Alaska Air Group on returning to profitability and plans for the future

Transcript

Karen Walker:

So hello everyone. I'm Karen Walker and a very warm welcome to CAPA Live, where I'm absolutely delighted today to be joined by Ben Minicucci, who is the CEO at Alaska Air Group, parent company of Alaska Airlines and Horizon Air. Ben was promoted to the top job in March after a 17 year career at Alaska, where he is overseeing the integration with Virgin America and previously served as president and chief operating officer, Ben a very warm welcome to you. And thank you so much for your time today I'm really looking forward to this discussion.

Ben Minicucci:

Great. Karen, thank you for having me. I'm looking forward to our discussion as well.

Karen Walker:

So Ben can I ask you to maybe just start us off here a little bit with what the scene is at the moment with passenger recovery, which I think is starting to look pretty strong on the domestic front in America and the financial status of where things are looking now and expectations perhaps down the road a little.

Ben Minicucci:

Yeah. Thank you Karen. No things are looking really good right now compared to three or four months ago, maybe just to give you a sense. In the first quarter of this year we lost $570 million in the first quarter, which was a massive loss. And as we were going through the first quarter we weren't seeing a recovery coming. Then towards the end of March, going getting towards the end of March and into the second quarter, there was just a step change in recovery. Leisure demand started coming back and it's been robust ever since. So for the last three months, we've seen a dramatic change, a dramatic recovery. We're pretty much seeing leisure demand come back to a 100% and in some cases, well, over a 100%. Business I would say is not quite there yet it's at 25%.

So going from a $570 million loss in the first quarter to something where we're going to approach breakeven is what we're hoping, but we're going to get something to close to breaking even. So looking at a swing up Q1 to Q2 with a massive swing and I've been in this industry for 25 years, I've never seen such a dramatic swing in financial recovery. And then the third quarter were expecting to be profitable back to a solid footing. So just a dramatic, dramatic change over the course of six, nine months.

Karen Walker:

So it doesn't take away from just how difficult of course the situation has been for everybody. But like you say very good news. And I think it really is proving that point that when people feel they want to travel, they're really coming back. They really want to travel.

Ben Minicucci:

We've just seen it and I think in our country the vaccinations have proven to be the catalyst. People confident to come back and it's quite remarkable just how quickly it's come back. And I was worried a little bit about volatility of it coming back and dipping again. But with infections staying low, death staying low and just the pace of vaccinations increasing, I think the traveling public after 12, 15 months of being cooped up are saying, "Look we want to get out and our leisure markets are strong and we're primarily a leisure airline so it's been good for us.

Karen Walker:

So people want to connect again. And as you say that primarily leisure, but can we just focus a little bit on the business side because there's still quite a lot of concern about that. As you say, it's Alaska's advantage that you're so strong in the leisure market, but business travel is still an important element. What's your sense there about when that could start to turn the corner, is it going to be after the summer season, after the Labor Day or is it going to even take longer than that?

Ben Minicucci:

So Alaska is primarily a 70/30 mix is what I tell people we're 70% leisure, 30% business. So the business portion is extremely important and they're usually higher yield traffic. So it's important to not only to Alaska's business but the whole industry. What we're seeing is at least now business traffic from small, medium sized businesses is starting to increase. So we're seeing somewhere 25%, 30% of our business traffic from 2019 levels. But I think as we talk to corporate customers, as we talk to small and medium business owners. I have a lot of friends that I ride my bike with and they're all... they work for Microsoft, Amazon, they have their own company and they're starting to tell me, "Look, I booked my trip. I booked my travel trip I'm going to go see a customer. My company's relaxing its travel policy."

So what I'm seeing is the business thawing out. The business restrictions thawing out and what we're planning is for the 4th quarters to go from 25 to 50% of our business traffic coming back. And that's what we see is about 50%. If you talk to other they may be talking about this thing, having a similar rebound as leisure demand. I don't know about that, but we're going to take an approach that we're going to see about 50% of it coming back. And then it just building towards the latter part of the year and into 2022. Now I was asked on the weekend from some other folks, do I see it coming back to a 100% of 2019 levels tough to say.

Would you fly down here Karen to talk to me in person for 30 minutes or an hour chat, maybe if you had some other business students in Seattle, you would, maybe you wouldn't. But my sense is that we're human beings, we need social interaction. We need to connect with each other. This is a great substitute, but it never just makes up for that human to human interaction so we'll see where it lands.

