Delta takes a jab at Spirit and says it soon expects more profit from premium seats than economy

• Delta Air Lines is focusing on premium cabins to boost revenue and outpace economy sales.

• The premium demand is driven by millennials willing to spend more for an elevated experience.

• Delta's president suggested budget carrier Spirit failed because it was too focused on low fares.

Delta Air Lines believes a premium-focused strategy is the secret sauce to success, as outlined during its Investor Day in Atlanta on Wednesday.

President Glen Hauenstein said that premium demand is soaring thanks to millennials willing to pay more for an elevated experience. As such, premium seats — currently about 30% of Delta's inventory — will be a majority focus of any added capacity next year.

By 2027, the airline expects to make more money from premium seats than those in economy.

Hauenstein said focusing on the premium market will help Delta win against budget carriers that depend on low fares to lure in customers.

"I think [post-pandemic demand] had a very different impact on the carriers that were supplying premium products and services, which had a little bit of a downdraft, versus those who were just focused on price that had an incredible cliff to fall off of," he said. "I think we've seen that manifest itself in the bankruptcy we saw filed this week."

Hauenstein is referring to Spirit Airlines' filing for Chapter 11 bankruptcy on Monday. The low-cost airline has not posted a full-year profit since 2019 and has been forced to lay off staff and sell $500 million worth of planes to stay afloat.

United Airlines CEO Scott Kirby said in a June podcast that passengers prefer experience over low fares and that budget airlines may go out of business without making quality changes.

Breeze Airways CEO David Neeleman gave Business Insider a similar take in November, saying low-cost carriers should stop nickel-and-diming their customers.

Spirit and Frontier have bent to modern flyer expectations. Both overhauled their business models this year to offer more premium perks, such as extra legroom and business-class-like seats. They've also dropped most change and cancel fees.

Delta's presentation on Wednesday set the tone for the coming months, as airlines continue to struggle with high costs driven largely by inflation and labor, which have weighed on profit margins.

While the investments may take years to show full potential, at least in the near term, Delta CEO Ed Bastian has welcomed president-elect Donald Trump as a "breath of fresh air" as opposed to what he described as government "overreach" under the Biden Administration.

Delta's stock price was down about 2% after Wednesday's Investor Day and is up about 57% year-to-date.

Delta is doubling down on premium seats

Delta's premium cabins, including premium-economy upgrades, Delta One business class, and domestic first class, have long been profit drivers. So far, adding more of the expensive seats has been a boon to its bottom line, and it's showing no signs of letting up.

Delta said its Airbus A350-1000 aircraft will be introduced with about 50% premium seats, for example, while the airline plans to add lie-flat business class to A321neo jets.

This all comes after Delta had higher-than-expected earnings in the third quarter, largely anchored by premium seats, even though it was dinged by a costly CrowdStrike outage.

From July through September, Delta generated $5.3 billion in premium revenue compared to $6.3 billion for the economy cabin despite premium taking up less cabin real estate.

Hauenstein said Delta's biggest opportunity to add premium products and services is in the international market, where he said there is short supply but high demand.

He said that increase would come from retiring Boeing 767s, adding new A350-1000s, and reconfiguring existing A350-900s with more Delta One seats.

While executives didn't further discuss the previously hinted-at "business-class-lite" product that would unbundle business class, letting flyers buy only the seat but not other perks like lounge access, Hauenstein said there's revenue opportunity in segmenting premium economy and domestic first.

"That's where a huge revenue base is, and segmentation of that revenue base would potentially drive a significant improvement to the bottom line," he said.

Read the original article on Business Insider