A Bon-Bon for Richard: Why Delta Should Buy Alaska ASAP . . .

Alaska Airlines, Cardinal, Delta, Guest Posts

When we last saw “The Cardinal” he commented on Virgin America, stirring up a lot of emotions in the process. This time he tackles something I bet will be less controversial — today The Cardinal proposes that Delta CEO Richard Anderson should buy Alaska (the airline, not the state) as soon as it possibly can. He benefits from discussions with “The Rabbi”, another pseudonymous source who I know is well-informed. All mistakes remain the responsibility of The Cardinal.

Delta is in the middle of digesting Northwest, quite a meal. For dessert, we suggest Alaska Airlines, which should be sweeter for Delta than for any other airline in the US.

Alaska Airlines theoretically makes sense as a merger partner to just about all the major US airlines with the exception of Southwest and United. Southwest is out because a lot of what Alaska does is outside of Southwest’s mission (and Southwest has only truly merged once in its lifetime — with Morris Air — plus it took over, re-branded and then shut down Muse Air) and United is out because it would probably cause anti-trust issues, given United and Alaska’s overlapping networks on the west coast.

US Airways would probably love to merge with Alaska (any port in a storm) but there’s no way it could afford it. It might make sense for AirTran too — giving AirTran geographic reach it simply does not have at the moment. Again, AirTran probably can’t afford it. Neither of these is likely to be a serious bidder if Alaska was ever in play.

But Alaska’s value is really to the legacy majors with international systems — American, Continental and especially Delta. The value is Seattle.

Seattle ought to be a substantial international gateway, but it’s not, because the dominant hub carrier (Alaska) has no intercontinental flights. Seattle, in fact, is potentially the best hub to Asia in the whole lower 48, simply because it’s closer to Asia than any other large lower 48 city. It also results in shorter connections to many (perhaps most) US mainland points. Check it out for yourself on the Great Circle Mapper. Try a bunch of connecting itineraries from say, Tokyo (NRT) or Seoul (ICN) via Seattle (SEA) or San Francisco (SFO) to some interior point, like Kansas City (MCI) (put “NRT-SEA-MCI, NRT-SFO-MCI” in the “Paths” box and hit the “Display Map” button to compare the lengths of the paths from Tokyo to Kansas City via Seattle and San Francisco).

Buying Alaska is one of the rare situations where a merger with a largely domestic airline would yield substantial benefits to the international side of the purchaser.

Alaska’s operations would also give greater access the US west coast to each of Continental, American and Delta. But Alaska is worth more, by far, to Delta. Why?

First of all, Delta has a big Tokyo operation inherited from Northwest, so like United it has a powerful Asian operation. What Delta lacks, however, is a west coast hub/gateway to anchor its Asian operation. Delta is in the unusual position of having a lot of ways to bring people to the US from Asia but not having a good distribution system on the part of the US mainland which is closest to Asia — namely the west coast. Compare to United with its big San Francisco hub/gateway.

Continental and American also lack west coast hubs/gateways, so Alaska would be valuable to them too. However, their Asian systems are not as powerful as that of Delta, so Delta could leverage Alaska’s Seattle hub far more than either Continental and American.

Seattle has another feature that matches up well with Delta. Delta’s fleet is unusually heavy in small widebodies — it probably has too many 767s. The interesting thing about Seattle is that it’s the one large potential US hub from which the 767 has sufficient range to reach useful parts of Asia,including Japan and Korea. In other words, a Seattle hub would give Delta’s probably underemployed 767s something to do — imagine 767 nonstops from Seattle to most of the significant Japanese cities, plus Korea, plus maybe parts of northeast China, especially as Delta is adding winglets to some of its 767s to give them more range.

But wait, there’s more. Seattle would do some great things for Delta on the domestic side as well. In particular, it would fix a long-time problem in the Delta network, namely the relative weakness of its Salt Lake City hub against United’s Denver hub.

Denver has always been, and will likely always be, a far better place for a hub than Salt Lake City. Denver’s a larger city, it’s placed better for domestic traffic flows, flights from Denver are allowed to fly into New York LaGuardia airport (as opposed to those in Salt Lake City, which are not, because of the idiotic perimeter rules of the Port Authority) and so forth.

