Saturday, April 2, 2016

An Airline Battle Is Heating Up in Los Angeles

Delta Air Lines and American Airlines are fighting for supremacy at one of the nation's busiest airports.

At most major airports, there are one or two dominant airlines that carry most of the passenger traffic. It's rare to see rivals mount a serious challenge to the market leaders. Delta Air Lines recent move into Seattle -- Alaska Air's home turf -- has been a somewhat surprising exception to the rule.

It looks like the next big airline battle could come in Los Angeles. Right now, all three legacy carriers are in a dead heat there, with none holding more than 19% market share. However, American Airlines and Delta Air Lines are both trying to pull away from the pack.

Delta is ready to invest for growth in LA

Delta has been the fastest-growing airline at Los Angeles International Airport (LAX) since 2009 and it now offers about 160 peak day departures there. Delta roughly doubled its capacity at LAX between 2009 and 2015, as measured by the number of seats offered.

Delta now has nonstop flights to dozens of destinations from LAX, including up to 10 daily flights to New York and an hourly shuttle flight to San Francisco. Los Angeles is also a key trans-Pacific hub for Delta. It has nonstop flights to both Tokyo airports, Shanghai, and Sydney, and has requested government approval to begin flying to Beijing in December.

The main thing preventing Delta from expanding further at LAX is the airport's cramped terminals. The carrier recently completed a $229 million renovation of its terminal at LAX, but it's still far from being a state-of-the-art facility.

That's why Delta has signed a letter of intent with the city to completely renovate Terminal 2 and Terminal 3 and move Delta's entire operation there. This would allow Delta to build a world-class terminal from scratch (more or less). Delta may be willing to spend more than $1 billion on this project to make it by far the best terminal at LAX.

The new facility would presumably accommodate more gates than Delta currently controls. This would allow the carrier to ramp up its growth again. However, it will probably take at least five years to execute this project -- if it is even approved.

American Airlines looks for its own advantage

Today, American Airlines is the largest airline in Los Angeles -- if only by a few percentage points -- and it plans to build on that advantage. It currently operates about 200 daily departures at LAX and is in the midst of building two more gates there. That will allow American to add another 20 daily departures beginning in June.

American is also in the midst of a rapid international buildup in Los Angeles, which is becoming the carrier's main trans-Pacific gateway. Just a few months ago, American's only trans-Pacific flights from LAX were to Shanghai and Tokyo's Narita of seats offered.

However, American Airlines launched new nonstop flights to Sydney in December and Tokyo's Haneda Airport in February. It has also announced new routes to Auckland and Hong Kong that will start later this year. Finally, just two weeks after Delta applied for LAX-Beijing flights, American Airlines put in its own application to serve that route -- with the same proposed starting date!

Clearly, American Airlines doesn't want to let Delta gain any route network advantage in Los Angeles. But the stakes are particularly high in this case. The U.S. government can only award one more daily flight to China under the current bilateral aviation treaty -- so it will have to pick either Delta or American and leave the other one out in the cold.

Competition will benefit travelers

The consolidation of the airline industry has meant that travelers in fortress hub markets often face high fares, while travelers in mid-size cities typically have limited nonstop flight options. In either case, service is frequently subpar.

That's not the case in Los Angeles, though. The rivalry between Delta and American -- with United Continental and Southwest Airlines not far behind -- will likely lead to low fares, lots of flight options, and better service. That's a great reason to root for a stalemate rather than a decisive victory by any airline in the battle for Los Angeles.

(Adam Levine-Weinberg - The Motley Fool)

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