Delta Woes Signal Tougher Trans-Atlantic Business

Delta Air Lines' decision to sell fewer seats from the UK this winter highlights the threat that Britain's planned exit from the European Union and stiffer airline competition pose to US airlines that have raked in cash from flights across the Atlantic.

Air travel between the United States and Europe has churned out steady profits in the past decade since major US carriers deepened partnerships with European rivals, consolidating what had been a fragmented, money-losing market outside the summer tourism season.

With immunity from US antitrust law, the airlines in four trans-Atlantic joint ventures have shortened connection times, set prices and distributed revenue among them. But a combination of new entrants and economic uncertainty stirred up by Britain's 'Brexit' vote threaten the business.

According to travel data analysis company ForwardKeys, Europe was the only region that saw fewer advance bookings by people from other continents for the first five months of the year.

As of May 31, long-haul bookings to Europe for summer trips were down 2.1 percent this year, compared to bookings made at the same time a year ago, the ForwardKeys study found.

A more than 10-percent drop in sterling against the US dollar since the June 23 Brexit vote has chopped around USD$40 million off Delta's annual UK sales, the company said on Thursday.

In response, it said it will cut 6 percent of its US-UK seats this winter.

"We have seen some strength in the US point of sale to the UK as the pound has deteriorated," chief executive Ed Bastian said. "Likewise, we've seen some reduction in our UK point of sale coming to the United States, and that's why we're making certain of the capacity adjustments combined with overall high levels of capacity in the North Atlantic."

Even so, Delta said this summer was still on track to be one of the most profitable for its trans-Atlantic business.

The other US airlines with trans-Atlantic partnerships, American and United, will likely roll back service as well, aviation industry consultant Robert Mann said.

"In the fall, Europeans congregate on Fifth Avenue and Rodeo Drive and buy stuff," Mann said. "With the fall of the pound, there will be a little bit less of that, and not enough of an incentive to get US leisure travellers to do some impulse travel" to Britain outside summer.

Delta had been steadily expanding service to the UK, and its British partner Virgin Atlantic, during the past two months announced new flights from New York to Edinburgh and Glasgow in Scotland, as well as from Portland to London.

Now, Delta plans to scrap flights on off-peak days and use smaller aircraft from places such as Manchester, which caters more heavily to leisure passengers than London, Delta President Glen Hauenstein said. London makes up about 35 percent of business travel between the United States and all of Europe, he said.

Delta's move comes after British Airways-parent IAG cut its 2016 profit expectations, citing the Brexit vote, though chief executive Willie Walsh said demand will bounce back in the long run.

HEADWINDS

Brexit is just one potential headwind that airlines face across the Atlantic. US and European carriers alike have warned that new competitors - such as low-cost Norwegian Air and Emirates, which caters more to business users - threaten to lower fares and even upend their business model.

Several Western flag carriers have asked US and European governments to limit their new rivals' flights, saying three Gulf carriers are subsidised by their governments and are adding capacity irrationally, without respect to demand. US airline unions have said Norwegian's subsidiaries would undermine wages and working standards.

The rivals have disputed these allegations and say they are competing fairly, in response to genuine demand.

"Whatever I do is perfectly rational. Whatever you do is completely irrational," Mann said. "This is what every airline management team has said."