching to a network model. And look that’s a lot more complicated. It’s one thing to run a point-to-point network, but when you’re trying to run connecting traffic, you got to slow down the aircraft utilization because you got to wait for passengers and employees to connect and airplanes to be timed correctly.

You got to staff up, because you have peaks and valleys, you got to connect bags, which is one of the most operationally difficult thing we do. Today if Frontier has a flight from Orlando to Denver and it’s delayed by two hours, all they have to do is run the flight two hours, but the customers still get there and it’s not a good experience, but it’s not the end of the world. Tomorrow when they’d have half the people in that airplane that are connecting, if that flight is two hours late, their choice and they got one flight a day to all these markets, do we delay everything else for the rest of the day by two hours or do we have half the people on that airplane go to a hotel and spend the night or do we buy [indiscernible] half of the people in that airplane tickets on United to get them to their destination that day.

It is exponentially more complex to run a connecting model. And for Frontier to publically acknowledge that the old business model has run out of growth opportunities in the middle of an IPO process I just view as a phenomenal validation of everything we’ve done has worked and our ability to compete and win against them. And I can promise you they’re not competing on our turf and trying to get a network carrier in Denver, that is a battle I guarantee United will win.