A Bon-Bon for Richard: Why Delta Should Buy Alaska ASAP . . .

When we last saw “The Cardinal” he commented on Virgin America, stirring up a lot of emotions in the process. This time he tackles something I bet will be less controversial — today The Cardinal proposes that Delta CEO Richard Anderson should buy Alaska (the airline, not the state) as soon as it possibly can. He benefits from discussions with “The Rabbi”, another pseudonymous source who I know is well-informed. All mistakes remain the responsibility of The Cardinal.

Delta is in the middle of digesting Northwest, quite a meal. For dessert, we suggest Alaska Airlines, which should be sweeter for Delta than for any other airline in the US.

Alaska Airlines theoretically makes sense as a merger partner to just about all the major US airlines with the exception of Southwest and United. Southwest is out because a lot of what Alaska does is outside of Southwest’s mission (and Southwest has only truly merged once in its lifetime — with Morris Air — plus it took over, re-branded and then shut down Muse Air) and United is out because it would probably cause anti-trust issues, given United and Alaska’s overlapping networks on the west coast.

US Airways would probably love to merge with Alaska (any port in a storm) but there’s no way it could afford it. It might make sense for AirTran too — giving AirTran geographic reach it simply does not have at the moment. Again, AirTran probably can’t afford it. Neither of these is likely to be a serious bidder if Alaska was ever in play.

But Alaska’s value is really to the legacy majors with international systems — American, Continental and especially Delta. The value is Seattle.

Seattle ought to be a substantial international gateway, but it’s not, because the dominant hub carrier (Alaska) has no intercontinental flights. Seattle, in fact, is potentially the best hub to Asia in the whole lower 48, simply because it’s closer to Asia than any other large lower 48 city. It also results in shorter connections to many (perhaps most) US mainland points. Check it out for yourself on the Great Circle Mapper. Try a bunch of connecting itineraries from say, Tokyo (NRT) or Seoul (ICN) via Seattle (SEA) or San Francisco (SFO) to some interior point, like Kansas City (MCI) (put “NRT-SEA-MCI, NRT-SFO-MCI” in the “Paths” box and hit the “Display Map” button to compare the lengths of the paths from Tokyo to Kansas City via Seattle and San Francisco).

Buying Alaska is one of the rare situations where a merger with a largely domestic airline would yield substantial benefits to the international side of the purchaser.

Alaska’s operations would also give greater access the US west coast to each of Continental, American and Delta. But Alaska is worth more, by far, to Delta. Why?

First of all, Delta has a big Tokyo operation inherited from Northwest, so like United it has a powerful Asian operation. What Delta lacks, however, is a west coast hub/gateway to anchor its Asian operation. Delta is in the unusual position of having a lot of ways to bring people to the US from Asia but not having a good distribution system on the part of the US mainland which is closest to Asia — namely the west coast. Compare to United with its big San Francisco hub/gateway.

Continental and American also lack west coast hubs/gateways, so Alaska would be valuable to them too. However, their Asian systems are not as powerful as that of Delta, so Delta could leverage Alaska’s Seattle hub far more than either Continental and American.

Seattle has another feature that matches up well with Delta. Delta’s fleet is unusually heavy in small widebodies — it probably has too many 767s. The interesting thing about Seattle is that it’s the one large potential US hub from which the 767 has sufficient range to reach useful parts of Asia,including Japan and Korea. In other words, a Seattle hub would give Delta’s probably underemployed 767s something to do — imagine 767 nonstops from Seattle to most of the significant Japanese cities, plus Korea, plus maybe parts of northeast China, especially as Delta is adding winglets to some of its 767s to give them more range.

But wait, there’s more. Seattle would do some great things for Delta on the domestic side as well. In particular, it would fix a long-time problem in the Delta network, namely the relative weakness of its Salt Lake City hub against United’s Denver hub.

Denver has always been, and will likely always be, a far better place for a hub than Salt Lake City. Denver’s a larger city, it’s placed better for domestic traffic flows, flights from Denver are allowed to fly into New York LaGuardia airport (as opposed to those in Salt Lake City, which are not, because of the idiotic perimeter rules of the Port Authority) and so forth.

Delta has struggled for years to make Salt Lake City work in the shadow of Denver. Really the main thing Salt Lake City has going for it is that it’s the only other plausible city for a hub in the Mountain West other than Denver. It ain’t much, but it’s something.

The merger with Northwest has already helped a little bit. Delta is now more relevant to a section of the Great Plains/Upper Midwest/Montana, etc, because it can provide access from two directions with the combination of Salt Lake City and Minneapolis. It’s not as good as United’s Denver + Chicago, but it’s better than Salt Lake City by itself. The new Delta is already to likely see some market shift in its favor because of the Salt Lake City/Minneapolis combination.

Imagine, however, the influence Delta+Northwest+Alaska would exert over basically the entire northwest quadrant of the lower 48 from the combination of Seattle, Salt Lake City and Minneapolis. Washington State, Oregon, Idaho, Montana, North & South Dakota, Wyoming & Nebraska would all find the combination of Delta’s services to be a powerful competitor to United’s San Francisco + Denver + Chicago hub combination.

Neither Continental nor American would benefit the same way. Neither of them has hubs that are close enough Seattle to have a similar effect.

Lastly, it’s worthwhile noting that Alaska and Delta have similar pilot pay structures these days. You can check that out for yourselves by looking at rates at Airline Pilot Central. You can see that Delta & Alaska have similar 737 pay rates. This is important — prior to 9/11, Alaska’s rates were a lot lower than those of the “big ugly” airlines like Delta, meaning that a merger of Alaska with an airline like Delta would instantly impose significant additional costs on the Alaska route structure. That’s nowhere near the problem it once would have been.

Given the extraordinary benefits to Delta, we’d even go so far as to say that Delta would be nuts not to pursue a takeover with Alaska as soon as it is able. There are few occasions where a “fill-in” acquisition like Alaska could yield such benefits.

The Cardinal is a long time industry observer, who is currently a [redacted] at [redacted]. Prior to working at [redacted], he worked at [redacted], [redacted] and [redacted]. He resides in [redacted] and in his spare time enjoys [redacted with extreme prejudice].

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Muscat,  Oman
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