Alaska predicts falling revenue as competition heats up in home state

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Alaska Airlines, which has reported nine consecutive profitable years, expects unit revenue to continue declining in the coming months due to increasing competition on routes to and from Alaska, where it has traditionally faced only limited competitive pressure.

Speaking at the Bank of America Merrill Lynch 2013 Global Transportation Conference in Boston today, Alaska chief financial officer Brandon Pedersen says that unit revenue fell in April and will continue to decline in May and June.

"It's fair to say we are going to be looking at a tough second quarter," he says of Seattle-based Alaska, which reported a record net profit of $44 million in the first quarter of 2013, traditionally a difficult period for the carrier.

Pedersen attributes the profits partly to capacity changes made in recent months, including a reduction in May of flying to Hawaii in response to what he said was industry-wide over-capacity to the islands.

"The changes we have made in the business have gotten us to a point where we can generate first quarter profits," he says.

But capacity adjustments to Hawaii will not make up for challenges in Alaska, where low-cost carriers are attempting to establish a foothold.

New competition comes from Virgin America, which will begin seasonal service from San Francisco to Anchorage, Alaska in June, and JetBlue Airways, which starts seasonal service between Seattle and Anchorage tomorrow.

Alaska has historically been seen as a niche airline that generates most of its revenue from flights to Alaska, but Pedersen says that that is no longer true.

Today, roughly 18% of the airline's capacity comes from Alaska, one-third comes from the US west coast, 20% comes from Hawaii and 20% comes from east-west cross-country flights, Pedersen says. "There isn't one particular region that has a disproportionate amount of the profit. All of our regions are performing well."

Despite revenue challenges, Pedersen says Alaska is well positioned financially, with significantly liquidity, a healthy debt ratio, an untapped $200 million line of credit and 35 debt-free aircraft that could be used for collateral.

The airline, which has reduced expenses in 10 or the last 11 years, also expects costs to fall again in 2013, Pedersen says.

He adds that Alaska aims to keep costs below other large, network carriers, but does not need costs to reach levels of ultra-low-cost airlines, such as Spirit Airlines or Allegiant Air.