That’s What Friends Are For

Madhu Unnikrishnan

February 18th, 2020 at 9:00 AM EST

American and Alaska join forces in an attempt to be the West’s best.

Things were looking dark for American. Poor margins. Messy operations. Fights with unions. Grounded MAXs. Lost friends. Then suddenly, this: A revived partnership with Alaska Airlines, this time envisioning a much deeper relationship than the two ever had before. 

Make no mistake. This is a big strategic move for American, greatly elevating its position along the booming U.S. West Coast, where it was fast falling behind United (with its unbeatable San Francisco hub) and Delta (with its aggressive Seattle growth). For Alaska, the new alliance with American further enhances its West Coast credentials, adding more global reach without having to buy a single widebody airplane. 

As part of the new arrangement, Alaska will join the oneworld alliance in mid- 2021, which adds seven more airlines to its partnership ranks. It plans to retain relationships — typically involving codesharing and loyalty plan reciprocity —  with its eight current partners that aren’t oneworld members, namely Korean Air (SkyTeam), Singapore Airlines (Star), and the unaligned Emirates, Hainan Airlines, Condor, El Al, Icelandair, and Aer Lingus (the latter part of IAG but not part of oneworld). 

More importantly, Alaska’s earlier decision to downgrade its American relationship now reverses. The two will no longer follow through on plans to reduce their domestic codesharing next month. On the contrary, they’ll continue their domestic codesharing and go one step further: They’ll also share codes on American’s international flights from Los Angeles and Seattle. American’s international flights from Seattle? It doesn’t fly internationally from Seattle. Oh, but it will soon. Now that it has full support from Alaska, American will launch new Seattle nonstops to Bangalore this fall and London Heathrow next spring (see Routes section).  

By putting their respective AA and AS codes on more of each other’s flights, American and Alaska will make it more likely to generate bookings via travel agencies. But more importantly, the two carriers will deepen loyalty plan ties by restoring full Mileage Plan and AAdvanatge reciprocity, with respect to mileage accrual, mileage redemption, elite status recognition, and airport lounge access. By this spring, Alaska’s customers will be able to earn their Mileage Plan miles on any American flights, not just domestically but internationally too.  

An airline’s appeal to corporate travelers depends on several factors. Service and reliability matter, for sure. But critically, an airline’s market share in any given city is linked to 1) how many routes it offers (can it conveniently get you to Bangalore?); and 2) the benefits of its loyalty plan (what perks do I get, and can I enjoy my earned perks when flying other airlines?). The new American-Alaska partnership amplifies each carrier’s network and loyalty benefits without having to form a true joint venture, which entails joint scheduling and pricing. Joint ventures are more powerful, but they also require antirust immunity, something regulators typically grant to U.S. airlines only when partnering with an international carrier. 

Might American have considered an outright merger with Alaska? The thought surely crossed its mind at one point or another. But Alaska’s fiercely independent streak made a consensual merger agreement unlikely. A hostile takeover? That would have been extremely expensive for American given Alaska’s market value. American’s buying power meanwhile, has diminished with the recent drop in its own market value. Its stock price has dropped by about one-fifth in the past year.   

But American felt the need to something big and bold. Its miserable 2019 featured, among other setbacks, the humiliating loss of partner Latam to Delta. Delta stole away Canada’s WestJet too. Alaska itself, perhaps as a negotiating ploy to secure better terms, unilaterally downgraded its American relationship. More to the point, American was quickly becoming the worst of the West, with corporate appeal only in Los Angeles, a notoriously competitive market where rivals like United and Delta were themselves well positioned. 

What’s more, to be weak in the West implies weakness in Asia, a region where American has always lagged United and Delta. The US Airways merger, remember, did nothing for American in Asia. And while its position in Tokyo remains formidable thanks to a partnership with Japan Airlines, its position elsewhere in the region is limited. During the past 12 months, according to Cirium schedule data, American flew fewer than 3,000 flights to Asia. Delta, by comparison, flew more than 8,000. United flew more than 13,000. 

But how to get stronger in the West? Delta, in fact, had a similar problem at the start of last decade. Sure enough, it tried to foster a deeper relationship with Alaska, building on legacy cooperation Alaska had with Northwest. But they ultimately didn’t see eye to eye amid wrangles about how much Delta would pay for seats it sold on Alaska’s flights (if someone books a Delta flight from Tokyo to Seattle, connecting to an Alaska flight from Seattle to Portland, the two airlines need to negotiate what percentage of the fare each airline gets to keep). They also presumably disagreed about which seat inventory classes to make available to each other’s customers. Unable to lure Alaska into its arms, Delta, in 2013, decided to build a Seattle hub on its own. The two ended all loyalty and codesharing cooperation in 2017.

