Alaska Airlines has long faced intense competition from Delta Air Lines in Seattle, but soon the carrier could face increasing pressure from American Airlines, says at least one research analyst.
Wolfe Research released a report dated 10 January suggesting American might choose to encroach on Alaska's markets in response to codeshare changes resulting from Alaska Air Group's recent acquisition of Virgin America.
"The revision of the codeshare between AAL and ALK as part of the DOJ’s merger approval could lead to a response from AAL in ALK’s markets," says New York-based Wolfe Research's report.
The US Department of Justice (DOJ) approved the Alaska-Virgin merger on 6 December, but required that the merged company end codeshares with American on dozens of routes.
The DOJ feared that, following a merger, Alaska would use its codeshare with American to compete less aggressively, particularly on routes where Virgin currently competes with American.
Seattle-based Alaska, which closed its purchase of Virgin on 14 December, downplayed the concessions.
It said only 45 routes were affected. Those routes generate about $60 million in revenue, but Alaska predicted it would "recapture" $40 million to $45 million by selling seats to its own passengers. Alaska will continue to codeshare with American on other routes.
But Wolfe suggests the codeshare changes could have broader impact on Alaska's competitive position.
In its report, Wolfe questions whether the changes have made American a "friend or foe", and it suggests American could respond by expanding further into Alaska's markets.
American has not yet made such a move.
But any encroachment would worsen Alaska's so-called competitive capacity, an industry term meaning the amount of capacity that an airline faces from competing carriers on its routes.
Alaska's competitive position in recent years has largely been shaped by Delta Air Lines, which in 2013 began a massive expansion at Alaska's primary hub at Seattle.
Between 2013 and 2016, Delta's available seats in Seattle more than doubled to 5.7 million. In 2016 Delta carried 21% of all seats in Seattle, up from 12% in 2013, FlightGlobal schedules data shows.
As a result of expansion by Delta and other carriers, Alaska faced double digit year on year increases in competitive capacity in each quarter of 2016, says Wolfe's report.
Competitive capacity growth peaked at 15% year on year in the third quarter of 2016, according to Wolfe.
Even under such competitive pressure, Alaska in recent quarters has returned one of the industry's best financial results.
In the third quarter of 2016, Alaska posted a pre-tax margin of about 26%, according to financial filings. By comparison, Delta posted a third quarter 2016 pre-tax margin of 18%, the best among the three US network carriers.
Some analysts, including Wolfe, expect Alaska's strong performance to continue. But part of that prediction has been based on data showing that the carrier's competitive pressures are, finally, easing.
Alaska executives have forecast that competitive capacity growth will decline to 9% year on year in the first quarter of 2017.
Wolfe's figures show Alaska will face 6% competitive capacity growth in the first quarter. Including Virgin's operation, Wolfe puts the first quarter year-on-year competitive capacity growth figure at just 3%.
"ALK’s sequential competitive capacity trends are among the best in our coverage," writes Wolfe.
Whether that trend continues, however, depends partly on American's next move.
"Small capacity additions by AAL in ALK’s markets could dampen ALK’s very promising competitive capacity trends," writes Wolfe.
NEW THREATS FROM DELTA
Wolfe's report came one day before Delta announced yet another expansion in Seattle. The Atlanta-based carrier intends to begin seven new nonstop routes this year, and to add capacity on existing Seattle routes.
The new routes from Seattle include those to Milwaukee, Eugene and Redmond in Oregon, Nashville, Raleigh-Durham, Austin and Lihue in Hawaii, Delta says.
With the new routes, Delta will operate up to 160 daily flights from Seattle to 49 destinations, it says.
In addition, Delta says it intends to add daily flights from Seattle to Boston, Orlando, Portland and San Diego. It also intends to operate larger aircraft on flights from Seattle to San Francisco and Denver.
Alaska serves all the routes on which Delta will expand.
Delta's expansion follows last month's news that Delta and Alaska will end their codeshare and frequent flyer partnership on 1 May.
Source: Cirium Dashboard
