Last year, aggressive competition from Southwest Airlines (NYSE:LUV) in California caused unit revenue declines -- and severe margin erosion -- at Alaska Air (NYSE:ALK). However, during 2018, the two low-fare airlines have started to pull back in each other's core markets.
This process of "detente" continued this week, as Southwest Airlines abandoned a plan to serve Paine Field, a secondary airport near Seattle that will get commercial service early next year. Instead, Southwest will transfer its slots to Alaska Airlines, allowing the latter to further solidify its position as the leading carrier in the Seattle area.
Calling a truce
Whereas Alaska Airlines and Southwest Airlines were battling for market share (primarily in California) during 2017, the two carriers have been more focused on returning to unit revenue growth this year. This has entailed giving up on costly market share battles.
For example, back in the spring, Alaska decided to cut its unprofitable routes from Dallas Love Field -- Southwest's hometown airport -- to New York's LaGuardia Airport and Washington, D.C.'s Reagan National Airport. It then leased all of its slots at LaGuardia and its short-haul slots at Reagan to Southwest Airlines for a 10-year term. That allowed Southwest to expand at both slot-restricted airports earlier this month.
On the flip side, Southwest Airlines recently dropped its flights from San Francisco -- which is now a key focus city for Alaska Airlines -- to Portland, Oregon, and Orange County, California. All of these route network changes are likely contributing in a small but meaningful way to the unit revenue improvements expected at both Alaska and Southwest starting this quarter.
Alaska and Southwest strike another agreement
Earlier this year, Alaska Airlines and Southwest Airlines both announced plans to serve Paine Field, an airport in Everett, Washington (about 25 miles north of Seattle). A small commercial terminal is set to open there in early 2019, but with just two gates, the new terminal will only be able to support 24 daily round-trips.
As the leading carrier in the Seattle area, Alaska Airlines sees Paine Field as a logical place to expand. Commute times from the northern suburbs to Seattle-Tacoma International Airport can easily exceed an hour, so offering flights from Paine Field will allow the carrier to better serve its customers. As of January, Alaska planned to operate 13 daily flights from Paine Field to eight destinations in the western U.S.: Las Vegas; Los Angeles; Orange County; Phoenix; Portland; San Diego; San Francisco; and San Jose, California.
The other 11 slots were claimed by United Continental -- which plans a total of six daily round-trips to its Denver and San Francisco hubs -- and Southwest, which had planned to operate two daily flights to Las Vegas and three daily flights to Oakland, California.
In a route network update released on Thursday, Southwest stated that it no longer plans to fly from Paine Field. Citing undisclosed "business considerations," the carrier said that it had agreed to transfer its five slots to Alaska Airlines. This will allow Alaska to operate 18 daily round-trips at Paine Field.
Better schedules should drive better results
If it had been limited to 13 daily round-trips at Paine Field, Alaska Airlines would have had to offer just one daily flight to several of its eight intended destinations. The five extra slots it is getting from Southwest will permit more frequent service.
On Thursday, Alaska announced its initial Paine Field flight schedule. The flights will phase in gradually between Feb. 11, 2019, and March 12, 2019. By mid-March, the carrier will offer four daily round-trips each to Los Angeles and Portland; two daily round-trips each to Las Vegas, San Diego, San Jose, and San Francisco; and single daily flights to Orange County and Phoenix.
This schedule will enable Alaska Airlines to operate fairly frequent service to Portland and Los Angeles -- two key business markets for which it will be the only carrier with nonstop flights from Paine Field. Customers will be able to connect to dozens of additional destinations via Portland. Meanwhile, offering twice-daily service in four other major markets will allow Alaska to provide more convenient schedules for business travelers compared to flying those routes just once a day.
The biggest weakness of Alaska's earlier Paine Field plans was the lack of schedule options. The recent agreement with Southwest Airlines will go a long way toward addressing that issue. As a result, this 2019 expansion opportunity looks like it will be an attractive way to build on Alaska Airlines' strong franchise in the Seattle area.
Adam Levine-Weinberg owns shares of Alaska Air Group and Southwest Airlines. The Motley Fool owns shares of and recommends Southwest Airlines. The Motley Fool recommends Alaska Air Group. The Motley Fool has a disclosure policy.