Delta has struggled for years to make Salt Lake City work in the shadow of Denver. Really the main thing Salt Lake City has going for it is that it’s the only other plausible city for a hub in the Mountain West other than Denver. It ain’t much, but it’s something.

The merger with Northwest has already helped a little bit. Delta is now more relevant to a section of the Great Plains/Upper Midwest/Montana, etc, because it can provide access from two directions with the combination of Salt Lake City and Minneapolis. It’s not as good as United’s Denver + Chicago, but it’s better than Salt Lake City by itself. The new Delta is already to likely see some market shift in its favor because of the Salt Lake City/Minneapolis combination.

Imagine, however, the influence Delta+Northwest+Alaska would exert over basically the entire northwest quadrant of the lower 48 from the combination of Seattle, Salt Lake City and Minneapolis. Washington State, Oregon, Idaho, Montana, North & South Dakota, Wyoming & Nebraska would all find the combination of Delta’s services to be a powerful competitor to United’s San Francisco + Denver + Chicago hub combination.

Neither Continental nor American would benefit the same way. Neither of them has hubs that are close enough Seattle to have a similar effect.

Lastly, it’s worthwhile noting that Alaska and Delta have similar pilot pay structures these days. You can check that out for yourselves by looking at rates at Airline Pilot Central. You can see that Delta & Alaska have similar 737 pay rates. This is important — prior to 9/11, Alaska’s rates were a lot lower than those of the “big ugly” airlines like Delta, meaning that a merger of Alaska with an airline like Delta would instantly impose significant additional costs on the Alaska route structure. That’s nowhere near the problem it once would have been.

Given the extraordinary benefits to Delta, we’d even go so far as to say that Delta would be nuts not to pursue a takeover with Alaska as soon as it is able. There are few occasions where a “fill-in” acquisition like Alaska could yield such benefits.

The Cardinal is a long time industry observer, who is currently a [redacted] at [redacted]. Prior to working at [redacted], he worked at [redacted], [redacted] and [redacted]. He resides in [redacted] and in his spare time enjoys [redacted with extreme prejudice].

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25 comments on “A Bon-Bon for Richard: Why Delta Should Buy Alaska ASAP . . .

  1. While a DL/AS merger makes sense, how likely is it that the DoT would approve it? The DL/NW merger happened under the Bush administration and went through without a glitch but now that Delta’s the world’s largest, it would seem unlikely that another merger would get approval. That approval would be even harder under the a Democratic administration. Also, Oberstar’s (head of Transportation and Infrastructure) been making noise about airline alliances and CO/UA’s proposed alliance. While Oberstar has any official jurisdiction over this, he could theoretically make approval harder through various legal mannerisms.
    While DL/AS makes sense for DL, I think it makes even more sense for CO as their Asia/West Coast presence is sorely lacking.

  2. Please, or please, let’s not lose Alaska. It’s one of the few decent airlines out there, and to have it subsumed by crappy Delta (or any dinosaur) would be a shame. Let’s get rid of a couple of the old-school carriers, and have more airlines like Alaska, not the other way around.

  3. That blog was a lot of words just to show why another old airline should vanish. Do we really want a county this size with only a few airlines that would be left if everyone keeps buying the ‘other guy’ because they themselves can’t grow on their own?

    Maybe the question should be does Alaska need Delta?

  4. Brett, I am not sure about your commment suggesting that DL probably has too many 767s.

    As you know, some of those 767s (some of them quite, ahem, venerable) were and have been a key part of Delta’s recovery strategy.

    We’ve seen DL downsize mainline runs to RJs or MD88s and place 757s on routes where 767 were once common.

    I can vouch for this on the Atlanta-Tampa routes. Gone are the days of flying on 767-400ERs to Tampa.

    Or from Atlanta to Savannah, for that matter (been there, done that, too).

    Those 76s are now correctly serving international routes to places that Delta has opened up from Atlanta. True, not all of those routes have been successful, but many have.

    In my view, all in all, DL’s plethora of 767s have been a good thing for DL and for Atlanta.