A year earlier, Alaska bought Virgin America, giving it lots of West Coast network coverage it previously lacked. It thus didn’t need to codeshare with Delta anymore, or American quite as much. In any case, regulators now limited what it could do with American, as a condition for approving the Virgin takeover. By the fall of 2019, it was ready to tell American that all it wanted was scaled-down mileage cooperation, some reciprocal lounge access, and some modest codesharing. Alaska’s Pacific Northwest customers could connect with American in Chicago to roughly 20 Eastern cities, while American’s customers could connect with Alaska at its main hubs to roughly 20 West Coast cities. An Alaska executive described the new codeshare arrangement as “really, really small.”   

American, however, never lost sight of the potential to use Alaska to amplify its west coast credentials, just as Delta wanted to do. How much stronger would its appeal in Los Angeles be, for example, if corporate high-fliers there could use their loyalty benefits on Alaska? It certainly wasn’t going to copy Delta and build a hub in Seattle, but might it be able to expand intercontinental flights there without a hub, if Alaska was performing the hub function for it? American, with lots of B787 firepower, is indeed doing some creative things intercontinentally, announcing service to places like Casablanca, Auckland, Christchurch, and Krakow. 

But it takes two to tango, and Alaska did not seem interested. Or was it? By late 2017, it became clear that the Virgin merger wasn’t producing the benefits Alaska had hoped, at least not yet. Alaska’s once-vaunted profit margins began slipping dramatically, ending a remarkable seven-year streak in which its operating margins consistently bested those of Delta, American, United, Southwest, JetBlue, and Hawaiian. Looking for ways to reinvigorate its fortunes, Alaska said at a November 2018 investor day event that it was looking at the oneworld Connect program, a form of limited association with the alliance. It added: “We’re not considering a full membership.”

Well, it is going full-fledged oneworld, which might reflect additional pressures to revive interline traffic. In the years before buying Virgin, Alaska got as much as 15% of its total traffic from other airlines. That was down to about 7% in 2018. With its plan to upgauge to larger narrowbodies, though, it will have more seats per departure to fill, hence the renewed attractiveness of external sources of traffic, especially with Seattle running out of places Alaska doesn’t yet fly. Note also that last June, Alaska hired Delta’s former alliance chief Nat Pieper, who once ran Northwest’s groundbreaking joint venture with KLM. If there’s one executive who understands the benefits of airline partnerships, it’s Pieper. 

In the meantime, Alaska wants to win more West-Coast corporate traffic as this market grows rapidly. As CNBC recently pointed out, just five West-Coast companies — Seattle’s Amazon and Microsoft, plus Silcon Valley’s Apple, Google, and Facebook — account for almost one-fifth of the value of the entire S&P 500 index, a proxy for all of corporate America. It’s hard to win this business without offering an intercontinental network though, which is what American can provide.  

Joining forces with American also boosts Alaska’s Mileage Plan, an enormously important driver of the airline’s profits. Most U.S. airlines, including American, can make similar assertions of importance about their loyalty plans. But it’s even more the case at Alaska, whose plan many West-Coast competitors find superior to alternative plans. It’s the last U.S. airline, for example, to stick with earned miles based on distance, not revenue. The latter tends to favor only the very highest-paying passengers. The plan also features unique benefits for elite members, like waivers on fees for itinerary changes. Alaska’s loyalty plan is one of its most powerful weapons in the Seattle war it’s fighting with Delta. Now the plan has even greater utility with the new American alliance. And yes, that boosts the appeal of Alaska’s lucrative co-branded credit cards too. 

But this won’t just help Alaska in Seattle. It frankly doesn’t need much help there. In Los Angeles, Alaska is considerably smaller than the Big Three ranked by departures. Combined with market leader American though, the two can offer far and away the most robust schedules. In addition, Alaska’s Los Angeles customers can now book and enjoy their loyalty benefits on American’s LAX flights to overseas destinations like London, Tokyo, Sydney, Beijing, Shanghai, Hong Kong, Sao Paulo, Buenos Aires, Auckland, and Christchurch. Even in San Francisco, some travelers might switch to Alaska knowing it can now seamlessly sell them flights to points around the world with a single stop in L.A. or Seattle.  

Alaska, in other words, wants to be global without being global. It doesn’t want to buy widebodies. But it wants to ensure it can remain independent flying just narrowbodies. As it once said in an earnings call: “We want to ensure that when people in the cities that we serve travel internationally, they’re on our partners, so they stay in our program.” 

Keep in mind too that American is asking less of Alaska in Seattle than Delta was — just help with filling flights to Bangalore and London, not the eight intercontinental flights Delta currently offers. That would have required a much bigger commitment of Alaska’s Seattle seat inventory.   

The bottom line: Alaska needs help in California, and American is providing it. Conversely, American needs help all along the West Coast, and Alaska is providing it. It’s thus a big strategic win for both airlines, more significant for American in fact, than its loss of Latam to Delta. That’s what friends are for. 

Madhu Unnikrishnan

February 18th, 2020 at 9:00 AM EST