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.
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.
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 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.
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.
Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.