Despite reporting record net income for the first quarter of 2013, Alaska Airlines' executives are concerned about excess capacity on some of the its prime routes and encroachment by competitors into the Alaska market.
"The state of Alaska is our big challenge. We are seeing a lot of carriers bring their metal into the state of Alaska this summer," says Andrew Harrison, vice president of planning and revenue management, during an earnings call today. "The main story, really, is the state of Alaska."
Executives say that in the second quarter of 2013 other airlines' traffic to Alaska will increase 22% compared to last year. That number will jump to 35% percent in the third quarter.
Among carriers adding flights are JetBlue, which is starting service between Anchorage and Seattle in May, and Virgin America, which in June will begin flying from San Francisco to Anchorage.
Alaska competes with those same carriers in California markets, where some carriers are currently pricing flights $10 to $20 cheaper than a year ago, Harrison says.
Pressure from low-cost carriers has not stopped Alaska from turning a profit.
The carrier reports net income of $44 million for the first quarter, the highest ever, up 57% from the same period last year.
Alaska's adjusted net income was $37 million, compared to $41 million during the same period last year.
The financial results came in what is typically the airline's weakest quarter, says Alaska Air Group chief executive Brad Tilden in a statement.
The carrier's capacity climbed 8.7% from the same period last year, largely a result of new east-west mainland routes, executives say.
Since the first quarter of 2012, Alaska has added flights from the US west coast to Philadelphia, Pennsylvania, Washington, D.C., San Antonio, Texas, Kansas City, Missouri and the Florida cities of Orlando and Fort Lauderdale.
Alaska has also added flights to Hawaii from Portland, Oregon, Bellingham, Washington and Anchorage, Alaska.
The financial results represent the "nimbleness we're gained in tailoring capacity to demand," Tilden says in the earnings call. "We have been a solidly profitable company for several years now, and we expect the same thing this year."
Tilden says Alaska's passenger revenue per available seat mile (PRASM) increased in January and February, but declined 2.% in March, due partly to excess capacity in Hawaii markets.
In response, Alaska is cutting Hawaii flying. Later this month, it will downgrade to four-times weekly its daily flights from Kona, Hawaii to San Jose and Oakland in California. The carrier will make further reductions in the fall, resulting in a 6% year-over-year decline in Alaska's Hawaii flying by the fourth quarter.
An ongoing $100 million cabin upgrade initiative should help Alaska compete against low-cost carriers and reduce overall costs, Tilden says.
The initiative includes the installation on Boeing 737-800s and 737-900s of Recaro "space enhancing" seats. The slimmer seats, which will be installed by 2014, will allow the airline to add six extra seats on the 737-800 and nine on the 737-900, resulting in a 2.5% increase in Alaska's total seats, Tilden says.
"We know that to compete with LCCs we have to bring costs down," he adds. "This will enable [Alaska] to increase seat density and get closer to the low-cost carriers."
The airline is also adding 110-volt power outlets and USB ports at every seat on the 737-800 and 737-900.