Delta's Love-Hate Relationship with Alaska Air Escalates

Last month, I pointed out that the relationship between Delta Air Lines (NYSE: DAL  ) and Alaska Air (NYSE: ALK  ) has become increasingly ambivalent this year. Delta and Alaska have a code-sharing partnership in Seattle, where Alaska has its largest hub, and Delta is building an international gateway. This partnership allows passengers to connect between Alaska's domestic network and Delta's international flights, benefiting both companies.

Alaska Airlines operates its largest hub at Seattle-Tacoma International Airport (Photo: Alaska Airlines)

However, whereas Delta's international flights complement Alaska's domestic service, Delta is also starting to enter a number of markets where it will compete directly with Alaska. On Tuesday, Delta announced its latest round of capacity expansion in Seattle. This time, it is targeting three more of Alaska's major markets: Portland, San Diego, and Anchorage.

Growing the gateway

Delta's growth in Seattle has really taken off in the last year. In June, the company began flying from Seattle to Tokyo's nearby Haneda Airport, which replaced service between Detroit and Haneda . (Delta also flies from Seattle to Narita International Airport, Tokyo's main international hub.) Delta also began flying between Seattle and Shanghai in June.

This rapid international growth is set to continue next year. By mid-2014, Delta plans to begin service to London, Seoul, and Hong Kong. That will bring its total of international cities to 8.

Delta is growing capacity in Seattle rapidly (Photo: Delta Air Lines)

However, Delta does not have much domestic service in Seattle today, aside from flights to its hubs. This means that it relies heavily on its relationship with Alaska to generate connecting traffic for its international flights. In fact, roughly one-third of all passengers on Delta's international flights from Seattle connect from Alaska's domestic flights !

Delta's decision to expand its domestic flying indicates that it is uncomfortable relying so heavily on Alaska for connecting traffic. Clearly, some markets do not have enough traffic to support multiple competitors. But in the major West Coast markets, Delta is looking to provide its own passenger feed.

Domestic competition rises

The first round of domestic expansion was announced in early October. Delta revealed plans to start frequent service between Seattle and San Francisco next spring, as well as plans to boost capacity between Seattle and Las Vegas and Los Angeles .

Wednesday's announcement adds nonstop service between Seattle and two new domestic destinations next year: Portland and San Diego. Delta also plans to add a second daily flight between Seattle and Anchorage for the 2014 summer season.

While Alaska is the leading carrier on all six of these routes, the flights announced this week target its strongest markets. Alaska operates hubs in both Anchorage and Portland, and it has a growing presence in San Diego .

Delta is still far from mounting a serious challenge to Alaska in Seattle. Delta currently operates just 36 peak-day departures from Seattle (down from around 45 during the summer), whereas Alaska has several hundred daily departures in Seattle . Still, Delta's current plans have it expanding both domestic and international service in Seattle by 50% or more over the next 12 months. A few more years at that pace could put a serious dent in Alaska's Seattle market share.

Thus far, Alaska has done an admirable job of keeping profitability up despite the fare pressure caused by growing competition from Delta and other carriers. On the other hand, Alaska has lagged the industry in terms of profit growth this year -- it's not immune to competition! As long as Delta continues expanding rapidly in Seattle, Alaska's profit growth is likely to lag that of the industry.

Foolish bottom line

Delta and Alaska benefit from a partnership that connects passengers between Alaska's domestic flights and Delta's international flights in Seattle. However, they are still competitors, and that competition is becoming increasingly cutthroat .

Delta is undertaking a relatively small risk by invading Alaska's home turf, because the flights it is adding represent less than 1% of its global capacity. Its international gateway in Seattle will be much more secure if it can provide most of the necessary connecting traffic on its own, and that justifies the risk of expanding its domestic service.

By contrast, Alaska will have to fight hard to keep profit moving in the right direction. The company has a good track record of overcoming such obstacles, but it will need to provide a clear plan at its investor day next week to keep its stock afloat.

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  • Report this Comment On November 08, 2013, at 9:58 AM, AcuraT wrote:

    This move is now more serious, the first was just increasing flights to hubs. This analyst is on the ball with the latest moves.

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