ANALYSIS: Alaska eyes fleet, network and brand strategy for 2014

Washington DC
Source:
This story is sourced from Pro
See more Pro news »

Alaska Air Group plans to continue the strategies that have proved successful into 2014, as it aims to maintain its return on invested capital of 13% this year.

This includes continuing to streamline its fleet around larger Boeing 737 aircraft, maintaining tight unit cost control, continuing its network and codeshare evolution, and updating its brand for the first time in more than two decades, say executives during an investor day on 14 November.

“This is a company that’s producing almost a $1 billion in cash flow today,” says Brad Tilden, chairman and chief executive of Alaska. “We’re using that cash flow to buy new, modern, big airplanes that help us offer low costs, low vulnerability to fuel prices [and] give our customers exactly what they want. We’re using that cash flow to pay down debt, fund pensions and return capital to shareholders.”

FLEET

Alaska plans a net increase of two aircraft to its mainline fleet on deliveries of 10 Boeing 737-900ERs in 2014, says Andrew Harrison, vice-president of planning and revenue management at the carrier. However, it anticipates a 5.4% increase in available seat miles (ASM).

The carrier will remove three Boeing 737-700 and five Boeing 737-400 aircraft during the year, he says. The 737-400s have 144 seats, the -700s 124 seats and the -900ERs 181 seats.

“This is extremely efficient growth,” says Harrison.

The 737-900ER costs 10% more to operate than the -700 but generates 20% more revenue, he says. Compared to the -400, the larger narrowbody costs 2% less and generates 14% more revenue – a 16-percentage point difference.

This growth will continue. Alaska plans to remove six 737-400s and replace them with -900ERs in 2015, eventually removing more than 20 aircraft during the next few years, says Harrison.

The carrier has 24 737-400 and five 737-400 combi aircraft in its fleet, Flightglobal’s Ascend Online database shows.

In addition to the upgauging to larger 737-900ERs, Alaska will retrofit its 737-800 and 737-900 fleets with new Recaro slimline seats by the end of 2014. The cabin upgrades will add six seats for 163 to the -800s and 11 seats for 181 to the -900s.

The airline has 61 737-800s and 12 737-900s, according to Ascend.

The fleet at Alaska’s regional subsidiary Horizon Air will remain flat with 51 Bombardier Dash 8 Q400s in 2014, according to a 14 November fleet plan.

UNIT COSTS

Cost control is an operational issue at Alaska, says its chief operating officer Ben Minicucci.

“The rubber meets the road on execution,” he says of his team. “This is where we hit or we don’t hit CASM [costs per available seat mile].”

CASM excluding fuel will increase between half to one percentage point in 2014, says Minicucci. This is driven by investments in information technology, the implementation of new labour contracts with higher wages and a pending brand update.

“We are not happy about the fact that we’re going to be up next year,” say executives during the investor day, despite the fact that the increase is small and better than most other US carriers.

Delta Air Lines, Southwest Airlines and United Airlines – Alaska’s largest competitors along the west coast – all saw comparable or higher unit cost excluding fuel growth during the third quarter. The metric was up 1% to 8.64 cents at Delta, 6.8% to 8.75 cents at United and 1.2% to 8.11 cents at Southwest.

Consolidated CASM excluding fuel rose 1.4% to 8.16 cents at Alaska during the third quarter and is expected to be up slightly for the full year.

Looking further out, Tilden outlines a long-term strategic goal of 7-cent unit costs excluding fuel.

NETWORK COMPETITION

“2013 is the most competitive year this company has seen in a long time,” says Brandon Pedersen, chief financial officer of Alaska.

The carrier saw its codeshare partner Delta begin service on its bread-and-butter routes from Seattle to Anchorage, Las Vegas and Los Angeles in 2013, and announce plans to begin flights between Seattle and Portland (Oregon), San Diego and San Francisco in 2014.

JetBlue Airways and Virgin America have also expanded in some of Alaska’s core markets from Portland and Seattle.

Tilden has said repeatedly that the airline will “vigorously” defend these markets.

“We’ve known… that more competition would be coming,” says Harrison, though he adds that they may have been surprised by who it was.

As a result of Delta’s recent encroachment in Seattle, revenue generated by Alaska’s codeshare with the Atlanta-based carrier is expected to fall while revenue from its other partners will grow.

“There’s a changing landscape with our partners,” says Harrison. “What I do believe is, over the next 12 months if I was standing before you, I think that you’re going to see that American number grow, especially as it looks like the DOJ [Department of Justice] is going to allow American and US Airways to merge, and you’re going to see that Delta number shrink.”

Delta contributed about $235 million and American about $165 million to Alaska’s roughly $5 billion in operating revenues during the year ending in September, according to the airline.

Network-wise, Alaska has shifted some connecting capacity to Portland International airport in order to open up more seats from Seattle Tacoma International airport to local traffic during the past year, says Harrison. This has helped it drive up passenger unit revenues by 9% in the year ending 30 September.

“[Portland] was a grass roots effort from my network team,” he says. “We’ve seen some great results from that.”

BRAND

Alaska’s pending brand update is arguably one of the most sensitive among its brand-loyal customers. Disclosed during its third quarter earnings call in October, the update will keep the iconic eskimo, which has adorned Alaska aircraft since the 1970s, but is otherwise up for a refresh.

“Our brand is really good defensively,” says Tilden. “If people are in our system, if they’re in our mileage plan, there is loyalty to this company. We want the brand to work a little bit better offensively so, if we went to a market like San Diego and we’re flying San Diego-Orlando [and] San Diego-Boston, people know what is great and what is compelling about this company.”

Sprague elaborates saying that the Alaska brand is less known in “key spots in California” where the airline would like to have stronger local point-of-sale.

The carrier is targeting travellers that it calls “everyday explorers” – people who travel for business but also for fun.

“I’d like to put a bid in for the facelift, if it happens, for a clean shaven Eskimo,” jokes one Alaska investor. “I think it’d be a good change.”