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Morningstar | Delta Remains the Highest-Quality Network Carrier in Our Airline Coverage

Delta Air Lines operates a global network that centers on its presence at hubs like Atlanta, New York, Minneapolis, and Detroit. Delta commands nearly 73% market share at Atlanta--the highest market share of any network carrier at a hub--and 40% of its network goes through Atlanta, exposing the carrier to more domestic regional traffic than peers. We believe this route structure offers favorable economics and allows it to capitalize on the effects of recent upgauging. Delta extracts a revenue premium per available seat mile from its unique network but also has lower unit costs when compared with other network carriers. By dominating the hub airport in Atlanta, the busiest airport in the world, Delta garners unmatched benefits from connecting this hub to other parts of the country.Fleet upgauging--swapping smaller planes out for larger aircraft--has long been a strategy of airlines, but no airline has replicated Delta’s approach. Delta plans to convert a substantial portion of its small regional jets (50-seaters) and medium-size aircraft (MD-88s) to larger planes. The carrier expects small regional jets will decline to 2% of total aircraft in 2023 from 7% in 2017, and medium-size aircraft will shrink from 35% of its fleet to 15% in 2023. In 2017, upgauging accounted for nearly 60% of Delta’s domestic capacity growth. We expect the benefits of rolling markets up into bigger planes will manifest into higher margins and prove durable through our midcycle period due to Delta’s unique network structure and dominance at Atlanta, which we don’t see changing.Not only is the carrier set to reap benefits from its upgauging strategy, its unique route structure and frequent flyer program (Delta SkyMiles) will add value for several years to come. Profits from the SkyMiles program increased Delta’s financial performance after it changed how miles were accrued. Since adopting a revenue-based loyalty program in 2014, Delta has logged several consecutive years of returns above cost of capital. After extending its frequent flyer agreement with American Express through 2029, we expect the SkyMiles program will continue delivering strong cash flows.