Delta’s Seattle expansion comes under scrutiny

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Delta Air Lines’ rapidly expanding operations at Seattle/Tacoma International airport are coming under scrutiny, as at least one analyst questions its international growth strategy.

Delta has gone to great lengths to organically compete in Asia in part by building up Seattle, but we believe some of the new flights might not be working as well as planned,” writes Hunter Keay, an analyst for Wolfe Research, in a report on 17 January.

He cites the fact that Delta has had to put in at least 10 new domestic routes to feed its expanded international services at Seattle/Tacoma International and its request for gateway flexibility for its two Tokyo Haneda frequencies from the US Department of Transportation (DOT).

Delta launched new nonstop service from Seattle to Anchorage, Las Vegas and Los Angeles in 2013 and plans to begin service to Fairbanks, Juneau, Portland (Oregon), San Diego, San Francisco, San Jose (California) and Vancouver in 2014.

Codeshare partner Alaska Airlines has responded by promising to “vigorously defend” its home turf in Seattle and announced seven new routes from Salt Lake City International airport, which is a hub for Delta.

Glen Hauenstein, chief revenue officer of Delta, says that only about 10% to 20% of the airline’s traffic at Seattle/Tacoma International is connecting, in response to Keay’s questions during an earnings call today.

Hauenstein says that they expect the percentage of connecting passengers to increase when new international flights begin later this year, including London Heathrow in March, and Hong Kong and Seoul Incheon in June.

Delta already flies from Seattle to Beijing, Tokyo Haneda, Tokyo Narita and Shanghai Pudong. It ended Seattle-Osaka Kansai service in November 2013.

“The Seattle strategy was never going to be a slam dunk and it may actually be trending better than we think,” writes Keay. “But Delta needs Seattle to work, particularly given the changes and the structure of its transpacific network… we expect the Asian strategy to change in the coming quarters given many challenges.”

Delta is in the midst of restructuring its Pacific network away from its Tokyo Narita hub. Ed Bastian, president of the carrier, says that the effort is “well underway” both in terms of reducing connecting operations at Narita and aggressively managing “beach” markets – flights from Japan to places like Guam, Hawaii and the Philippines.

The continued weakness of the Japanese yen resulted in a $65 million decrease in revenues for Delta during the fourth quarter, says Bastian. This weakness contributed to a $250 million revenue hit during 2013.

The Pacific was Delta’s weakest region in the fourth quarter, with yield declining 1.5% on a 2.2% decrease in revenues. Capacity was up 0.6%.