Alaska Air Targets the Dallas Business-Travel Market

By Adam Levine-Weinberg Markets Fool.com

When Alaska Air (NYSE: ALK) purchased smaller rival Virgin America last year, it raised questions about the future of Virgin America's underperforming operations at Love Field in Dallas. Earlier this month, a senior executive at Alaska indicated that the company did not intend to exit the Love Field market, but that changes could be coming.

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Last week, Alaska Air revealed what those changes will look like. The carrier plans to add nonstop service from Love Field to several new cities over the next year. However, it will primarily use regional jets at Love Field going forward. These moves signal a focus on gaining business-travel market share at the expense of American Airlines (NASDAQ: AAL) and Southwest Airlines (NYSE: LUV).

A sticky situation

Since late 2014, Virgin America has flown several times a day from Dallas Love Field to San Francisco, Los Angeles, New York's LaGuardia Airport, and Washington's Reagan National Airport. It added service to Las Vegas in late 2015. While the flights to Virgin America's California focus cities have performed reasonably well, the other routes never met the company's expectations.

Virgin America's Dallas operations haven't been as profitable as expected. Image source: Virgin America.

Indeed, Virgin America thought that flying from Love Field to LaGuardia Airport and Reagan Airport would be extremely lucrative, because all three airports are capacity constrained. Furthermore, Love Field is closer to downtown Dallas than Dallas-Fort Worth International Airport (DFW), where American Airlines has its hub.

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However, a huge wave of capacity growth on those routes caused fares to plummet just as Virgin America entered the market. Southwest Airlines and American Airlines were better able to manage around the overcapacity as the market leaders in the Dallas region.

Virgin America has reduced its capacity in Dallas in response to the weak fare environment. As a result, it isn't fully utilizing its valuable gate space there. Moreover, its financial results in Dallas still aren't up to par.

New routes coming

Alaska Air has a two-pronged plan for maximizing its profitability at Love Field. The first piece of that plan involves adding flights to several other cities where Alaska Airlines has a strong presence.

Last week, Alaska Air announced that it will start nonstop flights from Love Field to its two main hubs of Seattle and Portland in late August. The Seattle flights will operate twice a day, while Alaska will offer one daily flight to Portland. Alaska Airlines will add daily flights from Love Field to San Jose and San Diego next February.

In conjunction with these new flights, the Virgin America route from Dallas to Las Vegas will end in August. As of next spring, Alaska Airlines and Virgin America together will offer 18 daily departures in Dallas, with four daily flights to New York, three daily flights to San Francisco, Los Angeles, and Washington, D.C., two daily flights to Seattle, and daily service to Portland, San Jose, and San Diego.

Using smaller planes

The second aspect of Alaska Air's new strategy in Dallas is that it plans to shift most of its flights there to regional jets. The existing routes to San Francisco and Los Angeles will continue to use Virgin America's Airbus fleet, as will one of the two daily flights to Seattle. However, the other 11 flights will all operate with 76-seat E175 regional jets.

By next spring, most of Alaska Air's flights in Dallas won't use mainline planes. Image source: Alaska Air.

This means that Alaska Air will barely increase its total capacity at Love Field over the next year, despite going from 13 daily departures today up to 18 daily departures by next spring.

On the Love Field-LaGuardia Airport route, seating capacity will decline by 15% even though Alaska is adding an extra daily frequency. For the Love Field-Reagan Airport route, the aircraft change will reduce its capacity by 36%.

Going for the business market

Alaska Air's route additions and aircraft changes indicate that it plans to challenge American Airlines and Southwest Airlines in the business market. By this time next year, it will fly from Love Field to all of the major West Coast metro areas, as well as two of the biggest East Coast business markets. Meanwhile, with smaller aircraft, it won't need to attract lots of leisure travelers to fill the back of the plane.

While Alaska will continue to have a tiny presence in Dallas relative to American Airlines and Southwest Airlines, it does have some advantages over its larger rivals. First, with respect to American Airlines, Alaska benefits from operating at Love Field. In addition to being closer to downtown Dallas, Love Field is a smaller, more manageable airport than DFW.

Second, with respect to Southwest Airlines, Alaska Air has the advantage of offering three-class service. Indeed, the E175s that it's introducing at Love Field have 12 first-class seats and another 12 extra-legroom seats. (That's even more premium seating than the 119-seat A319s that Virgin America currently operates at Love Field.)

Alaska Air prides itself on making many of its extra-legroom and first-class seats available as complimentary upgrades for elite frequent fliers. This may encourage business travelers who want a little more comfort to pick Alaska Airlines over Southwest if they have a choice.

It's a bit of a shame to see Alaska Air switching to regional jets at Love Field when other airlines are eager to add capacity there. However, this move seems to be the best way for the company to maximize its profitability in Dallas based on the current competitive dynamics there.

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Adam Levine-Weinberg owns shares of Alaska Air Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.