In the past year, Alaska Air (NYSE:ALK) has experimented with a number of strategies to retain customers in its hometown of Seattle, where it faces a strong challenge from Delta Air Lines (NYSE:DAL). For example, Alaska has offered double frequent flier miles on several routes where Delta has recently introduced or significantly increased its service.
Now, Alaska is looking to be even more aggressive in its customer retention efforts. On Monday, it announced a new customer-friendly promotion. Members of Alaska's Mileage Plan frequent flier program (and their companions) will be able to check a bag for free during the whole month of January.
Delta's expansion creating pressure
Alaska Airlines has dominated the Seattle market for many years. By next spring, it plans to offer 280 daily departures from Seattle to points as far as the East Coast, Mexico, Hawaii, and, of course, Alaska.
However, Delta Air Lines has been working to build an international gateway hub in Seattle for the past couple of years. Delta has rapidly expanded its U.S./Canada flight schedule in Seattle this year. By next summer, Delta will offer 120 daily departures from Seattle, up from just 34 at the beginning of 2014.
This new competition has already started to put pressure on Alaska Airlines' unit revenue, which fell about 1% in the third quarter. Delta's growth in Seattle ramped up even further in the fourth quarter and will continue into 2015, so Alaska could face even tougher times ahead. It needs to be proactive in order to maintain its leading position in Seattle.
Alaska's free bag promotion is a clever way for it to try to maintain its market share. Virtually every U.S. airline has instituted checked bag fees (or announced plans to do so) -- much to the chagrin of air travelers -- with Southwest Airlines now the lone holdout. Only elite frequent fliers or airline credit card holders can avoid these bag fees.
Thus, Alaska is giving its customers a taste of "elite" status for the month of January, just for joining the frequent flier program in the first place. The cost is relatively manageable. At most, Alaska is losing out on a $25 checked bag fee per customer. In practice, most people don't normally pay to check a bag, so the opportunity cost is lower.
By contrast, the potential upside is significant. January tends to be a seasonally weak month for air travel, so this offer might help Alaska Airlines entice a few more customers onto each of its flights.
Additionally, by enrolling customers in its frequent flier program, Alaska has a better chance to get repeat business. First, customers may try to keep most of their flying with one airline in order to maximize the value of the frequent flier miles they receive. Second, Alaska can send its Mileage Plan members targeted offers to get future business from them.
The worst will be over soon
Thus far, Alaska has withstood Delta's onslaught in Seattle while continuing to grow its earnings. The recent drop in oil prices should allow Alaska to deliver further earnings growth in 2015 even though unit revenue is likely to decline again due to competition from Delta.
By the end of 2015, Delta will have built out more than half of its long-term footprint in Seattle, so its future growth will be more modest. Meanwhile, Alaska's industry-leading customer satisfaction ratings, its reputation as Seattle's hometown airline, and special offers like its January free checked-bag promotion should help it maintain its leading position in Seattle.