Remember that whole thing about American stagnating? The message reached a deafening roar when Delta took LATAM away. It looks like someone over there got the message. This morning, American is announcing that it and Alaska are planning to renew the codeshare that was set to all-but-end next month. Alaska will join oneworld as a full member by next year, and American is going to start flying long-haul from Seattle. It has taken me some time to get my head wrapped around this one, and after much thought… I like it, especially when looking at this from a corporate business perspective. This may or may not work out, but it’s a bold move with little risk that has a strong strategic rationale behind it. That is not something anyone would have expected from American.
There is a lot going on here, so let me start with the bullet points before getting into the analysis.
- American and Alaska will renew the codeshare that they announced last October would be cut dramatically starting in March. This will eventually grow to be much more important and include codesharing on international flying in both LA and Seattle.
- Alaska will join oneworld as a full member by 2021. That means the airline will now have standard shared elite benefits with all members but most importantly with American. It sounds like there’s an interest in having greater benefits for American and Alaska travelers, but there’s nothing to announce on that yet.
- American will launch nonstop 787-9 service to Bangalore in October and 777-200 service to London in March of next year.
What do you think of that, Delta?
Not a Merger, No Equity
Before I get too deep into this, let’s be clear about something. This is not a merger or acquisition. There is no equity being exchanged. There isn’t a joint venture or antitrust immunity. Yes, the codeshare will require government approval review, but this is about each airline being able to take advantage of what the other brings to the party. They can increase cooperation significantly without running afoul of any potential regulatory issues, or so they hope. That’s up to the feds to decide.
Some of you may wonder, “why not merge?” After all, the Trump administration is likely to be friendly to consolidation, and really, there isn’t much if any concerning overlap here. Still, it’s a nonstarter. Why? Let me put it this way:
Translation: American’s stock price is just way too low right now. Even if it wanted to buy into Alaska, it couldn’t afford it. That will eventually change if the company is run well, but for now, there’s no way an acquisition would make sense unless Alaska decided to swallow Goliath. That would be something, but it’s not happening now.
Instead, these airlines can come together with what may seem like a codeshare and alliance partnership, but it has to be more than that. It’s a cooperation that, as I understand it, will make sure that each airline actually wants to take customers connecting from the other. Alaska’s Chief Commercial Officer Andrew Harrison told me that both Alaska and American “will both be rowing in the same direction,” and he said this renewed partnership will work better than it has in the past.
Alaska Gains Reinforcements to Fight Delta
You might be tempted to think about this as American opening up a new front with Delta, and to some extent that’s exactly what’s happening. But it’s not like the Russians opening a new front in World War II. This is just the US stepping in to fight with its allies on an existing front. (I’m not going to take that analogy any further.)
Alaska is already fighting Delta head-to-head in Seattle, but it is largely limited to the domestic market. Sure, it has partners that can fly internationally, but those partners don’t add nearly enough and don’t have the same level of integration to make Alaska competitive with Delta on the long-haul. Now, Alaska is getting reinforcements in the form of American. While it’s not a completely equal fight, it’s far from the completely unbalanced fight it is today.
For Alaska, this gives it an international network with enhanced benefits available for its elites. This network is important, and that’s why this is such a big win for Alaska, especially since nothing about this requires Alaska to get rid of existing partnerships. (Though you can imagine some might be on the hot seat in the future.)
I’ve been working with a partner on a more in-depth subscription product, and we looked at Alaska’s options for growth in one of our test reports. The end result was we saw a need for Alaska to be able to grow internationally to able to support more growth throughout its system since it’s largely tapped out in existing markets. We suggested it would be something more straightforward than what’s occurring — a Hawaiian acquisition makes the most sense — but that’s because we didn’t think American’s team had this kind of creativity in them. (Then again, this doesn’t have to preclude doing something with Hawaiian anyway.)
American’s Fight for the West
From American’s perspective, this creates all kinds of opportunity, most importantly with corporate accounts. First, American will now regain more access to the Pacific Northwest. It had that previously with Alaska, but American made the decision just a few months ago to effectively end that deal because it was thinking traditionally. Alaska was increasingly viewed as the enemy, but now there’s been a complete reset. Delta’s position as a competitor and American’s standing in the West are much bigger issues. Working with Alaska can help solve those problems. This changed in a very short time, so the shift must have come with a conscious effort to think smarter at American.
American’s challenge has long been relevance in the West. When Dallas/Fort Worth is your best Asian gateway, you know you have a problem. And that’s why this is even more interesting. Los Angeles is a bad Asian gateway, but this won’t see American walk away from that. (If anything, it might help a little if Alaska can feed a few people, but nothing will make it good.) This is American testing the waters with a different gateway that Delta happens to own today. If it works, then I imagine we’ll see more Asia out of Seattle and less out of LA. That would be great for American… and bad for Delta. Can American beat Delta? Maybe not. But can American + Alaska beat Delta? That is entirely possible.
