Alaska Air Survives Fare-War Stress
Alaska Air Group's momentum seems to be building as the airline market on the West Coast stabilizes.
After years of turbulence that brought cutthroat competition from new low-fare airlines and caused Alaska's first financial losses in history in 1992 and 1993, the parent of Alaska Airlines and Horizon Air appears to be gaining headway by cutting its costs and raising its yields from fares.
Despite continuing fare wars with no-frills Southwest Airlines of Dallas, Shuttle by United and other airlines, the Seattle-based company is showing strong signs of improvement.
As a result, analysts are raising their stock ratings. The stock - unchanged at $17.875 late today - is considerably above its low in the past year of $13.125 though still below the high of $21.375.
Bill Whitlow, Seattle analyst with Pacific Crest Securities, said he raised his rating to a "buy" from "hold." He cited strong November traffic results and management's assumption that, after a 7 percent decline in average yields from fares in the first three quarters of 1995, the fourth quarter will even out.
Alaska Air Group's third-quarter profit was $27.4 million on $419.6 million in sales, up from $24.3 million in profit and $386.8 million in sales in the same quarter a year ago. Profit per share is expected to dip from last year - Whitlow predicts $1.05 vs. $1.62 - but analysts believe market stabilization and increased yields point to long-term improvement.
Alaska Airlines flies from Mexico to the Arctic Circle, while Horizon Air serves commuter routes throughout the West. November traffic for Alaska increased 12.5 percent to 711 million revenue passenger miles (seats paid for), up from 631 million a year earlier. At Horizon, the increase was 1 percent to 66 million. Capacity increased 5.2 percent for Alaska, 6.6 percent for Horizon.
"I think Alaska has done an amazing job (in countering the competition)," Whitlow said.
One major factor beginning to show results for the carrier is better utilization of its 74 aircraft, expected to increase to an average of 11.3 hours each per day next year, from 10.8 hours in 1995.
In addition, Alaska has installed electronic ticketing and a new computerized reservation system. It already had slashed capital spending, negotiated cost-saving contracts with its work force, closed unprofitable ticket centers and cut routes.
Alaska has been meeting fare cuts instituted by competitors and has set a few of its own, such as just-announced major reductions in ticket costs between Seattle and Anchorage and Fairbanks during the holidays. On Christmas Day, one-way fares between Seattle and Anchorage are $99, and $109 to Fairbanks.
"The overcapacity situation on the West Coast is beginning to rationalize," Merrill Lynch's Michael Linenberg wrote in a recent report on Alaska Air Group. Some of the "intruders" already have cut service on a few routes, and he said United executives recently told analysts that United's non-hub West Coast flying has been unsuccessful and it will pull out of the Seattle-Oakland market Jan. 4. That's a market where Alaska has nine flights a day, and United's departure is "a very significant event for Alaska," Linenberg said.
He also raised his rating to "above average" for both the long and intermediate term. He said Alaska, the nation's 10th-largest carrier, has lowered unit costs 24 percent over the past three years to help increase its dominance despite fare competition.
Linenberg's report reveals that even with the frequent slaps from Southwest and Shuttle by United in low fares, Alaska still dominates 20 of 25 West Coast markets and is second in the five markets in which it trails.
Lowering fares to meet the competition, Alaska has managed to continue being the preferred airline, a status it enjoyed for years with token competition and when it emphasized better food and better service.
The airline leads with more than 75 percent of market share in seven West Coast city-pair markets, said Merrill Lynch. These are Juneau/Seattle, Burbank/Seattle, Ontario/San Bernadino/Seattle, Santa Ana/Portland, Anchorage/Fairbanks, Seattle/Santa Ana and Seattle/Portland.
Alaska's Seattle/Spokane market share is 57.5 percent; Anchorage/Seattle, 60.3 percent; Seattle/Sacramento, 58.4 percent; Seattle/Boise, 58.6 percent; and Los Angeles/Seattle, 47.2 percent - all the top-ranked in their markets.
Shuttle by United dominates Seattle/San Francisco and Los Angeles/Portland, partly because of participation in United's frequent-flier program. The only route dominated by Southwest is Oakland/Santa Ana.