Karen Walker:

It's an interesting point actually an aside here, but related is that I was talking to someone earlier this morning related to a big CEO event that was happening. And they raised the point about the G7 Summit that starts this week in England. And they were saying there's a reason they're not holding that summit via Zoom, for deals to be made people have to be in person. And I think what you're probably going to see is that once people realized that some are getting out to make those deals in person, others will catch up fast.

Ben Minicucci:

Well, sure and I think you just got to build the relationship. And things that happened before a virtual meeting and after that you can't capture in person. Those quick casual conversations they could be two, three, four, five minutes long, but you're making personal connections. You're finding out about people. Deals are made through trust. There's the financial construct of a deal, but there's also getting to know and trusting the person you're doing business with. And like I said the virtual world has done a great job of keeping us somewhat connected, but I think that person to person is something you we can never replace.

Karen Walker:

Now a big event for Alaska this year was joining Oneworld, the Oneworld Global Alliance. I think that's interesting in that there was a lot of synergies there with American Airlines particularly, but also Oneworld prides itself, it tends to be brand itself a little bit as the business global alliance. So very strong synergies there too. So talk to me a little bit about the aspirations for Alaska in that particular alliance.

Ben Minicucci:

Oneworld is just a fantastic alliance we're so proud to be part of it. We had some partnerships with some of the carriers before, relationships before and this just solidifies those relationships in the Oneworld brand. But for us if you take some of the west coast hubs we operate, we'll start with Seattle. We have five of the biggest companies in the world based on the west coast. Just here in Seattle, you have Amazon, you have Microsoft yet you have Boeing, you have you have Nordstrom's, you have Costco, you have REI, you have Expedia, you have all these big, big, big companies that are just headquartered in Seattle. And when you look at our domestic network here, we have the largest domestic network. We go to almost a hundred destinations, 350 flights a day.

And you couple that with the one world carriers that are in Seattle connecting to a thousand destinations around the world, 150 different countries, the elite reciprocity that's going to happen. The seamless seamlessness that we're creating. Oneworld it's just a phenomenal value proposition that we can bring to these corporations that are looking for having their employees travel around the world, but also on the leisure side that we'll take advantage, it will be the leisure business side. So we're really excited about that. And then from Seattle a lot of these carriers operate out of our other hubs, out of Bay Area, out of San Francisco and out of Los Angeles, out of San Diego, out of Portland.

So we're really excited on this west coast platform that we're partnering with our one world partners and with American to provide this opportunity for these customers from the west coast, get to wherever they need to go, within the US with American and us and around the world with all these global carriers.

Karen Walker:

And it's interesting also I think that if you go back to 2019, maybe 2018, 2019, there was starting to be a little bit of a cynicism about some of the global alliances. Are they really going to continue, have they got too big, et cetera. And it seems to me that people are having a reverse of that thinking now, that actually what were seeing now is that this is being part of these alliances, having these sorts of partnerships, it's probably more important than ever. Would you agree with that?

Ben Minicucci:

I do. I think the partnerships they have to be done, right. I think customers who fly them do need to have a seamless experience. I think that's important. So you got to do a lot of work on the back end to make sure that their status is recognized, whether they're flying Alaska where they're flying British or Quantis or Japan Airlines, or American that they feel like, "Hey, it seamless for us." I think that is one of the keys that I think for customers they would see a ton of value, "I can go into any alliance around the world. I'm recognized with my elite status, bags, priority boarding, priority baggage all those things. I think if we do a good job doing that then I think we can provide just a bigger experience for customers. And I think it allows each airline to really focus on what they do well in the regions they do well.

Because right now as we come out of the pandemic, there's balance sheets to repair, there's fleets to get rationalized, there's cost to get under control. And I think these partnerships are going to be even more important as we look at taking care internally of what we need to do to get out of this pandemic strong financially, and yet still provide customers just a broad array of services.

Karen Walker:

And to keep your network not just rebuilding it, but really expanding it through those partnerships. So let's talk a little bit about that the network and how you're again rebuilding that. I'm particularly interested in I think you've just added Belize, I'd like to hear a little bit more about the Latin American route network how that's going and California.