Look at the routes American is launching. Seattle to London might seem odd since British Airways already serves the route, but remember, this is about connectivity and creating better access for both Alaska and American customers, especially corporate travelers. London is a key route. Delta has two daily flights via Virgin Atlantic and BA has the same (during the summer, at least). This new American flight helps American create a more favorable schedule, and it creates better upgrade opportunities that will make a big difference to corporates.
As interesting as any long-haul add like this is, it’s the Bangalore flight that has me really appreciating the strategic thinking here.
The Bangalore Strategy
Bangalore is very, very far from the US. It will be the longest 787 route in American’s system, and the second longest overall. (Dallas/Fort Worth to Hong Kong on the 777-300ER is a few miles longer.) It may seem like a strange route to start with in a city that isn’t currently a hub, but looking deeper there is a touch of genius here.
Bangalore is an important business destination, especially for tech. As mentioned, it’s also far away. I know I’m stating the obvious, but the point is that there aren’t a lot of cities in the US that can reach it nonstop without taking a weight penalty. Let’s put it this way… you think that United’s San Francisco to Singapore flight is long? San Francisco to Bangalore would be another 250 miles further. American’s strongholds in Dallas/Fort Worth and Charlotte are too far as is Los Angeles, so what should American do if it wants to serve this corporate market that gets a lot of requests from the sales team?
First, take a look at where traffic is coming from. I mentioned it was a tech hub, so this won’t be a surprise. Here’s a snapshot of ARC/BSP data in Diio by Cirium for the 12 months ending November 2019. The whole market has over 1,000 daily passengers each way, but I looked only at traffic originating in the US, assuming that is where American’s bread-and-butter would be.
The number one origin city is, unsurprisingly, the San Francisco Bay Area. But remember how I said that nonstop flight would be really long? Going via Seattle adds only about 50 miles versus the great circle route. Take a look at it compared to other options that are out there. The only thing that comes close is to take United to Delhi, but that requires overnight stays and changing airlines. It’s not great.
Throw in the Dallas, LA, Seattle, and Houston traffic and you’re now providing a good option to over a third of the daily travelers from the US to Bangalore. Travelers in the eastern US can fly via London on British Airways, so it is very well-covered.
Zeroing in on San Francisco, this is a market where the Alaska partnership is so important. Alaska can take those people from San Francisco to feed American in Seattle. This gives Alaska traffic to further grow its San Francisco hub both to Seattle and to other cities where even a double connection would be welcomed. American benefits from the feed without having to build its own domestic network.
Couldn’t United just start a Bangalore flight of its own and take all that traffic? Well, it could take some, but the question is… how many people could it carry? Sure, Qantas flies a 787-9 from Perth to London and that is further, but that route is easier to fly. United has a more dense configuration with 16 more seats onboard, so that adds to the weight issue. Further, winds are likely to be worse on this route over the poles than flying over the equator. Lastly, Perth and London are at sea level while Bangalore is at 3,000 feet. So yes, United could do it, but it’s unclear what the economics would look like and how much of a penalty would be required.
What Will Delta Do?
There’s a Star Wars-esque story here. The former Jedi (Delta) turns his back on the Republic (Alaska) to create a powerful Empire. The remains of the Republic dig in for a fight and get reinforcements (American)… but it’s not like the Empire just rolls over and gives up.
With this launching today, Delta is obviously already scrambling to figure out what it wants to do. Can it start flying to Bangalore? Only if it wants to dedicate a 777-200LR or a brand new A350. I doubt it wants to do that, but then again, it will now have to defend Seattle more broadly. The thing is, even if Delta does it, American is still going to have a compelling case for its corporate accounts in Seattle and beyond. And in Seattle, Alaska is going to have a great case to make to its own corporates. (Again, why Alaska should be positively giddy.)
Delta may very well try to poke at American elsewhere. We already know it’s growing in Miami to feed LATAM. Will it try to do more there? Maybe Europe from Miami? It could try it, but I can’t imagine that would have the kind of impact to make American run away from Seattle considering the heft that Alaska brings straight away. I look forward to seeing what happens.
In Summary
In the end, it’s the combination of American and Alaska that makes this move by American so compelling. American doesn’t have to build a brand new domestic hub. Alaska doesn’t have to buy widebodies. They can have their networks work together to create a true competitor to Delta with minimal risk. Alaska has virtually no risk while American just needs to throw a couple widebodies in the market.
This may not be a “bet the company” kind of move, but it is most certainly a bold one that could pay dividends and allow American to remake its presence in the western US. This is definitely not something I would have expected from American, but it’s a good sign that someone is shaking the branches inside that place to get things moving.
