Fare Cutters Chill Alaska : Airlines: The carrier earned a profit for 19 straight years by pampering customers with better meals and service. Suddenly it must cater to no-frills competition.

On trips to the Pacific Northwest, Paul McShane invariably flew Alaska Airlines. The planes were new and clean, the food good and the flight attendants helpful. Once, an Alaska jet delayed takeoff and lowered the back stairway so the late-running executive from Corona, Calif., could make it home.

But on a recent flight here from Ontario, McShane took Reno Air.

Why?

“The economics,” he explained. His fare on the year-old airline was about half of Alaska’s.

Alaska Airlines, which showed competitors how to profit by pampering passengers, is now struggling to survive in an era of low fares and increasingly price-conscious travelers. The challenge is much the same for American, United and other established airlines coping with the same fundamental changes in the industry.

The smile on the face of the Eskimo that adorns the tails of Alaska jets belies the painful transformation that the Seattle-based airline is undergoing. Shocked by an $85-million loss last year--after 19 straight years of profit--Alaska has eliminated costs and workers, and tested new ways of attracting passengers.

In many ways, the changes reflect a harsh truth that always has underlain the relationship between passengers and airlines, said Raymond J. Vecci, chairman of Alaska Air Group.

“The airline customer in general views buying an airline ticket as a waste of money,” said Vecci. “So they are motivated to pay the least amount of money. That’s always been true. That is something that I think we are acknowledging as a company.”

Alaska’s overhaul has resulted in experiments such as “Lite Flights,” which offer low fares and fewer frills on flights from the Pacific Northwest to Reno and Las Vegas. Instead of the hot meal that has long been a standard of Alaska service, Lite Flight passengers get a bag of nuts and a beverage a la Southwest Airlines--the industry’s low-fare leader.

Tampering with Alaska’s service could backfire by offending many who have come to expect high standards. Alaska spends roughly $8 per passenger for meals, way beyond the industry average, and unusual touches abound. A little card with a landscape scene--and a quote from the Book of Psalms--comes with the food.

Nevertheless, the airline has little choice but to change, said Peter M. Musser, an analyst at Ragen MacKenzie, a Seattle-based brokerage.

“The customers are not willing to pay for all the better service that you get on Alaska Airlines,” said Musser. “The alternative is for Alaska to continue to lose money.”

Alaska is not the only airline to overhaul operations. Nearly every major carrier has launched major cost-cutting efforts in the wake of $10 billion in combined losses over the past three years. American Airlines is looking at its non-airline businesses--such as information services--for faster growth. United has contemplated forming a non-union subsidiary to cut costs.

Musser, in fact, said Alaska’s management should have responded sooner to the fundamental changes that have swept the industry. “You could see this happening in 1990,” he said.

Despite fragile signs of an airline-industry recovery, executives such as Vecci do not see a return to the rapid growth and fat profits of the late 1980s. Instead, they see continued pressure to keep fares and costs low as Southwest and its brethren expand and airlines operating under Chapter 11 bankruptcy protection launch round after round of price cuts.

In the face of corporate cost cutting, meanwhile, business travelers--the key source of airline profitability--have become more resistant to paying top dollar. The growing availability of information technologies, such as faxes and video conferences, could also reduce the need for trips and face-to-face meetings.

Moreover, there is a growing breed of independent business people who--unlike traditional expense-account travelers--are very sensitive to price, said Atlanta-based business travel consultant Dennis McGinnis.

“The small-business employee and entrepreneur . . . are the best customers for the new upstart airlines, like Reno Air and Kiwi,” said McGinnis. “His loyalty goes to the airline who has the lowest price.”

Leisure travelers, who now make up half of all air travelers, have become conditioned to wait for the next fare war to bring lower prices, said travel industry researcher and consultant Stanley C. Plog.

“Don’t expect conditions to change dramatically when the economy improves,” said Plog. “Low fares just dominate everything.”

A low-fare world means big problems for high-cost airlines like Alaska.

Its distinctive style of service has stood out amid look-alike competitors. One frequent Alaska passenger said he never took advantage of offers to ride in first class because the service in coach was so good. The airline has frequently topped traveler surveys.

The combination of service, a vibrant regional economy and the absence of fare-cutting competitors in its home turf let Alaska grow at an average rate of 20% annually during the 1980s. Flights were added across the West; Alaska jets began landing in distant destinations, from Vladivostok to Puerto Vallarta.

But during the 1990s, Alaska has been plagued by all the industry’s problems, from an economic slowdown to fare-cutting rivals.

The arrival of low-fare airlines--including Reno Air and Morris Air--has forced Alaska to cut prices on lucrative routes between the Pacific Northwest and California. Last month, Alaska slashed unrestricted ticket prices between Los Angeles and Seattle by almost 60% to match competitors’ $159 one-way fare.

Meanwhile, a bitter fare war erupted with regional carrier Mark Air on Alaska Airlines’ bread-and-butter routes between the state of Alaska and the Lower 48. Faced with stiff losses, Anchorage-based Mark Air filed for bankruptcy protection last year, but continued flying and cutting fares.

As a result of the price cutting, the average passenger fare Alaska collected fell from $131 in 1990 to $116 last year.

The competitive battle has proven a bonanza for travelers throughout the Pacific Northwest. Terry Egger, director of airline programs at Mutual Travel in Seattle, says the arrival of Mark, Morris and Reno has saved Seattle air travelers 25% to 30%.

“They used to be very slow to react,” said Egger. “Now, they are a little quicker.”

Vecci estimates that fighting the fare wars against Mark Air alone was responsible for one-third of Alaska’s operating loss last year. Mark Air emerged from bankruptcy protection early this summer.

“The public has accepted traveling on a Chapter 11 carrier,” said Vecci in an interview at Alaska’s offices near the Seattle-Tacoma International Airport. “They get the benefits of the pricing whether they are traveling on a bankrupt carrier or a healthy carrier. They like it.”

Faced with a bleak outlook and mounting losses, Vecci and his fellow executives have been forced to shape Alaska into a carrier that can turn a profit at lower fares and still deliver on its reputation for passenger service.

“We had built our company around a quality product, quality service,” said marketing chief Willie G. McKnight Jr. “To walk away from that would be a fundamental change, one we would not be comfortable with.”

But the changes Alaska executives had in mind required some massive cost-cutting--$500 million alone by forgoing such big-ticket items as new aircraft and maintenance bases. The long hit list included telephone reservation centers, service to Tucson and Toronto--even the complimentary wine for coach passengers.

McKnight chopped the advertising budget 25% and changed Alaska’s soft-sell approach. This year has seen fewer of the company’s humorous ads that poked fun of the hassles of air travel and more ads dedicated to frequent flights and price.

The airline’s restructuring has proved painful for Alaska’s more than 6,000 workers, whose ranks have been thinned by layoffs of both baggage handlers and vice presidents. Alaska’s pilots’ union agreed to a temporary 5% wage cut and more flexible work rules to save the jobs of 140 pilots. The machinists accepted lower pay rates for new hires and a bigger contribution toward their medical benefits. The flight attendants and management, however, remain locked in a nasty labor dispute.

“The sympathy of our members is long gone,” said Thomas Gibbs, general chairman of Alaska’s machinists union. “It’s not as if people haven’t already given. But it’s very unstable in the industry. That is a concern, and it’s one of the reasons why they got more concessions from us again.”

Some of the cutbacks point to a cautious mood in management, which has apparently become less willing to take risks in a punishing environment. Poorly performing Los Angeles-Toronto service, for example, was axed after only a few months. Plans to build a $45-million maintenance base in Anchorage were canceled over concerns about growth.

“If our growth rate fell below expectations, we did not want to get stuck with a huge fixed commitment,” said Vecci. “We can’t take that risk.”

At the same time, however, Alaska executives have been freed from traditions that dictated company behavior and strategy. Alaska’s full-service philosophy, for example, would never have permitted the company to offer Lite Flights.

The initial results of Alaska’s transformation have been promising. Lite Flights have exceeded expectations, and cost reductions helped Alaska reduce operating losses during this year’s second quarter. However, the airline still reported a $3.6-million loss for the three-month period ending June 30.

Despite the carrier’s battle to cut costs and tailor service for tight-fisted travelers, there is only so much Alaska can--or will--do to change.

“We could cut the price down to Southwest levels,” said McKnight. “We could eliminate all the food and bring the price down. But we could not make money. You can’t get (our) cost structure down to those levels without taking the company apart.”

For Alaska Airlines, A Cooling Trend

Alaska Airline’s 19-year string of profits was broken last year as an industry slump and fare-cutting rivals overwhelmed the carrier. During the past three years, the airline’s stock has lost almost half its value, and the company has suspended dividends on its common stock. Net income (loss) in millions of dollars

1992: -$84.8

Quarterly stock closes, except latest

Friday close (1993): $12.75, unch.

Source: Alaska Airlines, DRI/McGraw Hill