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.
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."
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.
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