Friday, July 10, 2015

Delta's West Coast Growth Defies Wall Street and Justice Department

It isn't just Seattle (SEA/KSEA) where Delta is adding domestic service to feed international flights, particularly trans-Pacific flights. It's the entire West Coast.

A new report compiled by OAG Aviation said that Delta continues to build West Coast capacity this summer, and has increased seat capacity by 35% in Seattle, 27% in Portland (PDX/KPDX), 20% in Los Angeles (LAX/KLAX) and 7% in San Francisco (SFO/KSFO) between July 2014 and July 2015.

Delta's growth on the West Coast seems to defy both Wall Street analysts, who continue to denounce capacity growth at the major airlines, and U.S. Justice Department attorneys, who are investigating whether carriers are colluding to reduce capacity in order to boost pricing.

So Wall Street said Delta is growing too fast, federal regulators may be saying that Delta is growing too slowly, and Delta seems to be saying that it just wants to grow on the West Coast, particularly in Seattle, where it is building a trans-Pacific hub.

"This is equally a long-term strategic move and a very wise play in the market to Asia," said John Grant, executive vice president at OAG and author of the report. "These other things have emerged in the last couple of months, but these moves were planned over the last couple of years, and they represent a very solid and very sound strategic play by Delta.

"Airline capacity cannot be adjusted overnight," Grant said. "It's not like electricity usage that can be increased {suddenly}. It's about the long-term ambitions and vision of an airline. Short-term expedience in terms of dividend and return isn't the same as long-term strategic value."

In general, Delta has been adding domestic feed to Seattle, transcontinental capacity at John F. Kennedy International Airport (JFK/KJFK) in New York and international capacity not only in Seattle but also in Los Angeles, where it began flying Los Angeles-Shanghai (PVG/ZSPD) on Wednesday.

"Our West Coast network supports our goal to develop International trans-Pacific connectivity, inclusive of key business markets," said Delta spokesman Anthony Black.

The OAG study said Delta's overall domestic capacity was 5% higher in July than it was the same month a year earlier -- and that on the West Coast Delta's capacity growth is far higher.

At Seattle-Tacoma International Airport, Delta capacity has grown by 123% since July 2012. The carrier currently flies from Seattle to seven destinations in Asia, three in Europe and two in Canada.

Over the past five years, Delta's international capacity at Seattle has tripled. Meanwhile, domestic capacity, which account for 81% of Delta's total Seattle capacity, has grown by 39% or 129,000 departing seats over the past year.

The report noted that Alaska is also growing rapidly in Seattle. Alaska accounts for 46% of SeaTac capacity, compared with Delta's 21%. Alaska has grown its Seattle capacity by 11% since July 2014.

Alaska serves 78 routes: Delta competes on 25 of them, up from five in July 2012 and up from 14 in July 2014.

In Portland, Delta's capacity share has grown to 16% this month, up from 12% in July 2014. Nevertheless, Delta remains the third largest carrier after Alaska and Southwest. "Almost all of Delta's new seats have gone to existing routes with the only new route added since July 2014 being PDX-SEA which is Alaska Airlines' biggest route at the airport," the study said.

Even at San Francisco International, where United operates the best West Coast hub, Delta is growing. That growth reflects new service to Seattle.

In Los Angeles, Delta has moved into second place in market share, behind American but ahead of United, the report said. Since July 2014, Delta has added 227,000 seats at LAX.

LAX is a difficult environment for airlines. "It offers West Coast connectivity to Asia, and it is the market of cache and fashion," Grant said. "Delta has to play in that.

"But what they have done, which I think is quite clever, is to stay in the market but also to have a secondary point {Seattle} where they have a dominant position and therefore avoid some of the competitive dynamic at LAX, where every Asian airline wants to fly," he said.

(Ted Reed - The Street)

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