Ben Minicucci:

So we're really excited. I think what the pandemic allowed us to do as business traffic pulled back, we started looking at some of these leisure markets that were opportunities for us and they were on our radar but it just allowed us to accelerate. So Belize is just an example that we were working on that says, "Look, I think it's a great destination for Seattle-based customers." So coming into this pandemic we took our S our capacity down to less than half of what it was in 2019 and we slowly started to rebuild it. We were really focused on the Pacific Northwest. We focused on Seattle, rebuilding Seattle really strong and fortifying Seattle. Continuing to build Alaska our connections to Alaska in Portland and some of our regional cities that we fly in the Pacific Northwest.

So that was a huge priority for us is we rebuilt our network. And connecting some of these Pacific Northwest destinations to California. So the two things that we're doing is we're connecting the Pacific Northwest to California, because what we're seeing is and who knows where this goes. People working from home they can work from home from almost anywhere and these are beautiful places to go some of these Pacific Northwest cities that we have here in the area. California, hasn't opened up as quickly as the rest of the country as you know, it's been a little slower. I think it opens up June 15th.

I'll be going there at the end of the week. Actually, my son is graduating from UCLA so I'm anxious to see how the city is doing. But we're slowly rebuilding California we're at 50% in California. And the goal is by the end of this year going into 2021 or toward 2022 we're going to build California back up to where we were pre pandemic, so that's our plan is to build that up. And California is still a big part of Alaska's strategy.

Karen Walker:

And you mentioned the regional network there touched on that Horizon Air of courses is your regional airline. You've just bought some more, ordered some more Embraer E175s. So again, talk to us a little bit about what those 175s will give you additionally and what's happening on the regional market?

Ben Minicucci:

Well, it's been a huge benefit having horizon as part of our family and SkyWest as a CPA provider. So these ones 175s, what we use in the Alaska network is a couple of things. One, they provide phenomenal fleet to our main line... our main line of fleet but they also help us explore new markets. It's a fantastic airplane. It's a new market where we're not sure we're going to put a 37, but we put on 175 if it works we're stimulating demand, we'll swap it to a 737 fairly quickly.

We did that with a few markets in 2019 it worked really well. So we look at exploring new markets and some markets that we fly are thin. So the 175 is perfect. State of Alaska is a few thin markets that make sense in the Pacific Northwest and in California. So the 175 is just a fantastic airplane as we grow our network. We use it to expand and grow our network where the workhorse is the 737. So we're excited to do it. It's a great airplane. Customers love it. And we're looking forward to bringing 10 more 175s on in the next 12 months.

Karen Walker:

And you've also referenced SeaTac a few times, obviously your base is Seattle. As this buildup happened. And as you say some of it is coming back pretty, pretty quickly, pretty rapidly. So that means all of a sudden airports are going from empty to pretty full again in this new environment. What's the relationship been like with SeaTac and how well between you do you feel you're able to manage sudden surges of passengers, which is good but within the new context of the virus.

Ben Minicucci:

Our biggest hub is Seattle, and it's really important that we have a great relationship with SeaTac with the port of Seattle and we do. We meet with the Port of Seattle on a quarterly basis. I think it's a type of relationship where we try and work to solve each other's problems. So one of the issues we had in 2019 with the airport and in the past was number of gates. So a lot of projects were started, there's I think up to 10 gates coming available here in the next 12 months. And so gates were an issue in Seattle and hopefully it's going to get resolved. Airspace is a big issue at SeaTac. Going back to 2019 Seattle's become just a booming city, everyone wants to come here.

So managing the traffic congestion in Seattle is one of the things that we still have to work on with the Port of Seattle. And I think in this new world with the pandemic, making people feel comfortable with the airport experience is something we're going to work together with. And right now they've introduced where you can select a booking time to be in the TSA line. TSA is always a choke point, so we're working with the port of Seattle and TSA to find ways to make it easier for people to navigate through the airport, which is something that people want that sometimes they experience that's most distasteful what's coming through TSA. I would just say the relationship is strong. We meet with them often, they've met with our board, so we continued to just nurture that relationship.

Karen Walker:

I'd like to switch gears a little bit here now to just some broader industry topics if you like and again how as this industry comes back, how things could be permanently changed. One of that is the relationship with the investor. Part of the tragedy here is that after so long of people being cynical about whether if airlines were good investments, we were seeing that change particularly here in the States. And much of that has been upended. The industry is going to come through this but heavily indebted. What's your viewpoint on just how has the relationship changed with the investor?

