Alaska Air Strikes Back Against Delta

This fall, Delta Air Lines (NYSE: DAL  ) has made a series of bold moves to grow in Seattle. In doing so, it has been encroaching ever more upon Alaska Air's (NYSE: ALK  ) home turf, despite an ongoing codeshare partnership between the two carriers.

Delta Air Lines has announced new service on several of Alaska Air's core routes recently.

Last week, Alaska Air struck back, announcing several new routes into Salt Lake City, Delta's main hub for the western U.S. Given that Salt Lake City is not a particularly large market and is dominated by Delta, it's hard to see this move as anything other than a tit-for-tat response to punish Delta. However, it's a risky gambit, as Alaska Air has a lot more to lose than Delta in this brewing capacity war.

Throwing down the gauntlet
In the past year, Delta has accelerated its attempt to build an international gateway in Seattle. At first, this was great for Alaska Air, as Delta was relying on it to provide connecting traffic through the two carriers' codeshare relationship.

However, in each of the last three months, Delta has announced significant increases in short-haul service from Seattle. In October, Delta announced new service from San Francisco to Seattle, along with capacity increases to Seattle from Los Angeles and Las Vegas. This seemed innocuous enough: all three are very large markets with multiple competitors. Alaska's management did not seem especially concerned about the issue when it was raised on the company's third-quarter-earnings call.

In November, Delta took a much bolder step, announcing new service from Seattle to Portland and San Diego, and an additional seasonal flight to Anchorage. Alaska has a major presence at all three of these airports and dominates those routes today. Finally, earlier this month Delta announced new service to Vancouver and new seasonal service to Fairbanks, invading another two core routes for Alaska Air.

Competitive response
Alaska is looking to get even, announcing last week that it will start service between Salt Lake City and Portland, San Jose, Los Angeles, and San Diego, and add a third daily flight from Salt Lake City to Seattle. This is a very ambitious expansion, considering that Alaska only began serving Salt Lake City earlier this year.

Alaska is striking back with several new flights to Delta's Salt Lake City hub (Photo: Alaska Air).

Alaska will offer two daily flights from Salt Lake City to Portland and San Diego, and one daily flight to San Jose and Los Angeles, beginning in June. It's hard to imagine that this relatively small batch of flights will do significant damage to Delta, which operates more than 200 daily departures from Salt Lake City and thousands of daily flights worldwide.

On the other hand, Alaska is a small fraction of Delta's size, so adding seven new round trips could have a noticeable (though still small) impact on its profitability. The bigger issue is that Alaska is wading into a likely fare war in Salt Lake City when it will also be under pressure on many of its core routes.

This is a potentially toxic combination. An increase in competition caused Alaska's earnings growth to slow dramatically in 2013. With an even larger increase in competition scheduled to heat up in the second quarter of 2014, Alaska could see its earnings growth come to a complete halt or even take a step backward.

Foolish conclusion
Alaska Air has become one of the most successful airlines in the U.S. by dominating its niche in the Pacific Northwest. With Delta looking to grow aggressively in that region, Alaska could feel sustained earnings pressure over the next several years.

Alaska's decision to fight back by adding flights to Delta's Salt Lake City hub sends a very clear message that it plans to compete aggressively. However, this may not be a wise decision. Delta is the strongest of the big three legacy carriers, and it seems determined to grow Seattle into a strong international gateway. By going on the attack, Alaska may only aggravate its problems.

One stock that could make you rich
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (6) | Recommend This Article (2)

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 December 13, 2013, at 1:29 PM, Tyeward wrote:

    I sure hope that Alaska can afford to spread the wealth around throughout it´s network to compensate for going to battle with Delta. You know you will end up running at a loss on some routes if this ends up being a fare war. Delta has the heft to run at a loss for the sake of competition and still turn a profit. Not too sure if Alaska is able to counter that. It´s just not big enough to be able to and do it for too long. Good luck though.

  • Report this Comment On December 13, 2013, at 7:15 PM, SkyJet wrote:

    Alaska Airlines has been faced with fierce competition in the past and in fact has forced a few of those other airlines out of business or to retreat. Alaska shall survive this invasion by Delta. If not, then Delta shall get their wish, and that is to merge with Alaska Airlines.

  • Report this Comment On December 13, 2013, at 7:18 PM, seanisbomb wrote:

    Alaska trying to do anything is a big laugh

  • Report this Comment On December 13, 2013, at 10:02 PM, TMFGemHunter wrote:

    @SkyJet: Delta is a much stronger competitor than any competitor Alaska's gone up against, except possibly Southwest. And Delta is much more committed to Seattle than Southwest, because of its potential as an international gateway. Alaska will survive (or get bought out, perhaps), but its margins may move back towards the rest of the industry.

    Adam

  • Report this Comment On December 14, 2013, at 11:09 AM, katz wrote:

    Alaska had some of the best consumer ratings according to a recent article.

    Delta refused airline miles for a frequent traveler and took them away from internationally famous cellist, Lynn Harrell. The miles were for the cello, Cello Harrell.

    Cellists are required to purchase tickets for the instrument, baggage is not a place for a valuable instrument. The ticket should have the miles, whether a person or instrument. A seat/ticket is a purchase as far as the airline is concerned. Lynn Harrell's career of over 40 years has included thousands of miles of travel.

    Colbert report:

    http://www.colbertnation.com/the-colbert-report-videos/42775...

  • Report this Comment On December 15, 2013, at 2:06 AM, bleep67 wrote:

    Long before the Delta takeover, Northwest Airlines had a very strong presence in Seattle, including maintenance operations, a crew base and even it's own flight kitchen. I never understood why NWA pared down it's involvement in such a strategically important location for both west coast and Asian flights, and now apparently neither does Delta.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2764081, ~/Articles/ArticleHandler.aspx, 11/26/2014 4:14:56 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