The Sky’s Not the Limit, but It’s a Start

Brad Stricklin

Byron Krempl

David Kelly Beisiegel

Chou-Ho Huang

BA569 Team 5

Alaska Airlines:  The Sky’s Not the Limit, But It’s a Start

Company Overview:

Alaska Airlines was incorporated in 1937 and strives to be the premier carrier serving the West Coast. With a defined vision of “creating an airline people love”, Alaska is continually working to improve by providing safe air transportation, developing relationships, providing exceptional customer service, and low fares. Alaska maintains a low cost structure to help it compete as it flies up to 44 million people to 118 destinations served by Alaska, and more than 800 destinations served in conjunction with global airline partners. This networks of flights spans the United States, Mexico, Canada, and Costa Rica, allowing for Alaska to effectively serve people across North America.  

Out of the above vision flows their stated company goal (they refer to their mission as this goal set), “Our goal is to always provide safe, reliable transportation for a reasonable price, along with the caring, friendly and professional service that we are known for.”  Having chosen service as their differentiation business strategy, their stated values logically reflect that:  “To:  Own Safety (Safety is important above all else), Do the Right Thing (fly with integrity and empower employees to do right by customers), Be Kind-Hearted (and show customers you care), Deliver Performance (lead the industry by being more efficient, more dependable, and more determined than their competitors), and Be Remarkable (provide an experience leaving lasting impressions).”

Alaska’s parent company, Alaska Air Group, is run by CEO Brad Tilden who is a 27 year veteran of the firm who has risen through the ranks having started in the finance office as a controller after being recruited away from Price Waterhouse as an accountant.  He later served as Executive Vice President of Finance and then Chief Financial Officer.  With a background in numbers and finance, his specialized background proved essential when Alaska acquired Virgin America in 2016.  This acquisition has made Alaska the fifth largest airline in the U.S., with one of the youngest, most fuel-efficient fleets in the nation. Alaska aims for service differentiation with its five-part strategic plan, focusing on: 1) being safe and on time; 2) focusing on people; 3) building a deep emotional connection for their brand; 4) defending and growing their customer base; and 5) winning with lows costs and low fares. Alaska has successfully created a competitive advantage against other airlines by being ranked one of the Top 20 Safest Airlines in the World for 2017, as well as receiving multiple awards for customer excellence including the top ranking for on-time performance over the past seven consecutive years. Alaska strives to provide high quality service via a highly engaged workforce, with service standards above industry average, and superior training of employees.

Industry Dynamics:

In order to understand what ALK’s management is trying to achieve one must first understand what the major competitors in the industry are doing in order to position themselves in the highly competitive space. By establishing this industry baseline, it is our hope that one will be able to understand where the gaps in value differentiation lie as well as how ALK is positioning themselves to fill those gaps.

During the 1970s and 1980s the airline industry in the United States was highly fragmented. A major contributor to this was the numerous regulations placed on operators. These regulations would constrain what and how the airlines could operate, making firm expansion difficult to achieve. It wasn’t until 1978, when the Airline Deregulation Act was signed into law that commercial travel really began to modernize and popularize.

In the late 1980s and early 1990s the industry experienced a major shift in strategy. Airlines, no longer limited to their operations, began leaving smaller regional airports to serve the larger more profitable terminals. Additionally, several competitors started to lever up their books in order to make strategic acquisitions. While these acquisitions made sense on paper, once the country experienced a recession it left many unable to pay off their debt. As a result of these acquisitions and bankruptcies, by 1991, American, United and Delta combined had secured over 50% of the US’ commercial passenger market. This trend of consolidation would continue until present day. Today, we have the “Big 4”, with Alaska and JetBlue a distant fifth and sixth in terms of market share respectively. Below are recent transactions that major competitors undertook in order to shore up their strategic positioning:

• United Airlines acquired Continental
• Southwest acquired AirTran
• Alaska acquired Virgin America
• American Airlines acquired US Airways
• Delta acquired Northwest Airlines
• Frontier merged with Midwest Airlines (kept Frontier’s name)

Currently the US market is comprised of legacy airlines and budget or niche airlines. Members of the Big 4 operate on a national scale where SkyWest, Spirit, Hawaiian and Allegiant serve a narrower market in addition to adding one differentiating factor to their value proposition in comparison to the Big 4. Both Alaska and Jet Blue are trying to make the leap from being viewed as a regional carrier to a national brand. Below are the revenue figures (in millions), for the ten largest US carriers (a comparable company valuation document is also attached):

1. American Airlines: $42,788
2. Delta: $42,111
3. United: $38,342
4. Southwest: $21,261
5. Alaska: $8,025
6. Jet Blue: $7,169
7. SkyWest, $3,240
8. Spirit: $2,761
9. Hawaiian: $2,754
10. Allegiant: $1,548

Managing numerous factors such as oil prices, labor unions and government regulation, most of the above companies compete on three primary determinants; price, service and markets served.

Key Competitor Strategy:

Southwest is one of the few point-to-point operators left in the United States. Southwest (LUV) primarily competes on its cost structure. Management at LUV makes the majority of their decisions the potential impact it will have on its bottom line. For example, the airline only operates one type of aircraft. Operating only one type of aircraft decreases costs associated with repair & maintenance, training and turnaround time. LUV seems to implement more of a cost-leadership strategy utilizing a first come first serve seating arrangement. This does a few things for the company. First, it keeps capital expenditures down because they don’t have to invest as heavily in their reservation system as competitors. Second, it speeds up the seating process which allows the company to decrease the turnaround time which keeps its core revenue producing assets operating. While many airlines struggled during the recession, Southwest was one of the few airlines to increase their market gate share in large part because of its unique cost structure.