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Sunday, June 17, 2012 - Page updated at 09:30 a.m.
Alaska Air takes top honors in annual ranking
By Drew DeSilver
Seattle Times business reporter
BACK IN 2001, ALASKA AIRLINES HAD THE WORST ON-TIME PERFORMANCE of any major airline: Just 69 percent of flights managed to arrive close to when they were supposed to. It was just one of many problems bedeviling the Seattle-based carrier, which lost $43.4 million that year amid the aftershocks from the 9/11 attacks and the crash of Flight 261 the year before.
But keeping its planes on schedule was essential if Alaska was to maintain its reputation for quality service and fend off competitors envious of its strong market position on the West Coast. So Alaska began an intensive effort to improve its on-time ranking — creating and enforcing checklists that detailed everything that needed to happen from before a plane landed to the moment it took off again.
"It takes a lot of little things, but the biggest thing it takes is to stop making excuses," said Brad Tilden, a longtime Alaska executive who last month became CEO of parent company Alaska Air Group. "There are thousands of people at Alaska who now know exactly what they need to do to make a plane depart on time."
Added Brandon Pedersen, Alaska's chief financial officer: "As our COO says, if a plane doesn't leave on time, that's not the problem. That's a symptom of the real problem."
Progress came slowly at first. Improvements in 2002 and 2003 didn't last and in 2005 Alaska was once again dead last in the on-time rankings.
But then on-time performance began rising, and this time the improvements stuck. In the 12-month period that ended in March, Alaska had the industry's second-best on-time performance — 88.5 percent, according to the U.S. Transportation Department.
The on-time advances exemplify the buckle-down-and-eat-your-peas approach that marks much of what Alaska does today.
"They've figured out what they do well and focused on it," said Savanthi Syth, an airline analyst with Raymond James & Associates. "Southwest, Delta, United have tried to compete with Alaska in its core market, and in the case of Delta, they've realized it's better to cooperate with them."
Alaska's financial performance in four key metrics topped 95 other companies based in the Northwest, making it the winner of The Seattle Times' 21st annual ranking.
Alaska's success stands in sharp contrast to the rest of the airline industry, whose recent history is, to paraphrase Gibbon, little more than a register of airlines' bankruptcies, follies and misfortunes.
For decades, most airlines chased market share at the expense of profits, a strategy that may have made sense in good times but, because of high fixed costs, could be deadly during downturns.
An empire-building mentality permeated the industry, Tilden said: "It was about market shares and building hubs, and flying at least one flight to every major city in the world."
The reckoning came in the decade after 9/11, when nearly every major U.S. airline spent time in bankruptcy court. Many have tried to merge their way to prosperity (Northwest-Delta, United-Continental, AmericaWest-US Air), with, at best, mixed results.
The 2000s weren't particularly good for Alaska either; the company lost money in all but two years between 2000 and 2008. But the company hasn't made any acquisitions since the 1980s, preferring to grow organically, and has avoided taking on new debt. As of March 31 it had $1.1 billion in cash and marketable securities, and one of the lowest debt-to-equity ratios in the industry.
The company's strong balance sheet has allowed it to expand gradually beyond its West Coast base while defending its dominant position here against competitors, analyst Syth said.
This year, she estimates, just 52 percent of Alaska's capacity will serve Alaska and the West Coast, versus 86 percent in 2001. Back then, Alaska had no Hawaii or transcontinental flights; this year, such flights will account for 20 and 19 percent, respectively, of the company's total capacity.
Alaska's cash pile also allows it to make greater use of fuel hedges than its competitors typically do. The company uses call options to effectively cap what it pays for crude oil, CFO Pedersen said, and swaps to manage the cost of refining that crude into jet fuel. Overall, about half of Alaska's fuel cost is hedged, he said, saving the company some $400 million over the past decade.
Holding down costs has been a big, and controversial, part of Alaska's success. The company employs 2,000 fewer people than it did in 2001; the 2005 contract between Alaska and its pilots union — imposed by an arbitrator after talks deadlocked — cut wages an average of 26 percent; the current contract restored some of those cuts.
To further cut costs, Alaska contracted out hundreds of jobs at the Sea-Tac, including baggage handling, jet fueling, cabin cleaning. Community and religious groups have joined with organized labor to push Alaska to raise those contract workers' pay; last month, they challenged Tilden at Alaska's annual meeting.
"Alaska Airlines has demonstrated not only strong profitability in recent years but an ability to share their prosperity with line workers who wear the Alaska uniform," several of the groups wrote in a recent report, "First-Class Airport, Poverty-Class Jobs."
"It is hard to believe that Alaska could not stand behind its contractors if they began to pay more. Furthermore, if Alaska helps even the playing field between Sea-Tac airline contractors, taking labor costs out of competition, then other airlines would follow suit."
Tilden has agreed to meet with representatives of the contract workers but was unapologetic about the steps Alaska has taken to cut costs, which now are the lowest of the remaining legacy carriers on an available seat-mile basis.
"The cost structure had to come down," he said. "That was unpleasant, but we had to have a fare structure that would allow us to be competitive with the new breed of carriers. We were terrified of what would happen if we didn't configure the company to compete with Southwest, JetBlue, Virgin.
"If you have low fares you can grow, but to have low fares you have to have low costs."
In the past three years, Alaska has recorded a combined net profit of $617.2 million, twice its aggregate 2000-2008 losses. Late last year, after American Airlines' parent filed for bankruptcy, Alaska took its place in the Dow Jones Transportation Index.
The company's strength has led to renewed speculation about combining with some other legacy carrier, such as Delta or American, interested in filling West Coast route gaps. But Tilden says Alaska isn't looking for a partner, and analyst Syth said it would risk losing many of its advantages — from its corporate culture to its strong financial position.
"They won't grow like gangbusters, but they're able to take advantage of opportunities when they come up," she said. "It seems like they're better off alone."
Drew DeSilver: 206-464-3145
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