Does Delta Still Want to Be Friends With Alaska Airlines?

Delta Air Lines (NYSE: DAL  ) has built a thriving international gateway in Seattle, thanks in large part to a partnership with Alaska Air (NYSE: ALK  ) , which operates a hub there. Delta and Alaska code-share on numerous flights from Seattle, and Delta has relied on the "feed" from these flights to fill planes for its flights from Seattle to Europe and Asia.

Delta is boosting its flight schedule in Seattle.

However, Delta has recently started to bulk up its domestic service in Seattle. In doing so, it is starting to become a direct competitor to Alaska on a number of routes, rather than offering complementary service. This shift in strategy could put some pressure on Alaska's profitability going forward.

Friends or rivals?
Just a year ago, Delta and Alaska seemed inseparable. The two carriers announced a joint Seattle expansion plan that involved increasing Delta's international service from Seattle. At the time, Delta claimed: "The partnership between Delta and Alaska is a major factor in enabling Delta to operate international flights from Seattle. The new Haneda service, for example, will benefit from easy connections to 55 U.S. cities on Delta and Alaska's domestic networks."

Alaska has benefited from Delta's international flights from Seattle. Photo: Alaska Airlines.

Since then, Delta has announced or begun new international service to Shanghai, London, Seoul, Hong Kong, and Tokyo's Haneda Airport. All of these new routes have been made possible by Delta's partnership with Alaska.

On the other hand, on Tuesday, Delta announced a significant increase in domestic service out of Seattle. It will launch new nonstop service to San Francisco next March, with six daily round-trips (increasing to seven peak-day round-trips for the summer). Delta will also add two new round-trips between Las Vegas and Seattle in January, and another two in April, thereby increasing service from once daily to five times daily by next spring. Lastly, Delta will add two more round-trips to its Los Angeles service next June, after adding three flights earlier this year.

In all three cases, Delta is adding capacity on routes that Alaska already serves with frequent mainline service. While some expansion of domestic capacity in Seattle may be needed to support Delta's new international routes, Delta primarily seems to be diverting traffic from Alaska's domestic network to its own.

A new strategy?
Delta is unlikely to make Seattle a full-fledged hub anytime soon. The start-up costs of adding service to small cities would likely outweigh the benefit of increasing traffic through Seattle. (That is especially true because Seattle is poorly located for connections within the U.S.) By contrast, San Francisco, Los Angeles, and Las Vegas are large travel markets and are major markets for international travelers.

In other words, Delta will probably be content to let Alaska continue handling the majority of its domestic feed in Seattle. However, I expect Delta to continue adding nonstop routes to larger cities in competition with Alaska. Delta's primary motivation is probably a desire to hedge its reliance on Alaska for supplying connecting traffic.

Delta's expanded service in Seattle could put a dent -- albeit a small one -- in Alaska's impressive profit margin. Alaska Airlines has recently seen its unit revenue come under pressure due to significant increases in competitors' capacity on some routes. With Delta entering into direct competition with Alaska on three high-traffic routes, that unit revenue pressure is more likely to increase than to abate.

Foolish bottom line
While I don't see Delta's new service out of Seattle as a death knell for the Delta-Alaska partnership, it signals that Delta would prefer to stand on its own two feet when possible. From Delta's perspective, the near-term financial implications are minimal. A handful of new regional jet flights are just a drop in the bucket for Delta.

By contrast, Alaska (being a much smaller airline) has a significant proportion of its total capacity on each of the three affected routes. As a result, it may see a noticeable financial impact next spring and summer, when Delta's new flight schedule has fully ramped up.

Two Airlines Breaking All the Rules
Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. The Motley Fool's special report on the airline sector reveals the secrets to success of these two companies. Click here for your free copy!


Read/Post Comments (9) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2013, at 12:05 PM, MJA64 wrote:

    Could it be that Alaska could not provide the type of service that Delta wants? Alaska being a small airline probably could not be able to have dedicated aircraft to this new service that Delta wanted to provide in order to give these business travelers the option to avoid delays or inconvenience.

