Delta Air Lines (NYSE:DAL) is expanding service in Seattle to build the city as its international gateway to Asia. The carrier is also adding service to many domestic destinations from Seattle, but we figure higher gains will come to it through its new service on Asian international routes. This is so because the demand for air travel on Asian international routes is growing faster than the demand for air travel in the domestic market.
To support its rising number of flights from Seattle, Delta is also expanding its related infrastructure such as ticket counters at the Seattle-Tacoma International Airport. We figure this strategic expansion of Delta at Seattle will bring immense benefits to it over the long term, driven by rising demand for air travel between the U.S. and Asia. In the near term, new flights from Seattle on Asian international routes will raise overall passenger traffic and revenues for Delta.
We currently have a stock price estimate of $35.95 for Delta, around 10% ahead of its current market price.
- Why Did Delta Revise Its Capacity Guidance?
- Delta’s Profits Continue To Surge As Crude Oil Prices Remain Low In 1Q’16
- What Should We Expect From Delta’s 1Q 2016 Results?
- How Did The Legacy Carriers Perform Operationally In January?
- How Will Delta’s EBITDA Be Impacted, If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
- What Will Be Delta’s Value In 2020?
Expanded Asia Network Will Help Sustain The Growth Momentum In Delta’s Results
Delta posted impressive growth in its revenues and profits in the past couple of years. Last year, with profits of $2.7 billion (excluding special items) the carrier led a strengthening U.S. airline industry.  Steps such as expanding service from Seattle to Asia will likely help in sustaining this growth in Delta’s results. In our view, driven by the fast growing economies of the Asia-Pacific region, demand for air travel on routes connecting this region to the U.S. will continue to rise at healthy rates for the foreseeable future. Delta, through its expanded Asia network will take advantage of this rising demand to add growth in its results.
Delta has also invested around $14 million in its facilities at the Seattle-Tacoma International Airport to support its growing passenger traffic at the airport.  The carrier has created new infrastructure which includes a Delta SkyClub, power recharging stations, expanded ticket counters and renovated lobbies. We figure these facility upgrades will improve Delta’s customer experience, which is highly valued in the airline industry.
Currently, Delta provides non-stop flights from Seattle to four Asian destinations – Beijing, Shanghai, Tokyo-Narita, and Tokyo-Haneda. In June, the carrier will add non-stop service from Seattle to two more Asian destinations – Seoul and Hong Kong. We anticipate these new routes will add growth in Delta’s results over the long term.
The carrier also serves non-Asian international destinations from Seattle. It provides non-stop flights to Amsterdam and Paris, and last month, it started non-stop flights from Seattle to London Heathrow as part of its joint venture with Virgin Atlantic. Additionally, to feed its passenger traffic on these long haul international routes to Asia and Europe, Delta is expanding service to Seattle from many U.S. cities, which include Anchorage, Fairbanks, Las Vegas, Los Angeles, Portland, San Diego, San Francisco and San Jose.
Delta’s Expanded Presence in Seattle Threatens Alaska Air Group
This expanding footprint of Delta on domestic routes connecting Seattle is raising competition for Alaska Air Group (NYSE:ALK), which for decades has dominated this market. Delta’s growing presence at Seattle is particularly worrisome for Alaska as last year around 60% of Alaska’s passengers either embarked from or disembarked at Seattle.  Additionally, routes such as Seattle-Anchorage, Seattle-Los Angeles, Seattle-San Diego, Seattle-Las Vegas and Seattle-San Francisco where Delta is expanding its service, are the leading routes for Alaska in terms of revenue generation.
Thus, as Delta expands in Seattle with an eye on the Asian air travel market, this expansion will raise competition for Alaska. On its part, Alaska in its 2013 10-K filing mentions that it will defend against this expansion from Delta by promoting its Mileage Plan, scheduling changes and executing more community events. But, it remains to be seen how effective these measures will prove in guarding Alaska’s market share on domestic flights connecting Seattle.Notes: