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Strategy Awards: Regional Leadership

Roughly nine years ago, Alaska Air Group embarked on a transformation plan and achieved a rare feat in the airline industry - executing it flawlessly.

As Alaska's legacy peers were embarking on their own restructuring schemes - through trips to the bankruptcy court - Alaska made a conscious decision to skirt the bankruptcy process, control its own destiny and create a "2010 plan", that last year delivered a 10.7% return on invested capital, eclipsing the company's stated 10% goal.

"They've done a terrific job getting to where they are over the last three to four years," remarked one judge.

Describing the logic behind his decision to forge his own plan to sustain viability, chief executive Bill Ayer says: "It's not the right thing to do to employees and customers. It's not right to kick investors back to zero." Declaring that in Chapter 11 scenarios "the bankruptcy judge does all the work", Ayer recounts, "We said 'why don't we do it ourselves?'"

Alaska built its plan on five major tenets - safety, a network revamp to balance seasonality, negotiating long-term contracts with labour groups to achieve market-based compensation, creating common employee incentive plans with the same goals and a fleet transition to Boeing 737s. This was to support operating efficiency that consistently places Alaska high on the list of top companies delivering on-time performance.

The results speak clearly of Alaska's success in re-organising the company against the backdrop of SARS, volatile oil prices and sinking demand, that required quick adjustments to rein in supply.

Unit costs excluding fuel at Alaska dropped 10%, from 8.73 cents in 2001 to 7.85 cents in 2010. Last year was the first since 1999 that Alaska Air Group recorded adjusted net profits in all four quarters, driven by its aim to eliminate the risks associated with seasonality in its network.

Alaska saw an opportunity to capitalise on expanding services to Hawaii, after Aloha Airlines and ATA became victims of the 2008 economic downturn. Services there now account for roughly 15% of its network.

Executives recognised the importance of working with employees during every phase of the transformation plan, and workers across the business are reaping the rewards of their commitment.

Under the performance-based pay programme designed by Alaska, the majority of employees have a target bonus of 5% equal to pay, and in 2010 the payout was 185% of target - and more than 9% of pay.

Ayer stresses that employees at Alaska truly understand the interdependencies that exist in airline operations. "You can't operate in silos," he adds, and explains that "what gets measured gets managed".

Throughout its transformation, Alaska has taken great care to measure elements of the business that were not gauged in the past.

As Alaska began its transformation process, the company recognised the airline industry spends a disproportionate amount of time worrying about issues outside of its control, Ayer adds.

Using that mindset as a baseline, Alaska has adhered to a catchphrase used by Ayer as "being realistic and optimistic". That philosophy has translated into an impressive financial and operational performance, as Alaska recorded its seventh consecutive year of adjusted profits in 2010. And Ayer stresses: "Just to be clear ­- we won't grow at this rate if conditions don't permit."

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