Alaska’s Net Rises, But It Continues To Battle Delta’s Expansion At Seattle

Alaska‘s (NYSE:ALK) second quarter revenues and profits rose strongly on gains from its capacity expansion and ancillary revenue initiatives, which were implemented late last year. The carrier’s revenues rose by 9% annually to $1.4 billion in the second quarter as it expanded its flying capacity, which in turn raised its passenger traffic given the growing demand for air travel. ^[1]

However, the growth in Alaska’s unit revenue (amount collected from each passenger for a seat per mile of flight) was below par, as expansion from Delta (NYSE:DAL) at Seattle hit Alaska’s pricing ability. Till last year, Alaska dominated the Seattle market, and therefore had considerable pricing ability in that market. But, beginning this year, with Delta raising its number of flights at Seattle in order to establish the city as its international gateway to Asia, Alaska’s pricing ability in the Seattle market got hit. Additionally, as Seattle constitutes the largest market for Alaska, reduced pricing ability in this market hit Alaska’s unit revenue severely. In the second quarter for instance, Alaska’s unit revenue rose by under 3% annually, when unit revenue for many other U.S. carriers increased at a much higher rate driven by the growing demand for flights. ^[1] Going forward, with Delta planning to expand further at Seattle, we figure Alaska’s unit revenue growth could lag the industry in the coming months. Effectively, this will weigh on Alaska’s revenue and profit growth. In the second quarter though, despite Delta’s expansion at Seattle, Alaska’s profit rose to $165 million, from $104 million in the same period last year. ^[1]

We currently have a stock price estimate $47.64 for Alaska, marginally ahead of its current market price. We are in the process of incorporating the carrier’s second quarter results, and shall update our analysis shortly. In this article, we take a deeper look at the challenge posed to Alaska by Delta’s expansion at Seattle.

See our complete analysis of Alaska Air Group here

Alaska Takes Steps To Counter Delta’s Expansion At Seattle

Seattle is the most important hub for Alaska Air Group. Last year, the carrier drew about 60% of its total passengers from this city. So, the carrier is highly dependent on the Seattle market.

Delta started 2014 with around 38 daily departures from Seattle, but currently the carrier has around 95 daily departures from the city. ^[2] This rapid expansion from Delta has raised the competition for Alaska. Currently, Delta’s Seattle flying overlaps with around 40% of Alaska’s Seattle flying capacity. This overlap is expected to grow to about 50% over the next year, as Delta adds more flights to and from Seattle. Some of the major routes connecting Seattle on which both Delta and Alaska fly include Seattle-Anchorage, Seattle-Los Angeles, Seattle-San Diego, Seattle-Las Vegas and Seattle-San Francisco. However, despite this increasing competition, Alaska is expected to control about 55% of the domestic seats in Seattle at the end of this year, compared to around 16% expected to be controlled by Delta. ^[3]

To protect its share of the Seattle market, Alaska is making some tactical changes to its network. First, the carrier is reallocating some of its capacity to new destinations out of Seattle such as Tampa, Detroit, New Orleans, Albuquerque, Baltimore and Cancun. On some of these routes, the carrier has already started flights, while on the remaining routes, it will begin operations in the second half of this year. We figure a more extensive network connecting Seattle will enhance Alaska’s position, as frequent fliers are usually attracted to a carrier that connects maximum destinations out of a city. Second, Alaska has reallocated some of its capacity to new markets outside of Seattle such as Salt Late City, which is also a hub for Delta. In the second quarter, Alaska launched flights to seven cities – Portland, San Diego, Los Angeles, San Jose, Boise, Las Vegas and San Francisco – from Salt Lake City. We figure these changes to its network will help Alaska protect its key Seattle market from Delta in the long term. But, in the short term, excess capacity at Seattle due to Delta’s expansion will weigh on Alaska’s pricing ability, yield and margins. So, in the near term, we could see more moderate growth in Alaska’s unit revenues and results.

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1. Alaska’s 2014 Q2 earnings form 8-K, July 24 2014, www.alaskaworld.com [↩] [↩] [↩]
2. Alaska analysts on Delta intrusion, July 21 2014, www.thestreet.com [↩]
3. Alaska’s 2014 Q2 earnings transcript, July 24 2014, www.seekingalpha.com [↩]