Delta Goes for the Jugular

Delta Goes for the Jugular

New York and Los Angeles are the two largest cities (and metropolitan areas) in the U.S. As a result, it's not too surprising that they are the two cities where all three of the country's largest airlines -- United Continental , Delta Air Lines , and AMR -- compete directly.

Delta and merger partner Northwest were not traditionally focused on the New York and Los Angeles markets. Instead, they had their largest hubs in somewhat smaller metro areas like Atlanta, Detroit, Cincinnati, and Minneapolis/St. Paul. However, in competing for high-value business travelers, it is increasingly important to have a strong presence in top business markets. Many business travelers are willing to pay for the convenience of having access to frequent direct flights to as many destinations as possible.

Accordingly, Delta has made a strong push to grow its presence in New York and Los Angeles. In New York, the company completed a "slot swap" deal with US Airways last year, giving Delta a dominant share of the traffic at LaGuardia Airport. Delta has also built an international gateway at JFK Airport, and recently opened a new, modern terminal there.

Delta is supplementing its own international service at JFK with a new codeshare arrangement with Virgin Atlantic. This will provide frequent service to London's Heathrow Airport, the most important international destination for business travelers. The Virgin Atlantic codeshare will also enable connections to other U.K. cities. Delta is even adding flights at Newark Airport -- a major hub for United -- with a new nonstop to Paris.

Los Angeles appears to be the next priority for Delta. So far, its strategy of growing in top business markets seems to be working. Delta has led the industry in unit revenue growth over the past two years, and has been reporting record profitability recently. Delta's expansion in Los Angeles is likely to put further pressure on rivals like United and American, while keeping Delta at the top of the airline industry.

New L.A. service
In 2013, Delta has announced a variety of new services in Los Angeles. In March, the carrier announced eight new routes from Los Angeles, as well as additional frequencies on six other routes. New service included year-round nonstop flights to cities like Seattle, Nashville, and San Jose, Calif., as well as seasonal nonstops to Boston and Anchorage.

Delta announced further increases to its Los Angeles footprint last month. The carrier will offer more frequent nonstop service to a variety of major U.S. cities from Los Angeles beginning after Labor Day.

Most significantly, Delta stated on Thursday that it will begin a "Delta Shuttle" service between Los Angeles and San Francisco next month. This mimics the company's successful Delta Shuttle from New York to Boston, Washington, and Chicago. Delta will fly 14 daily roundtrips between Los Angeles and San Francisco on weekdays, operating hourly beginning at seven a.m.

Delta is designing its shuttle product to appeal to high-fare business passengers, with separate check-in lines, gates near the security checkpoints, and more in-flight amenities. Los Angeles and San Francisco are both United hubs, and the new Delta Shuttle service is clearly designed to win more corporate accounts from United.

New facilities
Just as Delta has been investing heavily in its New York airport terminals in order to create a more appealing environment for travelers, the company is working to improve its facilities at Los Angeles International Airport. In Terminal 5 in Los Angeles, Delta is renovating its Sky Club, doubling the size of the ticketing lobby, adding separate "Sky Priority" and VIP check-in areas, and upgrading the look and feel of its terminal space.

All of these enhancements will help Delta gain share among premium passengers in the L.A. area. Delta is also making the most of its strategic partnership with Alaska Air in terms of providing better travel options from Los Angeles (via codesharing). For example, last year, Alaska moved its Los Angeles operation to Terminal 6 in order to be closer to Delta's gates, allowing for easy connections.

Gaining altitude
Delta stock has achieved a series of new multi-year highs this year. The company's aggressive expansion in New York and Los Angeles could drive profitability even higher, adding to the stock's momentum. Delta is laser-focused on boosting its appeal among high-fare business travelers, and its upgraded facilities and flight options in New York and Los Angeles will help Delta continue growing its corporate market share.

United and American will undoubtedly try to keep pace with Delta, but it will be hard for them to overcome Delta's superior customer service reputation. Delta's strong slot portfolio at capacity-constrained LaGuardia and JFK Airports provides a further competitive advantage. By complementing its traditional hubs in secondary cities with a larger presence in New York and Los Angeles, Delta has found a winning formula. As a result, the company is likely to maintain its leadership position in the industry for the foreseeable future.

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Adam Levine-Weinberg is short shares of United Continental Holdings and is long September 2013 $33 puts on United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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