  • Report this Comment On October 02, 2013, at 12:07 PM, AcuraT wrote:

    This is being made more than it is right now. San Francisco, Los Angeles, and Las Vegas are all markets that Delta has as "focus cities." Not hubs per se, but airports that have more flights than a normal destination. All three gained that status after the merger with Northwest, and Los Angeles had it once before the merger before pulling back out of the airport. In the end, these focus cities can provide more passengers to Seattle for the international flights. This is an attempt by Delta to boost traffic through Seattle to support those flights.

    Now if Delta expands further and starts adding flights to cities like Tampa, Florida, which is not a Delta hub or Focus city, then Alaska can get worried. Right now, this is just an effort to prop up further the expanded international schedule out of Seattle. Nothing more - nothing less.

  • Report this Comment On October 02, 2013, at 2:20 PM, cabri01 wrote:

    Not mentioned in the article is that Alaska has gotten cozier with AA recently, thus this might be a prudent move by Delta.

  • Report this Comment On October 02, 2013, at 3:43 PM, forefool wrote:

    The choice is the consumers. Fly Alaska on one of the most modern fleets in the sky or fly Delta with an average fleet age of more than 17 years.

    If Delta wants to compete in the west they will need new planes and a much better service ethic than what they currently offer. We have been spoiled by Alaska all these years and we are not anxious to be treated like cargo rather than fare paying passengers.

  • Report this Comment On October 02, 2013, at 5:08 PM, NewPeach wrote:

    Well Alaska has added MSP ATL SLC and NYC-via EWR nonstops in recent years so this isnt a one way deal.

    Also remember group travel is big in Asia, esp in Japan. Trying to get a group in a code share is difficult. Often you just cant. You just cant grab 30 40 50 seats off a partners flight. Certainly wont work on any computer system-no way. Manually its possible but often too many hoops and approvals and waiting and the group will go elsewhere before you can hope to succeed with that.

  • Report this Comment On October 02, 2013, at 8:23 PM, asflyer wrote:

    EWR started over 10 years ago. MSP started a good 5 or 6 years ago. It's not as if you could say that AS has been moving in on DL's territory. Over the last 11 or 12 years AS has added a grand total of 8 flights from SEA/PDX to DL hubs.

  • Report this Comment On October 08, 2013, at 12:06 AM, F111Driver wrote:

    Delta is reacting to Alaska's infidelity to the code share agreement it inked last year. Alaska signed a code share with AA after it already committed to Delta and will now suffer the consequences of shifting its allegiance but way of direct competition from DAL eating into its market. And if you think that shouldn't worry Alaska, you must have missed that Delta has 100 new B737-900 jets on order (exactly what AK flies) that they will be flying on competitive routes. As far a hub is concerned, Seattle already is a hub and the returns from Asian traffic are better than expected. Most of Wall Street, have been missing what DAL management has been doing since it came out of bankruptcy. The airline is under management of arguably the best airline CEO currently in the business and it has paid down enormous amounts of debt in an incredibly short period of time. While AA and UAL are distracted with their mergers, DAL is quietly strengthening its position. While AK has traditionally been a well run airline, they committed an egregious error going against DAL code share pact and it's going to cost them dearly...I'd even bet some play money that DAL may end up buying AK in the future.

  • Report this Comment On October 26, 2013, at 5:53 PM, TMFGemHunter wrote:

    @F111Driver: The Alaska-American code share is nothing new. Alaska is not part of any of the airline alliances, and it has relationships with various airlines that are in competing alliances.

    I don't think that Alaska will be hurt too much unless Delta tries to build up a full-scale hub in Seattle, which still seems unlikely. (It would require a massive amount of investment.) Still, I do agree that Delta could try to buy Alaska at some point down the road. The combination would definitely make sense.

    Adam

  • Report this Comment On October 30, 2013, at 12:47 PM, asflyer wrote:

    if AS decided to cancel all code-shares on DL to/from SEA, it would hurt DL FAR more than it would hurt AS. I think this would be a prudent move for AS. DL may shift some capacity to SEA to add flights to a few more of the bigger cities but there is no way they would ever shift enough resources to SEA to replicate AS' hub there. Even if they wanted to there isn't enough room for them at SEA to do so. DL benefits from this agreement more than AS does. They should probably consider that

Add your comment.

DocumentId: 2664471, ~/Articles/ArticleHandler.aspx, 7/28/2014 2:58:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement