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The Battle For Seattle: Alaska vs. Delta – Part 2

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The Battle For Seattle: Alaska vs. Delta – Part 2

The Battle For Seattle: Alaska vs. Delta – Part 2
June 29
06:21 2015

MIAMI — On the face of it, Alaska Airlines has held up relatively well to the face of an onslaught at its largest and most important hub. In the first quarter of 2015, Alaska reported yet another record net profit of $149 million (post taxes), and as I mentioned in Part One, Alaska has certainly managed to hold its own. The current fight in the Seattle market is a bit like a guerilla war, with Alaska playing the role of the Vietcong (or whatever your preferred ragtag group of misfits is) and Delta playing the role of the US. Through its superior knowledge of the local market and inbuilt sympathy of the populace (as well as a whole bunch of strong business execution) Alaska is staying in the fight.

But despite Alaska’s admirable strategic positioning and focus on winning customers with quality, at the end of the day, its “victory” thus far has been almost entirely about fuel, more precisely the rapid fall in fuel prices over the second half of 2014 and the uneasy plateau at $60-65/barrel of WTI crude in 2015. Alaska’s first quarter 2015 numbers were certainly pretty: $238 million operating profit, 18.8% operating margin, 20.1% ROIC. But beyond the headlines, two numbers stand out: 5.7% and $123 million. The former is the decline in PRASM for Alaska in Q1 and the latter is the savings it accrued from the drop in fuel prices YOY. Alaska’s net profits (pre and post tax) would have declined substantially YOY if not for fuel to $117 million and $23 million respectively. A year and a half ago, I said that all of the Delta capacity being added in Seattle would harm yields and compress margins at Alaska because Seattle was its most important and highest margin hub. That’s exactly what happened in Q1. But thanks to a pissing contest between American shale producers and the Saudis, Alaska instead gets to trot out a bunch of pretty numbers and go about its business without an investor revolt.

KSEA-6_9-8

A more charitable description of Alaska’s current position would note that many industry observers and analysts now believe that the price of oil has settled into a “new normal” with a peak price between $60-70 per barrel. And until the next recession, that’s probably a fuel price point that will allow Alaska to sustain its current level of competitive capacity and growth without harming margins too much. But the threat to its highly profitable core at Seattle is not something that Alaska can ignore. The reduction in fuel prices has merely bought Alaska more time to respond.

Alaska Diversifies While Going Long and Thin


I am loath to further overburden the guerilla warfare analogy but it fits the narrative of Alaska’s recent moves in Seattle and elsewhere incredibly well. Indeed Alaska’s response to Delta’s invasion of its home base, an event that “shocked” Alaska executives, has been remarkably measured. There was one major head-on strike (Alaska’s out-of-character buildup in Salt Lake City), but beyond that Alaska has largely stayed out of direct confrontations with Delta (Seattle – New York JFK notwithstanding). Instead, it has focused on leveraging its strength up and down the West Coast with new point to point routes such as Eugene – San Jose and Los Angeles – Baltimore while also reinforcing its secondary hub in Portland.

In Seattle, Alaska has conformed to a guerilla-esque strategy of indirect confrontation. Because Delta’s commitment to Seattle has been strong enough to prevent Alaska from bleeding Delta dry with price wars on new Delta routes, Alaska has instead focused on increasing its relevance for Seattle-based O&D customers through new, organic destinations. The recent announcements and additions of New York JFK, Raleigh-Durham, Washington Dulles, and Charleston to Alaska’s already powerful Seattle route portfolio are not direct shots across Delta’s bow. But they make it harder for the widget to compete with Alaska and build a sustainable hub in Seattle all the same.

In the meantime, Alaska has continued to cozy up to a hodge-podge of foreign carriers, aiming to replicate a small part of what Delta offers through nonstop long haul travel on its own metal. The more interesting partnership has come with American Airlines, who was only too happy to step in and leverage Alaska’s strength in the Western United States to boost its revenues. The most visible tie between the carriers was Alaska handing the lucrative Los Angeles – Mexico City route over to American, but overall, American has seemingly offset, if not entirely filled the void left by Delta’s sudden disengagement.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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