    I still miss the days when the apron at Hartsfield included 757s, 767s, L1011s, MD88s, DC-9s, 727s, and the stretch DC-8s all at once, though. Talk about a whacked-out fleet.

  5. While this would make practical sense and potentially benefit the consumer , the airlines have such different corporate cultures and just work differently. This would only work if Delta were to buy Alaska and keep it as a separate entity but integrate route structure ,frequent flier programs and so on. I would compare this to the idea that Qantas and Cathy Pacific merge, it would make sense but it won’t work.

  6. Cranky –

    Careful, good sir. Seattle is closer but does it have even half of the local Asian market that either Los Angeles or San Francisco supports? I believe there is a sizable Chinese population there but even Cathay calls in to Vancouver instead of Sea-Tac. That alone should say something.

    Then there is the total catchment area of Puget Sound. Beautiful as it is, it’s a fraction of thesize of the Bay Area much less Greater L.A.

    Finally there is the runway configuration. SFO and SEA both really only use one runway for all Asian departures and are comparable in flexibility where LAX uses two plus the two arrival runways. Given SFO’s issues with fog and SEA’s issues with rain it seems a wash (sic) operationally, which begs the question “why bother” if there is no functional gain in growing SEA as an international hub.

    All points back to Alaska. They’re the perfect size to run a handful of flights to the Pacific Rim for their customer base. Why they never did is a good question. Calling them a fit for Delta, though, is a stretch simply because DL would only really gain Alaska and some leisure routes out of California for their trouble. I don’t see them making any more of a Pacific hub out of SEA than is already there.

  7. While I do see the merits of SEA as an Asian gateway city geographically speaking I don’t see the huge benefit of DL “owning” the upper west of the USA. I’ve had the privelege of driving most of those states and while some beautiful country out there there is literally no population to gain air traffic from. From MSP you don’t hit another sizeable market until you get all the way out to SEA. It’s a stretch already for DL to fly A319’s to some of the biggest cities in MT. The SEA and PDX catchment area has some size but if there was a strong demand for Asian flights out of there why doesn’t DL just add a NRT flight and let Alaska feed it with code share flights. If I were DL and wanted to build domestic traffic I’d build up MKE and scab UA/AA flights from ORD….a catchment area that dwarfs the entire states of WA and OR combined. As for Salt Lake, why not feed that hub with flights from PHX, a much bigger market than SEA. I’m just not seeing the merit in building traffic off a smaller niche player in the US airline market. Gain market share from the bigger players in bigger markets.

  8. Why buy the cow when you are getting the milk for free???…well, not ‘free’…but all the above bennies are already realized with the ‘code share hooker’ of the industry (Alaska). I agree that on paper it is a slam-dunk marriage; yet todays political reality (avoidance of more ‘too big to fail’) and economics (Fitch just downgraded DL to B- with a neg outlook) make an outright acquisition difficult & unlikely.

    Plus, dont think for a minute that DL would keep lifeline flights to Bethel, Kotzebue, Nome & Barrow on the schedule, and I KNOW the State of Alaska will have something to say about that lol.

  9. Firstly, I’d rather DL left AS alone, because the history of majors buying western airlines, and then killing them (PSA, Western, Reno etc..) isn’t pretty. As do a pretty good job for us in the South West (of Canada).

    As good as SEA may be for an asian hub, it’s neighbour to the north (YVR) will always be better. It’s just a matter of asian population. Vancouver’s asian population is something like 30%(*1) of the total population, versus Seattle’s around 15%(*2).

    Even YVR airport is set up for this kind of operation, if you’re flying from asia, you can walk straight to USA pre-clearance (*3) without having to completely ‘enter’ Canada.

    *1: http://www12.statcan.gc.ca/english/census06/data/highlights/ethnic/pages/Page.cfm?Lang=E&Geo=CMA&Code=01&Table=1&Data=Count&StartRec=1&Sort=9&Display=Page&CSDFilter=5000
    *2: http://www.census.gov/prod/2002pubs/c2kbr01-16.pdf pg7
    *3: despite the sign at YVR pre-clearance announcing “Welcome to the United States”, you are still legally in Canada, it’s merely a pre-clearance area.

