As Delta has ramped up its operation in Seattle, there’s been plenty of talk about the battle between it and hometown carrier, Alaska Airlines. But while the various tactics used to compete with each other make for quite the soap opera, Alaska is busy just minting money. So far, this seems to be just a little speed bump for the airline.
In the second quarter of this year, Alaska made $157 million excluding special items. That’s a 50 percent increase over last year. The airline’s pre-tax margin was an incredible 18.3 percent. This is an airline that is clearly doing very, very well.
It’s no surprise since Alaska has been performing well for years now, but the extent of the success is somewhat surprising considering how much Delta has been ramping up capacity in Seattle to build an international gateway to Asia. A capacity increase like that has to hurt Alaska’s revenue potential, and it does, but Alaska is doing so well that it is still posting stellar results.
If this was just a story about an airline making money, it wouldn’t be worth me telling. After all, everyone is making money right now, especially in the domestic market where things are just so good. But what makes this story interesting is the commentary during the earnings call about how Alaska is competing with Delta.
Delta and Alaska have been partners for a long time, but when Delta started ramping up capacity in Seattle, the partnership was bound to fray. By simply having this extra capacity in markets where Delta used to rely on Alaska for feed, Delta would naturally be pushing less traffic on to the Alaska network. And that is what’s happening. Alaska saw $16 million less revenue coming from its Delta partnership this year.
Last year, Alaska said Delta brought $230 million in revenue to Alaska. Though we can’t really assume that it’s the same every quarter, I don’t have a better way to do this, so divide by four and you have $57.5 million per quarter. If that dropped by $16 million this quarter, that’s a pretty big chunk. Even if you assume Q2 had a bigger percentage of the total (as it would), it’s still not a tiny drop.
So how did Alaska deal with it? The airline was able to replace 90 percent of it. Though the wording of the call wasn’t entirely clear (and I haven’t gotten a response from Alaska clarifying yet), it seems that Alaska was able to boost revenues from other codeshare and interline partners by $11 million. Another few million came in from Alaska simply selling more directly to consumers. More specifically on the codeshare/interline side, Alaska increased its revenues from American by 20 percent. Those two have been getting cozier, and clearly that’s translating into more people going between the networks.
The increase in capacity by Delta is also pushing Alaska to do something that seems silly. It’s adding more capacity of its own. Some of this capacity appears to be performing well, but Andrew Harrison, SVP of Planning and Revenue Management had a interesting comment to add to that.
… we are making some tactical schedule adjustments to increase our flying in some of these markets to defend our franchise. This may have short-term impact, but we believe the water will find its level eventually and we’re confident these are the right actions for us to ensure the long-term sustainability of our business and preserve our ability to generate appropriate returns for our owners.
So Alaska is taking the long term view here. Short term pain might be worth it in the long term. With the kind of results Alaska is pushing, it can probably afford to make those investments. But with the airline doing this well on its own, why does it continue to partner with its biggest competitor, Delta, at all? I’ve long thought that continuing to partner with Delta was a mistake. It would make it easier for elites to transition to Delta if they so chose. But Brad Tilden, President and CEO, had this to say.
One reason to stay with [Delta] is the revenue that we get from feeding their flights and from the incentive we have for them to not fly against us in our markets. Another reason to stay there is it’s conceivable that, at some point, that relationship could get back on track and we could take advantage of natural end-to-end connection opportunities.
So there you have it. Can he really be all that optimistic that Delta will come back into Alaska’s loving arms some day? Well, it’s not clear how well Delta is doing there right now. The only real mention in Delta’s earnings call this quarter talked about unit revenue improvement. That says nothing about profitability, and you’d assume if it was profitable, Delta would have been happy to crow about it.
But if Delta wants Seattle to work, it can make it work. This isn’t an either-or thing with Delta and Alaska. It seems pretty clear so far that Alaska is going to be just fine on its own. And Delta will be fine with whatever it decides to do – it’s just a matter of strategic priority. Maybe someday, that’ll mean a reconciliation with Alaska.