Seattle/Tacoma International Airport

Delta presses forward to build a competitive network in a consolidated and mature US market

Delta Air Lines continues to leverage the competitive strength it holds over its US legacy peers to flesh out its network and build pockets of strength as United and Continental remain in the throes of their merger integration and American and US Airways lay the groundwork to begin the complex process of combining their respective organisations.

During the last couple of years Delta has used the nimbleness it enjoys versus its legacy domestic competitors to broker equity investments in foreign carriers to build a robust network ahead of the completion of US consolidation. Those investments have moved in tandem with Delta’s bolstering its presence in New York through its slot swap deal with US Airways and its investment in facilities at JFK and LaGuardia airports.

During 2013 Delta is attempting to strengthen its position in the fragmented but strategic Los Angeles market through a 12% boost in daily seats year-over-year from Jul-2012 to Jul-2013.

Alaska continues to face challenges getting investors to acknowledge its solid financial performance

Alaska Air Group during the last few years has consistently outperformed its US carrier peers in a financial metric – return on invested capital (ROIC) – that is prevalent in discourse in other industries but has only surfaced in discussion among airline executives during the last few years. Since 2010 the carrier has exceeded its ROIC targets on an after tax basis and has posted annual profits for the last nine years. Despite its consistent profitability, Alaska’s robust financial performance is often overlooked by the investment community, leaving executives scratching their heads as to why the company’s consistent financial results are not more recognisable.

Even as Alaska delivers consistent profitability, questions often arise over the company’s growth prospects at its two subsidiaries – Alaska Airlines and Horizon Air (which now operates under the Alaska banner). The carrier holds an advantageous position as the leading airline in Seattle, where it can feed into long-haul flights operated by its partner Delta Air Lines. It also has a strong relationship with American Airlines, but it is not certain how that partnership will evolve once American and US Airways close on their merger and complete a roughly 18 month-long integration process. Alaska does have the opportunity to flesh out its domestic network, and remains bullish that it will still deliver sound financial results with planned annual capacity growth of 4% to 8% during the next few years.

For trans-Atlantic airlines, JV benefits are less than obvious as they mature. A US perspective

SkyTeam partners Air France-KLM, Alitalia and Delta are approaching the fifth anniversary of the launch of their immunised trans-Atlantic joint venture. But the major strategic moves by those airlines during the last year were squarely outside that umbrella, as Air France warmed to the Gulf carriers through its new partnership with Etihad, and Delta moved to improve its position in the London Heathrow market through an equity stake and partnership with Virgin Atlantic.

Star joint venture partners Air Canada, Lufthansa and United have been preoccupied throughout most of the last year with getting their own respective houses in order and have done little publicly to play up any advantages they are enjoying through their business partnerships. oneworld joint venture partners American Airlines and sister carriers British Airways and Iberia have been equally distracted with Chapter 11 restructurings, mergers and strikes – and meanwhile, Qatar Airways has been welcomed into the fold, further complicating the evolution of the global alliances.

US-Japan airline alliances become lopsided as JAL, ANA expand while US to shift to other markets

The anti-trust immunity alliances between All Nippon Airways and United Airlines as well as Japan Airlines and American Airlines are past the honeymoon phase. Whereas the airlines a decade ago were bullish on linking the mighty US with Japan Inc., today the latter's economy is still underperforming.

Japanese airlines are now ramping up US capacity to existing and new destinations as they seek to woo markets with their premium products, efficient hubs and services to secondary US cities, reducing connections.

But US carriers are expanding less than their Japanese partners, which impacts the competitive potential of the JVs, as Japanese carriers have far higher CASKs. The US airlines are also looking to diversify what United calls its "non-Japan Asia" network, a reflection of the growing importance of China. United will resume services to Taipei while American will expand to Seoul, but the pot of gold is mainland China.

Expansion there will be steady as slots are difficult to secure and airlines are dependent on next-generation aircraft to make secondary cities profitable. China services would likely be excluded from the JVs with Japanese carriers due to the Chinese regulatory environment – possibly spearheading the formation of new JVs. But that will depend on the pace of liberalisation.

Delta sees solid demand as it diversifies its Asian network to offset Japan's weakness

Delta Air Lines believes 2013 is starting on a favourable note as overall demand trends remain positive and its unit revenue for 1Q2013 is forecast to grow in the mid-single digits. The carrier anticipates solid results in all its geographical entities, with the exception of Asia-Pacific, where its concentration in the important Japanese market has dragged down revenue performance in that region. To combat weakness in its Japanese markets triggered by the country’s weak economy, Delta during 2013 plans to centre the majority of its trans-Pacific capacity outside of Japan.

Carrier executives offered guidance for 2013 as Delta recorded a 4Q2012 profit of USD238 million and net income for the full year of USD1.6 billion.

Excluding special items that included charges related to its domestic fleet restructuring and a loss on the early extinguishment of debt, the carrier’s 4Q2012 profit was USD7 million and full year net income was USD1 billion. During 4Q2011 Delta recorded a profit of USD425 million and net income of USD854 million. Delta felt a sting of roughly USD100 million during 4Q2012 from the effects of “Superstorm Sandy” that struck the US east coast in Oct-2012.

Alaska and Frontier Airlines attempt to avoid competition in building up San Diego and Trenton

US carriers Alaska Airlines and Frontier appear to be satisfied with test routes they have launched from San Diego and Trenton, New Jersey during 4Q2012 as both airlines plan to make a push during 1Q2013 from each airport. Alaska is introducing its second transcontinental flight from San Diego to Boston in Mar-2013 followed by new Hawaii service in 2Q2013. Frontier, meanwhile, is making a push from Trenton to Florida during the northern hemisphere winter.

Frontier launched service from Trenton to Orlando in Nov-2012, and now is the lone commercial carrier serving the small airport close to the larger metro areas of Philadelphia and New York.

Alaska debuted its first transcontinental service from San Diego to the leisure destination of Orlando in Oct-2012. Both carriers characterised those forays as test cases in route expansion outside their core networks which are built around Seattle and Portland for Alaska and Denver for Frontier.