Airline Weekly - February 12, 2007
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Airline Weekly - February 12, 2007

West Coast Warrior: Alaska Airlines succeeds with a unique network and business model

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Cover Story

West Coast Warrior: Alaska Airlines succeeds with a unique network and business model

Several U.S. airlines returned to profitability in 2006. But one had its best year ever.

Alaska Airlines, with its unique network and business model, earned a company-record $138m net profit in 2006, excluding nonrecurring items like worker severance and fleet renewal costs, both linked to a major restructuring undertaken since 9/11. By this measure, the carrier also produced profits in 2004 ($5m) and 2005 ($55m). Though its 2006 operating margins weren’t among the industry’s best, Alaska Airlines has demonstrated for many years that it knows how to make money in an industry better known for losses. What’s its formula for success?

One of the carrier’s key strengths is a comprehensive north-south route network along North America’s Pacific Coast. Despite its name, Alaska Airlines is based in Seattle, where it’s by far the largest airline. Though the market isn’t among America’s top ten metro areas in terms of population, it does have some key advantages, including a sizeable concentration of major companies like Microsoft, Starbucks and Amazon. Boeing, too, though it moved its headquarters to Chicago a few years ago, retains most of its operations in the Seattle area. The city also attracts lots of tourists in the summer.

But tucked in the northwestern corner of the U.S., Seattle doesn’t work well geographically as a hub, which is why other airlines have avoided a large concentration of flights there. Unless, that is, the state of Alaska is an important part of your network. With 15% of its seats and about 22% of its seat miles assigned to Alaska flying, Alaska Airlines can use Seattle as a gateway to America’s disconnected far north. The Seattle-Anchorage market, in fact, is the airline’s busiest, with tourists, oil workers and other passengers connecting from points throughout the U.S. and beyond. It also serves five other non-Alaskan cities from Anchorage as well as 18 cities within Alaska, in some cases providing the only transportation, mail and cargo service available.

California, too, is a critical piece of the Alaska Airlines network. Though the carrier tends to avoid head-to-head competition with Southwest, which dominates the state’s biggest markets, it nonetheless serves no fewer than 16 California... (374 of 1498 words)

Also Inside this Issue:

Several prominent carriers from different parts of the globe announced earnings last week, with many showing profits thanks to strong demand, cost cutting initiatives and a late-year fall in fuel prices.

One major carrier that didn’t do so well was Japan Airlines, whose gargantuan struggles exist despite the absence of meaningful low-cost competition in its home market. Much of the problem appears to be internal, and management intends to implement a tough new turnaround plan to restore profitability. Whether it can get unions to go along is a separate challenge.

In the U.S., Northwest finished the year with a modest fourth quarter net loss (excluding bankruptcy items) but a strong full-year operating margin relative to its peers.

Traffic and yield trends in Europe were strong in 2006, but mid-sized legacy carriers remain troubled. Australia’s Qantas produced more profits, but competition from a new-entrant LCC looms. And in the Middle East, Air Arabia continues to succeed with its low-cost model, but rival Jazeera Airways could make life difficult with its new base in Dubai.

It should be another news-filled week as more carriers announce earnings; Air France/KLM, the world’s largest airline, reports tomorrow.

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