Delta Air Lines Retools Again in Asia

About five years ago, Delta Air Lines (NYSE: DAL) implemented a big strategy shift in Asia. The growing availability of nonstop transpacific flights and a sharp fall in the Japanese yen’s value had dramatically undermined the profitability of Delta’s hub in Tokyo. As a result, Delta slashed its schedule in Tokyo and began building a new hub in Seattle to serve as a gateway to Asia, rivaling United Continental‘s (NYSE: UAL) much larger hub in San Francisco.

In the past year or so, Delta’s strategy in Asia has started to shift again. The key catalysts have been a rebound in oil prices from the lows of 2015-2016 and the carrier’s new joint venture with Korean Air. This culminated in several changes to Delta’s Asia route network that were announced last week.

Delta adds one international route in Seattle and drops another

On Thursday, Delta announced that it will launch nonstop flights from Seattle to Osaka, Japan, in 2019. This isn’t a completely new route for Delta. It flew between Seattle and Osaka for a few years until canceling the route in 2013 due to the falling yen. (Delta also briefly flew between Tokyo and Osaka in 2016, in order to provide one-stop connections for travelers coming from its U.S. hubs.)

While Delta stated that the Seattle-Osaka route will be part of its Korean Air joint venture, Korean Air only flies to a few cities in South Korea from Osaka. A bigger reason why Delta thinks it can succeed where it previously failed is that it now operates 174 peak-day departures in Seattle, up from just 45 in the summer of 2013. This helps it gather connecting traffic.

In the same press release, Delta stated that it will cancel its Seattle-Hong Kong route in early October. (The timing is ironic, because Delta first announced the flights to Hong Kong a couple of days after it canceled its Seattle-Osaka route back in 2013.)

Delta will cancel its Seattle-Hong Kong route this fall. Image source: Delta Air Lines.

This route cancellation means that Delta won’t have any flights to Hong Kong, even though that is a major global business market. By contrast, American Airlines and United Airlines each fly to Hong Kong from multiple U.S. cities. However, American Airlines benefits from a codeshare and frequent flier partnership with Hong Kong-based Cathay Pacific, while United Airlines has hubs in big business markets that generate the high fares necessary to support long-haul flights. (United currently flies nonstop from New York, Chicago, and San Francisco to Hong Kong.)

Leveraging the Korean Air joint venture

Another reason Delta Air Lines can afford to pull out of Hong Kong is that it can now offer seamless connections via Seoul, thanks to its joint venture with Korean Air. In fact, Seoul’s geographical position is ideal for facilitating connections between the U.S. and Hong Kong.

Delta is working to facilitate more connections in Seoul by operating more nonstop routes from the U.S. to Seoul. Last Wednesday, just a day before announcing the new route to Osaka and the cancellation of its Hong Kong route, Delta revealed that it will start flying nonstop from Minneapolis-St. Paul to Seoul next year.

With the introduction of this new route, Delta will fly to Seoul from each of its three largest hubs — Atlanta, Detroit, and Minneapolis — as well as from Seattle. Korean Air offers nonstop service to Seoul from several other major U.S. cities, including Delta’s New York and Los Angeles hubs. This will allow the two joint venture partners to offer one-stop service to Seoul from virtually anywhere in the U.S., with connections available in Seoul to numerous destinations in Asia.

A Delta return to Hong Kong is likely — eventually

Delta has been flying a 777-200ER on its Seattle-Hong Kong route. That aircraft type entered service more than two decades ago — and it’s also among the largest aircraft in Delta’s fleet. With a smaller and more modern (and thus more fuel-efficient) aircraft, this route might have been viable for Delta.

At the moment, Delta doesn’t have any orders for the 787 Dreamliner, the most suitable in-production plane for “long-and-thin” routes like Seattle-Hong Kong. However, that could change eventually — or Airbus might offer a direct competitor.

Sooner or later, I expect Delta Air Lines to return to the Hong Kong market in its own right. The Korean Air joint venture is great for opening up access to markets that can’t support nonstop flights to the U.S. However, outside of its hubs, Delta will probably struggle to attract customers to its connecting service to Hong Kong when both of its rivals fly nonstop from the U.S. To keep up with United Airlines in particular, Delta must find a way to support nonstop flights from the continental U.S. to all of the top business markets in Asia.

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Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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