Today, American Airlines (NASDAQ:AAL) and Alaska Air (NYSE:ALK) have a common problem: Delta Air Lines (NYSE:DAL). Since 2014, Delta has built up a global hub in Seattle, gaining market share in Alaska Airlines' home city and threatening its ability to compete for corporate travel contracts there.
Meanwhile, Delta has grown significantly in Los Angeles, challenging American's main West Coast hub and top transpacific gateway. Delta's joint ventures with Virgin Atlantic and Aeromexico and its planned JV with LATAM Airlines are also putting pressure on American Airlines in the U.K. and Latin America, two of the strongest points in its international route network.
Now American Airlines and Alaska Airlines have realized that they would be better off teaming up to take on the threat posed by Delta's growth. On Thursday, the two airlines announced a new West Coast partnership, which will eventually include Alaska joining the oneworld global airline alliance.
Distinct strengths and weaknesses
The late-2013 merger between AMR and US Airways made American Airlines the largest airline in the U.S. However, while American became significantly bigger than rivals Delta and United Airlines east of the Rockies, it remained the clear No. 3 player in the western U.S.
This has made it hard to compete in Asia, a key growth market for American's competitors. In fact, after ending its routes from Chicago to Asia over the past year and a half, the airline is now considering whether or not to resume its flights from Los Angeles to Beijing and Shanghai when the current coronavirus outbreak subsides. Additionally, American Airlines has trouble competing for business in the Pacific Northwest, as its hubs are poorly positioned for serving the region.
By contrast, Alaska Airlines is the dominant airline in the Pacific Northwest. In Seattle, it offers about twice as many flights and seats as Delta, despite the latter's growth. It is also the leading carrier in Portland. Alaska has a substantial presence in many other West Coast markets, too.
That said, with no wide-body jets to serve long-haul routes, Alaska Airlines has had to rely on a hodgepodge of international airline partners to take its customers to overseas destinations. That's given Delta a natural advantage in competing for lucrative corporate contracts from big tech companies as it has grown in Seattle. Delta and its joint venture partners fly nonstop from Seattle to up to eight destinations in Europe and Asia.
An expanded partnership could be the answer
Alaska Airlines and American Airlines already have a codeshare agreement, but they have been scaling back that partnership in recent years. Now the two airlines are changing course. They plan to continue the current codeshare arrangement and extend it to new American Airlines long-haul routes from the West Coast. American and Alaska will also return to full reciprocity between their loyalty programs, allowing customers to earn miles for their preferred airline regardless of which carrier operates a given flight. The two airlines will also offer reciprocal lounge access.
In conjunction with this agreement, American Airlines announced that it will launch two long-haul routes from Seattle. It will begin flying to Bangalore, India, in October and will add daily service to London in March 2021. These routes would have been unthinkable without the Alaska partnership, as American Airlines doesn't offer any domestic service from Seattle except to its hubs.
Bangalore is a major tech hub, and American Airlines has seen growing demand from its customers to fly there. Partnering with Alaska to enable nonstop Seattle-Bangalore flights was a natural move based on Seattle's burgeoning tech industry and the simple fact that no other major city in the U.S. is close enough to Bangalore to permit reliable nonstop flights by fully loaded planes. London is also a natural city to serve, as a key business market and the hub of American Airlines' joint venture partner British Airways.
This expanded partnership is great news for Alaska Airlines. It's low risk, it will remedy a major network disadvantage vis-a-vis Delta, and connecting traffic to and from American's long-haul flights will boost traffic on Alaska's network.
From American Airlines' perspective, there is more risk. Starting a new 8,000-mile route in an unproven market is never a sure thing. But gaining additional connecting traffic from Alaska Airlines in Los Angeles will reinforce American's existing long-haul routes there. Plus, there's more long-term upside for American. If the Bangalore and London routes are successful, American Airlines could add other long-haul routes from Seattle, which might prove to be a more profitable international gateway than Los Angeles.
Alaska will join oneworld, too
In addition to partnering directly with American Airlines, Alaska Airlines plans to join the oneworld alliance in the summer of 2021. This will significantly improve its ability to serve customers' international travel needs. Alaska Airlines customers will be able to earn and redeem miles with all oneworld member airlines. Elite members of its frequent-flyer program will also get privileges like priority boarding, upgrades, and lounge access across the oneworld network.
In the long run, joining oneworld could be a bigger deal for Alaska Airlines than the American Airlines partnership. Through oneworld, Alaska Airlines will be able to book tickets to more than 1,200 destinations around the globe.
Nearly all of Alaska's international airline partners today are members of oneworld (including British Airways, Cathay Pacific, Finnair, Japan Airlines, and Qantas) or are unaligned. Thus, the carrier isn't likely to lose many partners from joining oneworld. Meanwhile, it will benefit from deeper integration with its oneworld partners, making it a more compelling alternative to Delta for business travelers based in Seattle -- and elsewhere up and down the West Coast. That could turbocharge Alaska's revenue and profit growth in the years ahead.