Delta Air Lines Punishes Alaska Air in Seattle
Over the last three months, Delta Air Lines and Alaska Air have gone to war over market share in Seattle, despite remaining partners in name. In October, when Delta began its recent round of expansion in Seattle, it was at least plausible that the company wanted to maintain a good working relationship with Alaska Air. Today, it's hard to make that case anymore.
On Tuesday, Delta announced an expansion of its Seattle service for the fourth time since October. Once again, it is targeting markets where Alaska Air is the leading carrier. This looks like a pretty clear-cut case of retaliation for Alaska's recent decision to expand at Delta's Salt Lake City hub.
A spiraling rivalry
On paper, at least, Delta is expanding short- and medium-haul service in Seattle in order to support its growing international gateway there. By next summer, Delta will offer nine daily nonstops to eight destinations in Asia and Europe from Seattle.
Delta's first two rounds of expansion made sense in the context of providing connecting traffic for international flights. Delta primarily targeted big markets: Los Angeles, San Francisco, Las Vegas, San Diego, and Portland, although it also added a second seasonal daily flight between Seattle and Anchorage.
However, earlier this month, Delta added service from Seattle to Vancouver and Fairbanks, two cities that seem less likely to generate significant connecting traffic for Delta's international flights. Vancouver has ample international service of its own. Flying through Seattle would mean enduring an extra trip through customs and -- for some travelers -- securing a transit visa. Meanwhile, Fairbanks is a small market that isn't likely to generate much international travel.
The latest round of growth in Seattle began with Alaska's decision to boost service on the Seattle-Salt Lake City route it launched back in April, while starting new service from Salt Lake City to Portland, San Jose, San Diego, and Los Angeles. Salt Lake City is a midsized market dominated by Delta that is not core to Alaska Air's business. Alaska's sudden interest in Salt Lake City is almost certainly not genuine; it was merely sending a message to Delta about encroaching on its turf.
Rather than backing down, Delta is escalating the capacity war further. It now plans to start four-times-daily service between Seattle and San Jose (another major route where Alaska Air has more than 50% market share). It is also adding a third seasonal daily flight between Seattle and Anchorage and beginning seasonal service between Seattle and Juneau.
While the San Jose route has some utility for providing connecting traffic to international routes, the additional seasonal flying to Alaska is all about stealing domestic traffic from Alaska Air. After all of its recent announcements, Delta will offer five daily round-trips between Seattle and the state of Alaska next summer -- up from just one this year.
Delta's planned growth in Seattle is stunning for a carrier that is expanding just 1%-2% a year overall. According to Tuesday's press release, Delta will have 79 daily departures from Seattle next summer. That's more than double the number of flights it currently offers and almost twice as many as it provided last summer!
The level of capacity growth that will occur in Seattle in 2014 is clearly more than the market will be able to absorb at current fare levels. As a result, Alaska, Delta, and other competitors are likely to become embroiled in fare wars on various routes from Seattle, as the airlines look to stimulate demand with lower prices.
For Delta, this is a manageable threat, simply because Seattle is still a relatively small part of its network; for example, it has more than 900 daily departures from its Atlanta mega hub. Even if it earns low (or negative) margins in Seattle next year, it is building a strategically important international gateway, which should deliver long-term returns that justify the initial costs.
For Alaska, the picture is more muddled. The company has a very strong franchise in the Pacific Northwest and has built up customer loyalty in the Seattle area over the years. That said, most fliers are just looking to score the cheapest fare possible, and this means that Alaska will have to match lower introductory fares from Delta next year on many of its high-traffic routes.
Alaska Air has faced substantial unit revenue pressure in 2013 due to new competition in its core markets. Right now, 2014 looks like it will be even worse from this perspective. Alaska will have trouble maintaining its above-average profit margin if Delta is determined to continue growing in Seattle. As a result, I would not recommend investing in Alaska Air today -- and it could even be a viable short candidate for 2014.
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The article Delta Air Lines Punishes Alaska Air in Seattle originally appeared on Fool.com.Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. 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.