Wednesday, October 23, 2019

Alaska's Shifting California Love

Over the past few years, Alaska as attempted to make good on their desire to be the West Coast’s go-to airline. After spending $2.6B to purchase Virgin America, Alaska's route network received a significant shot in the arm, boosting their already growing California network.

While many remember the 2017 SJC and SAN investments, Alaska's interest in California has been growing for quite some time especially in San Deigo. Starting around 2010, Alaska started increasing its San Diego service, both in terms of destinations and flights. The first wave started with vacation destination gaps, Hawaii and Mexico, which was followed up with a wave of Intra-California flights to Fresno, Monterey, and Santa Rosa.

San Diego saw modest growth between 2013 and 2017 with seasonal Mammoth Lakes service launched in 2013 (discontinued in 2018) and Kona service launched in 2015. Finally, in the latter part of 2016 thru 2018, Alaska really refocused its growth in the market and launched 16 new destinations. This massive expansion accounted for 14% of Alaska's 2018 year-over-year ASM growth and 26% of their departure count growth.

Recently, Alaska announced new destinations were coming to San Diego (SBP and RDM) as well as depth to MCO, BOI, STS, SJC, and BOS. Within the same RDM announcement, LAX and SFO also saw a healthy dose of growth.

In the past, the combined AS/VX saw rapid growth. From 2010 to 2019, the combined company had an average ASM CAGR of 6.5%, however, after weaker performance, the company's growth hit the brakes in 2019 with an anemic 2% ASM growth. In 2020, growth is projected to increase, however, a meager 3-4%. Taken in a vacuum, Alaska's August 28th and September 4th announcements would consume roughly 50% of its 2020 growth rate.

However, Alaska implemented adjustments within its California network. In the first and second quarter, Alaska exited or seasonally reduced a significant amount of transcontinent and midcontinent routes. These markets that were exited starting in 2020 will free up roughly 1.7B ASMs compared to the recent announcements of 1.1B ASMs added to the network. The gap of roughly 0.6B ASMs will open the equivalent of another 1% of year-over-year ASM growth that has yet to be announced. Seasonal reductions would open another modest amount of ASMs which also could be reallocated.

Reds = exits; Blue = seasonal reductions

To understand why Alaska made these seasonal reductions and market exits, we again go back to the RASM curve. Examining Alaska’s RASM curve, most of the markets are below, some pretty significantly below the 1Q2019 RASM curve. This tends to point towards some performance issues with many of the routes which were reduced. This should not be too terribly surprising. Most of these routes were launched within the last 1-2 years. It often takes time for the market to produce system-level returns.

I really do not believe performance was the entire story here. Alaska's midcontinent expansion out of San Diego never really made sense to me. If you are going to be California's go-to airline, why would a carrier introduce routes that were not really that important to the originating California market? The markets that Alaska has removed from their schedule were largely markets with customers that fly to California. Rather than concentrating on a singular California city, for Alaska to successfully grow the exited markets, it would have required growing a customer base across seven different cities where Alaska was not necessarily a major player in the market.

Digging deeper into the San Diego market, Alaska has significant gaps within their San Diego portfolio. Of the eleven markets with over 300 passengers originating from SAN, Alaska only has service to five of the markets. Building a San Diego customer base would require Alaska to offer meaningful service other top originating markets to grow a base within the city.

While Alaska did withdraw from many non-originating markets, we can see them reallocating their service in other key markets (SJC, BOS, and MCO). To me, this does not point to a withdraw in the SAN market, rather a recalibration. If I was a betting individual, I suspect we will see a redeployment of additional E175s with medium frequency to many of the top short to medium-haul markets. If the aircraft and capacity are available, this type of deployment would increase relevancy in SAN while balancing new ASM exposure compared to longer-haul and larger-gauge markets.

If we are to see more redeployment within San Diego by Alaska, my best bet would be DEN, OAK, PHX, and maybe LAS, all top demand markets from SAN. These routes would likely be funded in part from the drawdown from the midcontinent and transcontinental that we saw announced within the last month. Further, I would suspect if these routes are going to operate within 2020, they would be announced within weeks to a couple of months to hit the ideal 2020 booking curve.

Given the recent moves by Alaska, it appears to me that Alaska is not withdrawing from their San Diego investment rather time will show their recent withdraws to be adjustments in a much longer-term strategy.

1 comment:

  1. Excellent post, very interesting. Looking forward to more of your work.

    I have to say I'm surprised Alaska didn't go in this direction earlier, it's hard to see why the midcon strategy would work when they really only have strength on the West Coast point of sale. If you live in Omaha, you are probably only taking AS if it the cheapest or only nonstop option.

    Hope DEN and OAK are up next for an AS buildup, PDX-DEN, SFO-DEN, SAN-DEN are all huge gaps, same with OAK-LAX, OAK-SAN in the intra-California space. Might be holding back to avoid a big(ger) battle with WN.