Delta Air Lines, Inc. Is on the Move Again in Seattle

In the past few years, Delta Air Lines (DAL -0.45%) has made Seattle its primary international gateway on the West Coast. Initially, Delta relied on its partner Alaska Air (ALK -0.78%) to provide connecting traffic for these flights.

More recently, Delta decided it needs to be more self-sufficient to succeed in Seattle. As a result, it has rapidly expanded its domestic network in Seattle this year, challenging Alaska's dominance of the market. Delta recently announced that it plans further growth in Seattle, which will keep up the pressure on Alaska Airlines into 2015.

Delta bets big on Seattle

Asia is a key growth region for global airlines, and an opportunity Delta can't afford to miss. Faced with United Continental's dominance in San Francisco, a highly fragmented market in Los Angeles, and the widespread preference among business travelers to minimize the number of connections, Delta decided to make Seattle its primary Asian gateway.

Delta has made Seattle its primary international gateway on the West Coast.

This year, Delta has added nonstop flights from Seattle to three key overseas destinations: Seoul, and Hong Kong in Asia, and London in Europe. Delta now has more long-haul international flights from Seattle than all other airlines combined!

However, the even bigger story has been its move into shorter haul-routes within the U.S. and Canada. For most of these routes, Delta competes directly with Alaska Airlines for local traffic and connecting passengers, which is starting to put pressure on the latter's unit revenue.

Delta's growth spurt

The speed of Delta's growth in Seattle has been truly stunning. At the beginning of 2014, Delta operated just 34 peak-day departures from Seattle to 15 destinations. However, Delta has since added a slew of new flights from Seattle to virtually every major city in the western U.S.

Delta now operates about 80 peak-day departures to 25 destinations from Seattle. By the end of the year, these totals will rise again to 93 departures to 32 destinations. On Wednesday, Delta announced another round of growth that will add nonstop service to five more cities next spring, plus frequency increases on seven other routes.

As a result, by next summer, Delta will offer 120 peak-day departures from Seattle (up nearly fourfold in just 18 months) to 35 destinations across three continents.

More growth ahead

This growth spurt still leaves Delta as a distant second in Seattle in terms of departure count. By next summer, Alaska Airlines will have 280 daily departures in Seattle. However, Delta is the first meaningful competitor Alaska has faced in Seattle for many years, and unlike Alaska, it offers a global route network.

Delta's growth is giving local rival Alaska Airlines unwanted competition.

More importantly, Delta's rapid growth in Seattle is likely to continue beyond 2015. Earlier this month, Delta CEO Richard Anderson told employees that Delta is looking to operate 30 gates at Seattle-Tacoma International Airport in the long run, up from 11 today. That footprint could ultimately support up to 240 daily departures, according to Bloomberg.

Delta could potentially reach that size by 2020. Delta just placed a big order for A350 and A330neo widebodies, many of which will be used on transpacific routes from Seattle after they begin arriving later this decade. As it adds international routes from Seattle, Delta will also want to grow its domestic network in Seattle to provide connecting traffic.

A long-term headwind for Alaska

Alaska Airlines is one of the best-run airlines in the U.S., and thus far, its management team has done a great job of navigating Delta's encroachment onto its territory. Last quarter, Alaska's revenue per available seat mile declined 0.7%. Yet it grew adjusted EPS 32% year over year, thanks to the introduction of larger, more-efficient airplanes, the addition of seats to some of its existing planes, and lower fuel prices.

Despite Alaska's strong showing so far, there is only so much a good management team can do to offset external pressures. Its stock looks fairly cheap, but Alaska Airlines is running out of cost-cutting opportunities. (That said, it will benefit from lower fuel costs if oil prices remain low next year.)

Meanwhile, the pressure from Delta's growth in Seattle is continuing to increase. If Delta does try to grow to 240 daily departures in Seattle by the end of the decade, high competitive capacity growth will be a long-term fact of life for Alaska Airlines. Delta's aggressive growth in Seattle will be great for travelers, but it will be a major annoyance for Seattle's hometown airline.