After years of quietly dominating the Seattle air travel market, Alaska Air (NYSE:ALK) has suddenly witnessed the rise of a dangerous competitor in the last year or so. Delta Air Lines (NYSE:DAL) has started to grow its international gateway in Seattle -- originally supported by a strong partnership with Alaska Air -- into a full-fledged hub.
Delta's Seattle operation is still small by comparison to Alaska's hub there. That said, as the most profitable airline in the world, Delta has the financial capacity to rapidly grow in Seattle.
That's exactly what it's been doing this year. Alaska has fought back with its own growth plans. This cycle of competition continued this week, as Delta and Alaska both announced extensive growth plans for the next year.
Delta's rapid growth in Seattle
Just two months ago, Delta operated a measly 35 peak-day departures in Seattle. The vast majority of those were either flights to Delta hubs or to international destinations in Asia and Europe. However, Delta had already announced a series of capacity expansions in Seattle by that point.
These announcements encompassed new and expanded service to a variety of destinations: primarily large cities in the western U.S. Los Angeles, San Francisco, Las Vegas, Portland, San Diego, San Jose, and Phoenix were some of the highlights. These flight additions will more than double Delta's daily departures in Seattle by this summer.
Well over half of Alaska Air's flights touch Seattle, which is its home base. While much of Alaska's success can be attributed to good management and a culture of continuous cost improvement, the company has also benefited immensely from low competition in Seattle.
As Delta expands in Seattle, Alaska will see new competition on numerous routes that it has dominated historically. Alaska will start to feel the impact of some of Delta's new flights this spring and summer, but the biggest effects will not occur until after Labor Day, when travel demand typically drops off due to seasonal factors.
Growth in Seattle continues
On Tuesday, Delta and Alaska both announced plans to significantly expand in Seattle. Alaska hopes to protect its dominant position by adding 27 daily departures by next spring, representing an 11% increase. This includes flights to half a dozen previously announced new destinations as well as frequency increases on at least nine other routes.
Meanwhile, Delta is continuing to beef up its Seattle presence by beginning daily flights to Calgary, Spokane, and Kahului, along with less frequent or seasonal service to several other vacation destinations. All of these new Delta flights will begin in November or December.
Alaska's goal may be to head off Delta's expansion by proactively adding capacity in some of the markets where Delta would be most likely to expand in the future. This is a clever move, but it also highlights just how much Alaska is playing defense. Alaska is likely to put pressure on its profit margin by adding capacity in so many markets at once.
Meanwhile, Delta's expansion is breaking yet another Alaska Air monopoly (Seattle-Spokane, where Alaska has faced no direct competition since Southwest Airlines (NYSE:LUV) pulled out in early 2012.) As more and more of its routes face direct competition, Alaska may lose some of its pricing power -- which is one big reason why I am avoiding the stock.
Foolish bottom line
It will take at least two to three years to know whether Delta's expansion in Seattle will be a win for the company. Delta needs to gain more scale in Seattle and get the word out with potential customers -- particularly businesses -- that it is becoming a serious alternative to Alaska Air.
However, it's already virtually certain that Delta's expansion will be a loss for Alaska. Today, the company is still posting solid earnings growth due to favorable trends affecting the whole industry, as well as its own cost-cutting moves. Longer-term, though, Alaska will have a hard time offsetting the impact of stiffer competition in its home market.