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Seattle, WA 98168
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Alaska Airlines is a listed US airline, with bases at Seattle, Anchorage, Portland and Los Angeles International airports. Alaska Airlines started as a small regional airline, and today serves over 60 cities across the US, Canada and Mexico. The airline's operations are based largely on the West Coast of America, with transcontinental and international service operating from its West Coast hubs. It is not currently a member of a global alliance, but has bilateral codeshare agreements with carriers straddling the major groupings, including Qantas, American, LAN and Cathay Pacific (oneworld), Air France-KLM and Delta (SkyTeam) and Air New Zealand (Star).
Location of Alaska Airlines main hub (Seattle/Tacoma International Airport)
Alaska Airlines share price
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Excitement exuded by Allegiant Air a year ago over its then-impending service launch to Hawaii has been dampened by the realities of operating the market. Allegiant has admitted the dynamics have changed in the US-Hawaii market place since it opted to acquire Boeing 757s during 2009 to link its small market US destinations with Hawaii. Now the carrier is tempering its expectations for its expansion into Hawaii and reining in capacity as a means to bolster its performance from the US west coast to the Hawaiian islands.
Allegiant is likening its seasonal capacity management from the US to Hawaii to adjustments it regularly makes in its Florida markets to properly align its supply with demand. But it is unclear just how firm the airline’s commitment is to Hawaii as it has not assured that some routes undergoing a seasonal suspension will return, and has hinted its Hawaiian operations are likely to be smaller in scale than originally planned.
Delta Air Lines continues to leverage the competitive strength it holds over its US legacy peers to flesh out its network and build pockets of strength as United and Continental remain in the throes of their merger integration and American and US Airways lay the groundwork to begin the complex process of combining their respective organisations.
During the last couple of years Delta has used the nimbleness it enjoys versus its legacy domestic competitors to broker equity investments in foreign carriers to build a robust network ahead of the completion of US consolidation. Those investments have moved in tandem with Delta’s bolstering its presence in New York through its slot swap deal with US Airways and its investment in facilities at JFK and LaGuardia airports.
During 2013 Delta is attempting to strengthen its position in the fragmented but strategic Los Angeles market through a 12% boost in daily seats year-over-year from Jul-2012 to Jul-2013.
Alaska continues to face challenges getting investors to acknowledge its solid financial performance
Alaska Air Group during the last few years has consistently outperformed its US carrier peers in a financial metric – return on invested capital (ROIC) – that is prevalent in discourse in other industries but has only surfaced in discussion among airline executives during the last few years. Since 2010 the carrier has exceeded its ROIC targets on an after tax basis and has posted annual profits for the last nine years. Despite its consistent profitability, Alaska’s robust financial performance is often overlooked by the investment community, leaving executives scratching their heads as to why the company’s consistent financial results are not more recognisable.
Even as Alaska delivers consistent profitability, questions often arise over the company’s growth prospects at its two subsidiaries – Alaska Airlines and Horizon Air (which now operates under the Alaska banner). The carrier holds an advantageous position as the leading airline in Seattle, where it can feed into long-haul flights operated by its partner Delta Air Lines. It also has a strong relationship with American Airlines, but it is not certain how that partnership will evolve once American and US Airways close on their merger and complete a roughly 18 month-long integration process. Alaska does have the opportunity to flesh out its domestic network, and remains bullish that it will still deliver sound financial results with planned annual capacity growth of 4% to 8% during the next few years.
American and US Airways are pressing full steam ahead to close their merger by 3Q2012, including stressing to US legislators that the combination will improve the overall health of the country’s airline industry and make the merged airline a more viable competitor with legacy and low-cost carriers alike. With just a dozen routes that overlap, the carriers should not encounter any resistance from anti-trust authorities, and given that most the markets are hub to hub pairings, few changes are likely to be made to service patterns once the 18 month integration process is complete.
Some of the arguments made by American and US Airways over increasing competition from low-cost carriers and their potential service expansion into overlap markets might be overblown as those airlines in previous mergers have been selective in grabbing the low hanging fruit created by the tie-ups between Delta-Northwest, United-Continental and Southwest-AirTran.
US airlines moved closer to the razor’s edge during 2012 after collectively recording a profit margin of 0.1%. While the 10 largest airlines in the country may be commended for sustaining a three-year profit streak amidst record high fuel prices, they could find it tough to find creative ways to continue to achieve profitability as the potential to tap ancillary revenues reaches its peak.
On top of the seemingly everlasting threat of fuel price volatility, US carriers also face various forms of pressure from the US government, with looming threats of tax increases, as well as possibly significant operational disruptions triggered by bipartisan stalemate in budget negotiations.
Data compiled by US airline trade group Airlines For America (A4A) show the country’s largest carriers earned USD152 million during 2012, a 64% slide from the USD418 million in net income recorded the year prior. ExxonMobil earned around that much each day in 2012.
The 4.7% increase in airline expenses outpaced a 4.5% rise in revenue growth as fuel prices reached an average of USD128 per barrel during 2012. A4A estimates US carriers recorded USD50 billion in fuel costs during 2012, a 28% rise year-over-year.
US carriers Alaska and Southwest conclude trends are pointing to solid demand at the start of 2013 despite the expiration of certain tax breaks threatening to dampen consumer appetite for travel. Both carriers cite favourable booking trends as overall industry capacity remains disciplined. But Alaska during 2013 will be one of the few carriers to increase its supply relative to the industry as it expects capacity growth of 7%-8% versus 2% growth for Southwest and virtually flat to negative growth among the large US network carriers.
Alaska appears poised to replicate the results it garnered from its higher than average capacity growth in 2012 of 6% compared with a range of negative 2% to 2% growth at US legacy airlines. While Southwest had 6% comparable capacity growth to Alaska during 2012, the Dallas-based carrier plans a 4ppt drop in capacity growth year-over-year to 2% for 2013. Despite the higher than average expansion of supply, Alaska grew its top-line revenues by 8% during 2012 to USD4.7 billion. Expenses grew 7% to USD4.1 billion, which helped lift the company’s operating income 18% to USD532 million.
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