American Airlines (NASDAQ:AAL) and Alaska Air (NYSE:ALK) have been partners since 1999. However, the two carriers have enhanced their ties in recent years. On Wednesday, they announced the latest developments in their relationship.
Alaska Airlines customers can now book connecting itineraries on former US Airways routes for travel after October 17, when American and US Airways will move to a single reservation system. They can also redeem rewards from Alaska's Mileage Plan frequent flier program on those routes. And starting on August 15, members of Alaska's Board Room lounges will have access to all 54 of American's Admirals Club lounges.
Why are these two carriers -- the biggest airline in the world and a midsize carrier with a concentrated footprint in the Pacific Northwest -- so eager to deepen their ties with one another? The answer is that each one fills crucial gaps in the other's route network.
A dogfight in Seattle
Alaska Airlines' route network is centered on its home base of Seattle, which accounts for more than half of its capacity. Recently, it has faced a major threat there from its erstwhile partner -- Delta Air Lines (NYSE:DAL).
Delta decided a couple of years ago to build a full-fledged hub in Seattle, particularly to serve Asian markets. Rather than rely mainly on Alaska Airlines to bring in connecting traffic, Delta opted to build out its own domestic network there. It now operates about 128 daily departures in Seattle, up from just a few dozen in 2013.
As Delta has expanded in Seattle, it has worked to win corporate clients there -- many of whom have been loyal to Alaska Airlines previously. In that fight, Delta has one huge advantage: its global route network.
While it still has less than half as many daily departures in Seattle as Alaska, Delta flies nonstop from Seattle to eight key cities in Europe and Asia. Alaska doesn't fly outside North America at all. Furthermore, Delta can offer one-stop service from Seattle to hundreds of cities across the U.S. and the rest of the world via its other hubs. Alaska's entire route network consists of just 104 destinations.
Thus, a strong partnership with a global carrier is a virtual necessity for Alaska Airlines if it wants to keep its corporate clients in Seattle happy. By partnering with American Airlines, Alaska can provide the same global access for its customers as Delta while maintaining its independence and pursuing targeted growth opportunities.
What's in it for American?
The purpose of the partnership for Alaska is thus fairly obvious. But why is a mega airline like American Airlines so eager to reciprocate?
In fact, the logic on American's side is much the same. But instead of needing to bulk up its access to the wider world, it needs to bolster its presence in the Pacific Northwest region specifically.
Seven of American Airlines' nine hub cities -- including the four largest -- are in the Eastern and Central time zones. Its two western hubs are in Phoenix and Los Angeles. This leaves it with a surprisingly weak route network in the northwestern part of the U.S.
Between its big hub in Seattle and smaller hubs in Portland and Anchorage, Alaska Airlines fills that gap for American Airlines. It offers service to some cities in the region that American Airlines doesn't serve at all, and faster connections (or more broadly, better flight schedules) for many others.
Delta Air Lines and United Continental have much stronger route networks than American Airlines west of the Rockies. Given that all three are in a constant battle for the business travel market, American can use all the help it can get in the Pacific Northwest, one of its few areas of weakness.
American Airlines might be interested in buying Alaska Airlines outright, but the antitrust authorities would be unlikely to let that happen. (Alaska seems to prefer operating as a stand-alone entity anyway.) But even in the absence of an outright merger, investors should expect American and Alaska to continue to tighten their bonds. They both depend on each another.