Will Alaska Airlines grow through acquisition or "organically"?

By Stephen H. Dunphy
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With service upgrades, new planes and more international routes on the way, homegrown Alaska Air remains the dominant Northwest carrier.

By Stephen H. Dunphy

The nearly new 737-900 pushed back from the gate at Newark International Airport — on time — and soared into a late winter sky. The cabin came equipped with new, tablet-style entertainment systems loaded with films, TV shows and other content. You could tap into the system with your own tablet or cell phone, which you could power up using the plug at your seat. The menu featured the usual limited airplane fare, but you could get a special dish created by Seattle restaurateur Tom Douglas. The new pull-down overheads held more carry-on bags. Best of all, the five-hour-plus flight arrived about a half hour early.

All in all, about as pleasant a travel experience as possible these days.

That’s what many in Seattle have come to expect from Alaska, the homegrown airline, which maintains high customer loyalty. But if you read the press and some of Alaska’s statements over the past few months, you’d think the airline was in the fight of its life against rival Delta, which has entered the Seattle market in a big way.

There is no doubt Alaska is responding to the competition. One sign: the airline will begin operating a flight to New York’s JFK airport in September. In late March, Alaska took aviation reporters, travel writers and others on a two-hour flight over Washington and Oregon to show off its new Alaska Beyond service. A report on KING-TV called the service — which offers perks a la the Newark-Seattle flight — a direct response to the Delta threat. But based on comments by the airline at a recent industry event, Alaska seems to be holding its own.

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Alaska is counting on its Alaska Beyond service to keep its edge over Delta in the Seattle market. Credit: Alaska Airlines

Each year, JP Morgan Chase holds an airline and transportation conference that attracts the top people in the industry. This year’s meeting was in New York. Webcasts of conference presentations by Delta and Alaska executives offer some interesting insights into Alaska’s strategy going forward.

Brandon S. Pedersen, Alaska Chief Financial Officer & Executive Vice President, told conference attendees that his airline retains a majority (54-55 percent) share of the Seattle market. (Port of Seattle statistics confirm that figure.) In February, for example, Alaska and Horizon (both part of Alaska Air Group) served 55 percent of total passengers, compared to Delta’s and Delta Connection’s combined 15.5 percent.

“If you look at our competitor's expansion over the last two years, at this point, Alaska has continued to be very successful,” Pedersen said. “So I still think there are vast differences in one of us versus the other.”

Pedersen contends that competition has hurt other Sea-Tac carriers more than it has hurt Alaska. United, for example, a major Sea-Tac presence a few years ago, has now reduced its schedule in the Seattle market. It only serves about 8 percent of Sea-Tac passengers now, according to Port of Seattle figures, and the airline recently closed its flight attendant and pilot bases here.

Aviation experts tend to assume that Alaska will eventually be taken over by another airline. In fact, a 2014 April Fool’s Day story about a Delta-Alaska merger fooled some people at first. But Pederson turned that assumption on its head at the Chase conference, hinting that Alaska might be the one acquiring another airline down the road, rather than the other way around.

The Alaska CFO didn’t see any mergers at this point among the so-called big four: American, United, Delta and Southwest. But he predicted action in the next few years among the “smaller seven” airlines: Alaska, JetBlue, Virgin America, Hawaii, Spirit, Frontier and Allegiant.

The question Alaska is grappling with, he said, is whether to grow organically (from within) or non-organically. “We're getting to be a grown-up company,” Pedersen said. “And when you're a grown-up company you think about whether or not organic growth is the right approach, or inorganic growth is the right approach. Consolidation has been extraordinarily good for this industry. We've been benefited greatly from consolidation without actually participating in consolidation."

For now, Alaska will likely “continue to stick with the strategy that's worked well for us,” Pedersen continued. That strategy is growing from within. But Pedersen emphasized that Alaska is capable, financially, of going either way.

Another interesting takeaway from the JP Morgan Chase conference was how Alaska might grow when the new longer-range 737 MAX comes on line. Boeing launched the MAX, a 737 with new engines and other enhancements, in 2011 to complete with the Airbus A320 Neo. Later that year, Boeing and the International Association of Machinists signed an historic contract that kept production of the jet in Renton. The MAX's first flight is scheduled for 2016 with deliveries beginning in 2017.

In 2012, Alaska ordered 20 737 MAX 8s, 17 737 MAX 9s and 13 Next-Generation 737-900ERs. The order, with a current list-price value of $5 billion, was the largest in Alaska's history. Alaska currently flies 137 planes, all Boeing 737s.

With the MAX, Alaska can start thinking more internationally. “The MAX can go a lot farther,” Pedersen said. “And so as we think about expansion of the network over time, and potentially the places that we could go if we had 500 miles more of circle radius, it opens up some places.” Places like Central America and the Caribbean. Alaska already has a large international presence in Los Angeles. Horizon, its regional partner, is the second largest international carrier at Sea-Tac — slightly behind Delta — mostly because of its many flights to Canada. Horizon also serves Mexico.

Let's turn to Delta. Its presentation at the JP Morgan event was more finance oriented, tending toward items such as free cash flow and capitalization. Like Alaska, Delta expects to benefit from the lower cost of fuel this year. The far larger airline nationally, Delta expects savings of $3 billion.

Delta also plans to adjust its international capacity after the summer. That is not likely to affect Seattle operations. Delta currently services Amsterdam, Beijing, Hong Kong, London, Paris, Seoul, Shanghai and both Haneda and Narita airports in Tokyo.

The Seattle-Haneda route has been controversial for Delta. Because the airline did not offer frequent service from Seattle to Tokyo last fall and winter, American Airlines and Hawaiian Airlines challenged Delta's flight authority. In late March, the U.S. Department of Transportation (DOT) said Delta could retain its authority to provide daily service to Tokyo’s downtown Haneda Airport, “subject to additional conditions designed to ensure that Delta maintains a daily service in the Seattle market year-round.”

The DOT said Delta must fly the route at least two times a week: “Any failure by Delta to perform Seattle-Haneda service on two days of any seven-day period would mean the immediate loss of Delta’s authority.” If lost, that authority would go to American Airlines, which would operate Haneda flights out of L.A.

For now both Alaska and Delta are thriving in Seattle. Each has its own mission: Alaska is serving its home-town base, while Delta is trying to feed a growing number of international flights to and from Seattle. But with 55 percent of the market, Alaska is still the  region's dominant carrier, and it's likely to stay that way for the foreseeable future.


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About the Authors & Contributors

Stephen H. Dunphy

Stephen H. Dunphy

Stephen H. Dunphy writes on business and economic issues for Crosscut. He was a business editor and columnist for a number of years at The Seattle Times.