Ben Minicucci:

It's funny to say we had an investor conference last week or the week before in person in New York, which was good to get in front of investors and talk about our airline in the industry. Alaska is in a unique position I think. We entered the pandemic in great financial strength going into the pandemic and we're exiting and we're grateful, but we're exiting with the same level of net debt. So we have not taken on any more debt levels, which puts us in a strong financial position. It's one of the reasons we put in a huge deal with Boeing, we ordered 120 Boeing MAXs, 81 are firm and we've got 39 that are options left that we will likely exercise over the next couple of years. But the financial strength that we went in with and financial strength we're coming out of it really positions us well to explore more options and really position Alaska to take advantage of whatever this pandemic allows us to do.

So we feel grateful for that it's not everyone's case, but just speaking for Alaska we're feeling pretty good coming out of the pandemic from a financial perspective. I think investors want to see airline managements that are managing debt levels, liquidity, in terms of cost management, I think is important for them managing yields going forward. So these are things that are very much in our windshield in terms of as the recovery, the leisure recovery and the business recovery comes back how do we position Alaska to be in the best place? So I'm feeling pretty good Karen coming out of it, 12 months ago I may not have said that but no we feel pretty good where Alaska is.

Karen Walker:

So it's interesting because what really what you're saying is that the financial strength you had going in, which is not the case with all airlines is what's giving you both flexibility that you needed through while you're dealing with this, but also continued trust from your investor community, yes?

Ben Minicucci:

Yes. It's exactly that. I think they look at us, they look at our liquidity, they look at our balance sheet strength and they're feeling good about Alaska. And if you look at our stock price over what was pre-pandemic and post pandemic were pretty much where we were pre pandemic. I think it's a vote of confidence for Alaska

Karen Walker:

And then the other hot issue right now generally and specifically for aviation is sustainability. Alaska's net-zero goal by 2040, that's a pretty high bar. Talk to me about the parameters you have to get to that and why that's so important.

Ben Minicucci:

We set a goal 2040. For airlines setting a net-zero goal it's an audacious goal because what we do is we burn gas to run our business. And I always tell people, this is not like you're trying to improve energy efficiency of buildings or something like that. This is complicated, their audacious goals because we burn gas as a company. When we talk with our board, our board asked us, "How are you going to get there? Show us the plan how are you going to get there?" So our plan is it's a five point plan.

One is one first you got to create a culture of operational efficiency within the airline. People need to know everything we do is about efficiency so that's goal number one. And we've tied those carbon goals to everyone's bonus program, including the frontline employee, the ramper, the pilot, the flight attendant, the mechanic is bought into carbon goals starting this year and it's part of our path to net-zero. So one is a culture of efficiency.

Karen Walker:

So that's personal it's getting it to a real personal level.

Ben Minicucci:

The second plan was fleet renewal. We had Airbus, older Airbus airplanes from the Virgin acquisition that are being replaced with a Boeing 737 MAX that on a seat basis are almost 25% more fuel efficient than the Airbus, the older Airbus so that's the second step. The third step is sustainable aviation fuels. This is the one component that will have the largest impact for airlines around the world in terms of reducing its carbon impact. There's a lot of work to do here in terms of supply feedstock availability. And I think over the next 10 years this is where the industry... I think in conjunction with government and outside companies have to do to really reduce our impact on the environment, sustainable fuels is the third component, the fourth component is emerging technology. So there's a lot of R&D being done, a lot of innovative companies getting into the hybrid electric, hydrogen world.

And this is not for tomorrow or in five years, but maybe in 10 years we'll see some small passenger airplanes using hybrid electric. But in 20 years there could be something on the regional space that happens. So we're working with emerging technology companies and seeing where we can invest in, so that's something that we're working on. And then the last step is something it's carbon offsets but we want to use real credible carbon offsets. We don't want to use carbon offsets that people are dismissing and saying, "Well, you just doing that because you don't want to do the hard work."

So this is something that we're researching, carbon sequestration and all sorts of emerging technology along those lines. So that's our five step program and it's aggressive. I will tell you it's aggressive, but sometimes you have to put an audacious goal out there to get there. But I think our employees are excited, I think our employees want to... It's part of our values of doing the right thing, and part of doing the right thing for the environment and the climate and leaving a better planet to our children is setting these goals and trying to attain them.

Karen Walker:

I feel good about actually being actively involved in these programs. You talked about efficiency and technology there as two of the roots there, probably crossing over that. And I'm going to ask you to explain this a little bit more, but there's this artificial intelligence deal that you've done with Airspace Intelligence from Flyways. Explain that because I think that's really interesting.

