Alaska Air Seeks San Diego Niche

SAN DIEGO ( TheStreet) -- Let's just say upfront that although Alaska Airlines ( ALK) has added six new destinations at San Diego International Airport over the past year, it is not trying to build a hub.

That would be illogical, given that the airport has one very severe limitation -- a single runway -- as well as major presences by all four big U.S. carriers headed by Southwest ( LUV). Rather, in San Diego, said Andrew Harrison, Alaska vice president for planning and revenue management, "We are looking for underserved niche markets. Look at our history, that's really what we've done."

Alaska's approach has won favor from many airline analysts, giving it a sort of "golden boy" status in the industry, partially as a result of its route selection, partially as a result of its ability to leverage off its prime real estate in Seattle where it operates the only hub at one of the country's best gateways to Asia. Shares closed Monday at $59.58, up 35% this year.

Last month, Alaska began San Diego to Boston flights. In the preceding 12 months it boosted its San Diego operation with three new California destinations -- Fresno, Monterey and Santa Rosa -- as well as Orlando and Kauai. Its other destinations from San Diego are Portland and Seattle; Honolulu and Maui, and Los Cabos, Monterrey, and Puerto Vallarta in Mexico. The three California destinations are served with 76 seat Q400 turboprops flown by partner Horizon Air. This summer, Alaska and Horizon combined will offer 24 daily departures to a dozen destinations.

To the extent possible given its single runway, San Diego International is growing. In 2012, the airport accommodated 17.2 million passengers, up 2.1% from the preceding year, with about 500 daily departures. In June, US Airways ( LCC) began service to Washington Reagan National Airport, saying San Diego was the largest U.S. city without non-stop service to Washington. In November, Japan Air Lines began service to Tokyo in November, saying San Diego was the largest U.S. city without non-stop service to Asia. Fast-growing Spirit ( SAVE)added flights to Dallas in June and to Portland and Los Cabos in November. American ( AAMRQ.PK) will add a Miami flight this June. Southwest is the airport's leading carrier with about 38% of the traffic.

San Diego is a tough place to find a niche, Harrison said. "It is a lovely city, (but) it has one runway, and it will (always) have one runway. Southwest is No. 1 there, its dominant service is intra-California, and it has a heck of a lot of frequencies. Next are the big guys to their hubs. At the peak morning bank that thing is full; every major airline in country flies to its hub: Atlanta, Chicago, Dallas, Houston, Denver ...." The majors "complement their service with flow" beyond their hubs, he said. "We don't have flow.

"But that leaves some interesting point to point service," Harrison said. "The big growth for us has been to Hawaii." Alaska serves Honolulu and Maui and will start Lihue service in June." On the Boston route, which began March 29, Alaska departs at 9:30 a.m., arriving about 6 p.m., while JetBlue ( JBLU) has two flights that depart at noon and 9 p.m. "We have it timed for people who live on the West Coast," Harrison said.

Though the presence is small, San Diego is important to Alaska. "Alaska's small size allows it to make adjustments in capacity that meaningfully impact its profitability," wrote Imperial Capital analyst Bob McAdoo, in a recent report.

On the Orlando flight, which began in October 2011, Alaska operates the only non-stop. But Harrison has calculated that each day, from San Diego, "you can get to Orlando 200 different ways, on routes through hubs, some with ridiculously low fares." Also, the Orlando non-stop is a red-eye. That is good from the point of view of aircraft utilization, but not so good in terms of taking your children to Orlando. "We have loads, there is volume there, but we have a yield problem," Harrison said. "We are relooking at it: we may change the time."

Meanwhile, Santa Rosa, Fresno and Monterey "are doing OK but they take time to work." Of course, whatever Alaska can do in San Diego the carrier remains strong because of its dominance in Seattle and also in Portland. "We have a very strong brand in the Pacific Northwest," Harrison said.

In Seattle, Alaska has 260 daily peak-season departures and partnerships with both American and Delta ( DAL). Delta has been building its Seattle-Asia service. Seattle is 4,700 miles from Asia, while the other West Coast airports are 5,000 miles from Asia.

In a recent report, Deutsche Bank analyst Mike Linenberg raised his rating on Alaska to buy from hold "due to a stronger earnings outlook, an improving credit profile and a more favorable competitive backdrop." He has a $70 price target. Cowen Securities analyst Helane Becker has a buy and a $63 price target.

McAdoo calls Alaska "one of the better-run airlines." He said its "network is less competitive than those of its peers or most low-cost airlines" and "careful expansion has allowed it to grow (while maintaining) some of the highest margins of the legacy carriers." As far as San Diego is concerned, the route selection had better work, or the routes will be gone. As McAdoo has written, "Alaska has publicly committed to only grow when it can do so profitably."

-- Written by Ted Reed in Charlotte, N.C.

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