Alaska Air climbs through industry turbulence

As other air carriers fight for bare survival, Wall Street looks upon Alaska Airlines as the little airline that could.

Like other airlines that have cut capacity in the economic downturn, Alaska is forcing passengers to jostle as they board increasingly crowded airplanes. And starting next month, passengers will have to pay more to check the first bag.

Yet Alaska Airlines passenger loyalty has held, and at its key SeaTac International hub, the carrier is squeezing its competition.

"I've seen a very tough competitor essentially capitulate to Alaska," said Dan McKenzie, an airline analyst with Chicago-based Hudson Securities, referring to chief rival Southwest Airlines.

The airline's stock price is soaring on rising profits over the past year. With a strong balance sheet, Alaska will pay cash for four new Boeing 737s this year, including one set for delivery Thursday morning.

Because of travel patterns in the Northwest, Alaska typically books a loss January through March, then makes it up the rest of the year. The first quarter of 2010 showed a small profit.

"We're more seasonal than most airlines," said Chief Executive Bill Ayer in an interview. "To have a profit in the first quarter is quite a statement."

The financial results might make Alaska an attractive takeover target in an era of airline consolidation, but will also make the carrier expensive for any bigger fish to swallow.

McKenzie believes an acquisition bid is possible in a year or two.

But on a teleconference call last week, Ayer reiterated his standard line that "remaining independent, growing organically ... is the way to go."

In the past decade, unpredictable industry disasters — the Sept. 11 attacks in 2001, the Asian SARS epidemic in 2003, an oil-price spike of $125/barrel in 2008 and the world financial meltdown thereafter — have blasted the aviation business. Major airlines in crisis used bankruptcy to lower costs by getting out of labor contracts and canceling no-longer-affordable airplane leases.

Yet Alaska — the smallest of the major legacy carriers and the ninth-largest U.S. airline ranked by passenger miles flown — restructured itself without bankruptcy.

For a 78-year-old company that had a labor and cost structure similar to the bigger legacy carriers, it was painful.

Alaska negotiated tough labor contracts, outsourced some work, including baggage handling, and laid off staff.

Since 2008, Alaska and its regional airline sister, Horizon Air, have together shed more than 2,000 full-time equivalent employees. Just this year, 50 managers were cut.

"We've all been through a lot. It hasn't been fun," said Ayer. "We're trying to do the least we have to do, but still be financially responsible."

Coming out the other end of that, Ayer and his team must now manage through an economic downturn that has dramatically hit air traffic, especially business travel.

"The most troublesome part of it is the high unemployment," said Ayer. "It's going to be a very slow recovery."

And yet, he's found a recipe for profits: Adjust routes and flight frequencies to match demand, take airplanes out of service, fly fuller airplanes and add fees on top of low fares.

Alaska has been nimble in switching its route network. It has cut flights up and down the West Coast, by 20 to 30 percent on some routes, and reduced its service to Mexico.

When Aloha Airlines and ATA both folded in 2008, Alaska stepped into the breach of service to Hawaii. It now runs 14 flights a day to the islands from the West Coast, up from zero three years ago.

Overall, Alaska is operating with fewer airplanes.

While the airline will take those four new 737-800s in 2010, returns of six leased 737s will leave the airline down two jets by year end.

Facing an almost irrevocable downward pressure on fares, Alaska like most other airlines (except Southwest) has added fees on top of those bare-bones Internet ticket prices.

Next month, the airline bag fee changes to $20 for each of the first three checked bags, a $5 increase for the first bag. That and other fee changes are projected to bring in an extra $30 million in 2010.

But Ayer said he hopes passengers won't perceive the fees as unreasonable. He insists he's not taking Alaska toward the Scrooge-like service structure of Ryanair, where everything comes with a fee and a like-it-or-lump-it attitude.

"We're not going to take it to a ridiculous extreme," Ayer said.

For the second year in a row, a J.D. Power and Associates 2009 passenger survey ranked Alaska first in customer satisfaction among traditional North American carriers.

And after several years of poor on-time performance, federal transportation statistics show Alaska topped all the major U.S. carriers on that score in 2009, coming in second to Hawaiian.

So far, passengers have stayed with Alaska.

Airline analyst McKenzie said Southwest Airlines has cut its planned passenger capacity out of SeaTac by 24 percent this quarter compared to two years ago, while Alaska's capacity has shrunk just 8 percent.

Alaska also has gained market share against its other big competitor in the home market, United. And despite the heavy billboard advertising in Seattle lately from brash newcomer Virgin America, McKenzie's data has Alaska edging up in market share against Virgin too.

Alaska's rivals "are concluding they have bigger fish to fry elsewhere," he said.

Ayer aims to deliver a 10 percent return on invested capital, which McKenzie views as both achievable this year and "pretty remarkable and unprecedented" for the airline industry. If that return comes in, he said, it will make Alaska an expensive take-over target.

Still, he said, either Delta or American Airlines — both of which have close marketing relationships and code-sharing arrangements with Alaska — could make a move on their junior partner in a year or two.

First, Delta has to finish integration of Northwest. And American must iron out its labor situation. But later, said McKenzie, both those carriers will expand their trans-Pacific routes and may not want to share the Alaska flight connections with their competitor.

"Alaska has always been deemed by analysts as a take-out target," McKenzie said.

Alaska's stock price, which a year ago was $17.26, closed Wednesday at $42.16.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

This story was originally published April 28, 2010, and corrected the next day. The original said Alaska Air Group aims to deliver a 10 percent return on invested capital for this year. While analysts believe that may be achievable this year, the company hasn't stated a timetable for reaching that goal.