Ben Minicucci:

So this was something we took on a couple of years ago, simply because again we were trying to solve efficiency issues coming in and out of Seattle. We had a lot of traffic congestion and some of our just innovative people in flight ops said, "There's companies looking at artificial intelligence and machine learning," which is something we were starting to dip our toe in along all parts of the business is saying, "How can this help us?" And what they've done it's really interesting over the last two years partnering with them is it's the best way I can describe it is waves in the sky. You have a flight our dispatchers produce a flight plan it could be from Seattle to DC, and what this application does is it continually monitors and optimizes your flight plan throughout the flight.

And so as traffic changes at destination, as weather changes along the way, it continues to optimize the route based on past learnings and projecting what's going on in the future. So we've seen tremendous savings with this already. Not only do you waste less gas because we're going to use less track miles to get from point A to point B, we're going to improve our block times less time in the air. And so it's simply a win-win, the technology is solid, and we're hoping to continue to evolve it over the next period of time.

Karen Walker:

Excellent. Finally, if I may, I'd like to just talk to you a little bit about something that is just a key signature I think of Alaska as a company, I would call it the Alaska spirit. You have this mantra of do what's right. And that's at the company level, the employee level, as well as the customer level. How do you maintain and in fact grow that spirit, especially in very stressful times.

Ben Minicucci:

So like you mentioned at the I've been here 17 years, and the one thing I love, love, love about Alaska airlines is our culture and it's our values and something we live by every day, and do the right thing and being kindhearted. We have five values own safety, do the right thing, be kindhearted, deliver performance and to be remarkable. Do the right thing and be kindhearted those two anchors for us is about everything we do every day. And we continue to talk about it everyday when we... Anything we do with a customer or with employees or with the community, we did our Commitment airplane on social and racial equity. That was all the catalyst behind our values about doing the right thing and being kindhearted. One of the ways we keep it alive is we have a culture of empowerment.

And we tell people that, that you're empowered to do the right thing, whether it's between each other as employees or with an interaction with the customer. We have a framework of empowerment that we've established with employees that says as long as it's not a FAA regulation, or a VOT regulation. That if it's a company policy that we've created that has no safety implications or regulatory implications or compliance issues, that you're empowered to make exceptions to that policy based on the situation that's in front of you. You don't have to call a supervisor or manager to come arbitrate it, you're totally empowered. And we trust you, we trust you to do what is right. And I think our customers love that, our customers know that when they call that our employees will listen, will be kind and will assess and make a decision that's right. And it's something that I believe strongly about. It's something that I'm intending to nurture and push on because I think it's one of our differentiators as a company.

Karen Walker:

Absolutely. And you've been doing a lot of this in terms of the issues like diversity and all these issues that we've also been seeing come to the fore in these last 15 months as well. I think you've got a partnership with USCF, that's right, which is basically tying education programs.

Ben Minicucci:

It is. It is.

Karen Walker:

Does that connect to diversity, is that?

Ben Minicucci:

When we had the tragic deaths of George Floyd, Ahmaud Arbery and Breonna Taylor our employees were shaken. And we had listening sessions with our employees and we realized that we needed to do something. And something internally that again put our commitments on the line to say, "What are we going to do to advance racial justice and equity within our own company and hold ourselves accountable to it?" One of the ways we said one of the paths to that is through education. We know that education can be an equalizer to equity, racial equity and justice. And so we're investing heavily on that within the company and outside.

But the other thing too is we've made commitments to improve representation in Alaska. So today a third of our workforce is BIPOC black, indigenous and people of color but only 16% of our leadership is that. So we've made a commitment to reach the same levels. A third of our leadership will be BIPOC within five years. And we're going to hold leadership accountable. It'll be part of our performance documents that we get every year. Will tied to those goals to reach the goals, again, just like the climate goals we believe that you have to have skin in the game and as you make these commitments that you walk your talk. So we produced this beautiful delivery we call the Commitment airplane. There's 14 children on there that are children of our black employees, and that airplane reminds us of our commitment and accountability to our social goals.

Karen Walker:

Ben it's so fascinating of course continued difficult times, but as always Alaska's been very innovative and appears to be very positive for where you're headed so great to talk to you today. Again thank you so much for your time. You said at the outset of this, "Would Karen come over here to do an interview for real." I hope the next time we do talk, we can do that and I will definitely come out to Seattle. On behalf of CAPA thank you very much indeed.

Ben Minicucci:

It was my pleasure Karen, great talking to you.

Karen Walker:

And to you. Thank you.

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