  10. Another issue to consider:

    Airlines are like sports franchises. They need corporate sponsors to fill the premium seats.

    Who is headquartered in Seattle that would provide the corporate support someone like Delta would logically need to support a full spread of international service?

    Boeing decamped to Chicago, WaMu got swallowed up and CostCo is a far cry from Sam’s Club/Wal-Mart.

    Even with Starbucks, Microsoft and Nordstrom those three haven’t justified any major carrier setting up the kind of service The Cardinal is suggesting.

  11. The cardinal also misses including the negative synergies of losing all of
    Alaska’s codeshare hookering. It they got bought by Delta they’d lose all or much of the feed that Alaska currently gets from it’s partners.

  12. No, please don’t let this happen! While this may benefit shareholders, it would definitely not help consumers! Alaska actually cares about it customers, and treats us pretty well, and that feeling is reciprocated. Delta, on the other hand, only sees people as credit card numbers. Keep Alaska free and independent of the legacy airlines!

  13. While I’m sure that Delta adding biological and technological distinctiveness of Alaska into the Delta Collective would make some sense from an operational sense, it would suck very badly for AS’s customers. CZBB makes a good point that generally speaking, when West Coast regionals get bought, it’s great news… for Southwest, who picks up the pieces when the hidebound legacy airline inevitably screws the pooch.

    That, and I’m pretty sure Delta issues SkyMiles like Zimbabwe issues dollars (and has crappy redemption rates, too, much like a Zimbabwe dollar). SkyMiles is a terrible FF program. In general, Delta is none too generous with the FF bennies (the NW WorldPerks veterans are repeatedly wailing and gnashing their teeth while rending garments over on FlyerTalk at losing things like 125% Platinum bonus and other instances of “Deltafication”).

    Personally, I think Delta should set up their West Coast hub at LAX. Delta tried this “hey, let’s position a hub close to Japan, even if it’s not a huge market” trick at Portland, and it flopped miserably. While SEA is a better O/D market than PDX, LAX is clearly the winner there, and DL already has substantial feed into LAX: all the NW/DL hubs, anything they can get from AS/QX codesharing, and even non-hub flights from places like IND, MSY and LAS. This also has the advantage of not having to do ANOTHER merger right after NW- plus once Delta’s LAX West Coast hub operations are truly set up, and it still makes sense to buy Alaska, you can still buy them (though, as a loyal Alaska flyer, may the Gods and Goddesses save us all from being taken over by a company with such an awful frequent flyer program).

  14. I’m not sure why DL would necessarily axe the network within the state of Alaska. It’s a highly profitable monopoly, even if it poses some unique operational challenges. AS surely makes per seat mile more flying Seattle to Fairbanks than Seattle to LA. The population of Alaska is tiny, but much of the state is functionally landlocked or separated by such large distances form other cities that air travel is the only way in or out.

    I personally like Alaska’s service, and non-aligned status and partnership promiscuity means that their Mileage Plan is a great way for frequent pleasure travelers to get elite status by flying on either AA, DL, NW, or AS domestically. Internationally, Alaska is partnered with basically all the best pieces of Skyteam and Oneworld, which makes it a good “catchall” frequent flyer program. Obviously a DL merger would mean an end to all of the Oneworld partnerships.

  15. “All points back to Alaska. They’re the perfect size to run a handful of flights to the Pacific Rim for their customer base. Why they never did is a good question.”

    It’s an easy question to answer- widebodies capable of flying 5,000 miles or more are expensive and an easy way to kill a small airline with expenses, and hell, Alaska didn’t even start flying to California and Mexico until the 1980’s.They only started really doing transcon service out of Seattle, Portland and LAX in the 2000s. Kind of hard to fly an MD80 or a 738 to NRT from SEA.

    For a while tAlaska did do some flying from ANC to the Russian Far East, though, but they cut those flights after Russia had a financial crisis in 1998 and traffic crashed. I suppose they could start that up again, since a 738 has more than enough range for that, but really, the market’s much better for US flights.

    One thing that Alaska has also cornered a niche on: 738s to Hawaii on the West Coast. It’s a market that Southwest can’t touch (they don’t do ETOPS), and I’d imagine their costs are much lower than Northwest/Delta flying a 757 or UA/AA flying 767s. This is also something potentially useful to a buyer.

