MIAMI — Alaska Airlines CFO Brandon Pedersen brushed off concerns about unit revenues and 2015 capacity growth, and reiterated his carrier’s competitive strengths in the Seattle market versus Delta Air Lines while addressing the JP Morgan Aviation, Transportation, and Industrials conference yesterday.
“If you look at our market share in Seattle…we continue to have about a 54-55 percent market share versus our nearest competitor at about 20 percent,” said Pedersen. Alaska has maintained this market share despite significant growth by Delta, which presently operates 85 peak-day departures to 26 destinations from its Seattle hub.
By the summer, Delta will operate more than 125 peak-day departures to 34 destinations and it will continue to grow into the following winter, most recently loading nonstop service from Seattle to Kona, Hawaii, into the Global Distribution System (GDS).
Despite Delta’s aggression, Pedersen maintained that Alaska has been able to avoid the brunt of Delta’s expansion. “I still think there’s vast differences in…us versus [Delta],” said Pedersen, “I think you’ve seen [Delta] grow significantly, not at the expense of Alaska but at the expense of other carriers.”
Pedersen believes that Alaska has several advantages in its battle with Delta, noting that the company has strong reliability figures and customer service, winning the JD Power Customer Satisfaction Award for seven years running. He also highlighted Alaska’s cost advantage versus Delta, citing its single fleet of Boeing 737 mainline aircraft as a particular point of strength against a Delta operation largely built on the back of regional jets. But, noted Pedersen, the most important factor is Alaska’s customer base. “Importantly, I think we have fanatically loyal customers.”
However, despite Pedersen’s confidence, JP Morgan analyst and host Jamie Baker pressed him on the impact Seattle competition has had on the company’s business, asking if pressures in Seattle were behind the 7 percent drop in RASM that Alaska reported for January 2015. Pedersen demurred, noting that “If you look at January, we [Alaska] had 3.5 point headwind from both the tough comparison from last year when we carried a lot of the passengers displaced by the storms of January 2014, and then we’ve got a promotion… related to a free first bag.”
Pedersen did acknowledge that competitive pressures drove some of the decline, but claimed that Alaska had expected the decline in capacity. “And then if you layer in competitive capacity being up 14 percent and our own capacity being up 10 percent, I actually think the results were pretty much what we expected,” he said, “It’s not a great headline number, but in terms of what we expected and how we feel about the business, it was right in line.”
Looking forward to the full year, Pedersen noted that, “there’s a lot of people that would say that 2015 RASM at the industry level would be flat to down.” Moreover, Pedersen spoke to specific pressures faced by Alaska in tamping down expectations for RASM growth this year. “[A]nd then you layer on what’s happening in Seattle in the first half of the year and some competitive capacity growth in the second half of the year, along with our capacity growth, which should be about 10 percent this year, I think positive [RASM growth] might be less likely than not.”
That 10 percent capacity growth figure is layered onto several successive years of capacity expansion that have seen Alaska add 63 new routes to its network since 2010. Already for 2015, Alaska has announced new service from Seattle to Washington Dulles, Milwaukee, and Oklahoma City, as well as from Portland to St. Louis. Alaska’s track record of delivering record profits in the period certainly reinforces its capacity growth plans, but Baker still questioned Alaska’s decision to increase its capacity growth plans since last reported from 8.5 percent to 10 percent, wondering if lower fuel prices played a role in the strategic shift.
“It was not fuel driven,” claimed Pedersen, “although fuel certainly helps that. What it was was the opportunistic extension of 737-400s that were scheduled to be returned this year.” According to Pedersen, Alaska is “in the midst of a fleet transition, we have 27 737-400 aircraft. Those are older models and those are at the end of their lease life.”
Despite the age of the aircraft, Pedersen said that Alaska sawa strategic benefit from making a short-term alteration to its plans. “We had a bunch [of 737-400s] that were scheduled to go back this year,” he noted, adding, “We’ll retire the whole fleet by the time we get through 2017. So really what it was, was us pushing the lease returns into 2016, to take advantage of some of that really inexpensive lift to send it into markets that frankly, need more capacity.”
Pedersen also challenged the present investor focus on PRASM growth, arguing for a more nuanced analysis.
“There’s the headline number in terms of unit revenue. But underneath that, there’s a subset of very different market performances, with some markets wanting more capacity,” he pointed out, “And so this is a way for us to put more chips on the table in a pretty low risk way. And even if we decide that we don’t want to fly those, at the rate that we’re getting per month, which is extraordinarily inexpensive, we could even use those as spares.