    Finally- man, would Delta’s fleet be a MESS if they bought Alaska: 737s, MD80s, MD90s, A320s, A330s, 757s, 767s, 777s, DC9s, plus they’d be adding Horizon’s Q400s and CRJs, too, Perhaps they should work on getting NW squared away first…

  16. “I wonder if Southwest would be the only benifactor.”

    I think Jet Blue could be pretty happy, too.

    And look at what’s happened to St. Louis, Pittsburgh and San Jose- the examples of airlines abandoning mid-size cities like Seattle during mergers. To be honest, I would suspect Jet Blue and Southwest would launch themselves even harder at Portland in this scenario. Alaska is already dropping some mainline service for RJ/turboprop service there to the Bay Area- I would bet Delta would completely cut a lot of formerly AS, now DL mainline service in a heartbeat to funnel people to SEA on the grounds of “let’s use our new cool hub”, and let their PDX markeshare wither on the vine.

  17. Seattle lacks the degree of transpac flying because it lacks the high yield demand of San Francisco, not becuase Alaska chooses not to fly transpacific.

    Which isn’t to say there isn’t already transpacific service, precisely to Seoul and Tokyo which you suggest Delta send 767s out to. (An odd suggestion, since Delta ALREADY flies SEA-NRT, and chooses to do so with Airbus aircraft).

    Delta already gets feed from Alaska through their partnership ,recently amped up.

    They’ve got that, what’s the advantage of owning Alaska, giving up their cash to go all-in with more routes in a difficult economic environment? The goal has to be ‘profits’ not ‘complementary route maps’.

    These things always seem so lovely on paper, when looking at route maps and not profits. Amercan would be silly to swallow up Alaska, though they benefit greatly from their partnership. Cf. Reno Air.

    Speaking of benefits of beautiful route maps on paper versus economics, where you see advantage in clustering hubs, I see inefficiencies in overflying your own hubs…

    Is it conceivable that Delta could buy Alaska? Sure. Will it get anti-trust scrutiny? Sure. It would help pass muster if Alaska were in more trouble than it is, of course. The scrutiny would be strict.

  18. Please don’t take away Alaska. They are one of the few good, customer-focused airlines left!

    BTW- You could make a much better case turning your argument on its head, though: if Delta execs wanted to sell their entire airline to Alaska (and then quickly get out of the way)….

    I still like Alaska/Horizon for their good flights and the fact that they serve as basically a “universal” frequent flyer program. Plus, they serve the state of Alaska with more than just red-eyes.

  19. Ok, I guess I was wrong. I didn’t think this was going to be nearly as controversial as it seems to be. Excellent. That makes the discussion more fun.

    Zack Rules – I don’t think that there’s a huge antitrust issue here. There is relatively little overlap, though some Pac NW cities are only served by Alaska and Delta right now. I’m sure Rep Oberstar would raise hell, but it could probably still be done.

    David SF – This was certainly written from a Delta point of view. For Alaska, it would be a good way to cash out and make the shareholders richer. But in this case, I think the employees might end up being better off as well if Delta doesn’t screw it up. It could provide more flying opportunities and the stations should grow if this was done right. Do I think Alaska necessarily wants this to happen? No. But if Delta wants to make the offer sweet enough, I’m sure Alaska would have to at least listen.

    JM – These were not my words but rather those of a guest poster. Still, regarding the 767s, I think it’s clear they probably do have more than they need. The international expansion has only recently started to show weakness, but it’s going to get worse. I have to think that Delta is looking for good places to put 767s right now.

    Optimist – Again, I didn’t write this. It’s a guest post, but let’s talk about Seattle vs LA and SF. It is a smaller market, but the LA and SF markets are already quite full of flights. Seattle has a decent local catchment, certainly better than anything Delta has now for Asian flying. Plus, with Alaska, they have the added benefit of a very large catchment area that can’t be served well by Delta right now.

    As for the airport capacity, my understanding is that Seattle’s new runway allows for simultaneous landings, so there shouldn’t be a capacity issue.

    A – Not sure that the Milwaukee strategy is a good one – that’s about to be a bloodbath. The reality is that sending everyone through Salt Lake makes it a two stop to any place in Asia. Most people in those cities can fly one stop with United over San Francisco or connect via an alliance. Delta could be more competitive with 767s from Seattle to several Asian destinations.

    Nicholas – Yes, they would lose all those codeshare passengers, but that’s actually good news for Delta. They immediately make American’s presence in the West far smaller by yanking the codeshare. Some of the other codeshares they could keep if they wanted, but the fewer number of passengers isn’t necessarily bad in this case.

    It’s not a perfect fit – nothing is – but I personally think there is some merit to this proposition. There is a lot that can be gained here, and that’s often not the case in some of these mergers. Of course, as has been noted, airlines generally suck at merging so there’s no guarantee that they would do this right. If, however, they did, then it could be a great move from Delta’s perspective.

  20. Where does The Traveling Optimist get the idea that rain is a major issue in Seattle that is on par with fog in San Francisco? While I’ll agree that Seattle doesn’t have the same Asian population as LAX, SFO, or YVR to use as a cachement, there’s enough to go around. Further, part of the strategy is to spread where one may utilize a combination of connecting AND originating traffic to make a roune viable. Sure, with the right support SEA-ICN could be viable (as it is now with both KE and OZ serving it), as could SEA-PEK or SEA-PVG.

    Quite frankly, having done international transiting through LAX, I’d rather go through SEA with a faster connection beyond. Bigger doesn’t always mean better. Sure, there’s more opportunity to get locals on board from LAX, but maybe that is outweighed by the convenience of a quicker journey through another location, even if it means not experiencing one of the most self-centered cities in the world.

    …but that said, I’ll join the chorus of those who would prefer that this not happen, even if it looks good on paper. 1) Alaska is too good of an airline to be swallowed up by even the legacy with decent customer service (which isn’t saying much compared to Untied) and 2) as a resident of this corner of the map, I don’t like the increase in airfares that result when one lives in a fortress hub. Just ask anyone in Cincinnati, Minneapoplis, Memphis, Detroit, Dallas or Atlanta.

  21. Anyone using the phrase “Delta digesting NW” lost me there. Industry experts know full well…Northwest ate Delta from the inside out. DL name kept for $9.1Billion tax credit and the potential of hundreds of millions in bonuses saved from a lowest cost non union group of employees vs. Keeping the Northwest name and it’s hardcore unions.

    Airlines that take over others doesn’t replace it’s leadership with the takenover-ee’s leaders.

  22. LAX seems problematic for a few reasons; it is a mature market, so any foothold DL can gain will be at the expense of other carriers…which leads to problem 2, it is VERY competitive. LAX is saturated with every Asian flag carrier that has the metal to reach it, and, lets be honest…their product is superior to anything a US network carrier has to offer. Finally, LAX has a geographic disadvantage…much like SEA, by being in the ‘corner’ of the map. Opportunity for traffic flow-thru and feed are limited vs. say…SFO.

    I think the 2 wildcards here are what happens to the AA/BA/IB situation, as this could redefine the alliance model. If it moves forward intact, networks carriers really wont give a rats a&& who’s metal (within the alliance) is flying what…which makes the ‘need’ for a coastal anchor moot. The second wild card is when the 787 & A350 eventually come online…this would theatrically make a number of secondary markets to Asia do-able from a financial standpoint.

  23. Delta already wants voluntary retirement from DL/NW employees. And, with the new marketing alliance between DL and Alaska, what sense does a merger really make? It seems like Delta can take great advantage of Alaska from its current marketing agreement without involving itself in more costly merger activity.

    BTW…has anyone ever considered the possibility of AS acquiring AirTran?

  24. Let me school every body since i am a Seattle Native. Alaska back when they had MD-80s used to serve parts as far away as Russia but that didn’t pan out for them i don’t see many people wanting to sit on and MD80 or 737 for mor than 4 hours i sure the hell don’t it only makes sense that the asain routes have increased traffic on them i used to work for both United and Northwest out of seattle and these flights have always been oversold I do believe the market is here as long as they don’t over do it.

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