Alaska Airlines Stays the Course

Alaska Airlines is proving that in the post-Sept. 11 airline industry, it helps to have some northern exposure.

Although most carriers have made massive cuts to weather the plunge in air travel, Alaska has made only moderate trims in service because demand for its flights is holding up fairly well.

With its routes concentrated in the Northwest and West Coast, the airline expects to be back to full strength next month and will even expand a bit later this year.

Alaska’s Seattle-based parent company, Alaska Air Group Inc.--which also runs the short-haul regional carrier Horizon Air--has not laid off any of its 11,000 employees, while the rest of the industry slashed roughly 100,000 jobs.

“That’s all this business is, is people,” said Alaska Chairman and Chief Executive John F. Kelly. “We looked at layoffs. They’re not going to save any money; they’re just going to upset people’s lives.”

But Alaska’s decision to stay the course is risky. By keeping its service largely intact, the nation’s ninth-largest airline is losing money like nearly every other carrier.

Southwest Airlines, the leader in providing low-cost, low-fare service, is the only major carrier that has neither cut back service nor laid off anyone since Sept. 11, and it’s barely profitable.

Kelly is betting that Alaska, by holding its expenses in check, can keep its full network and recover financially when the airline business starts to improve later this year, as many expect.

“In our profit-planning and budgeting for 2002, we’re really trying to sharpen the pencil,” Kelly, 57, said in an interview.

Some analysts say the strategy could work. Alaska’s passenger traffic “is still strong enough” to warrant keeping its schedule full, especially because some competitors “have been cutting back,” said Betsy Snyder, an analyst at Standard & Poor’s Corp. in New York.

“Look at the Shuttle by United, which was a major competitor, and now it’s gone,” she said, referring to the decision by United’s parent, UAL Corp., to abandon the West Coast shuttle after Sept. 11.

“With the big guys cutting back capacity, it’s giving the smaller guys like Alaska opportunities,” she said.

Alaska, known for its Eskimo logo that adorns the tails of its 102 planes, serves nearly 80 cities domestically--including Los Angeles, Burbank and San Diego--and in Canada and Mexico. It flies up and down the West Coast and although Seattle is its hub, it has 31 daily departures out of LAX.

The airline has several things working in its favor. About a third of its business is flying people to and from Alaska, and ground travel really isn’t an option.

Alaska’s costs, though not as low as Southwest’s, are still lower than many other carriers, enabling Alaska to keep discounting fares to fill its planes. Yet the full-service airline still captures a good portion of the more lucrative business travel in the Pacific Northwest, owing to its strong route structure in the region.

And Alaska’s service is far away from the East, so its passenger traffic hasn’t been dented as much by the terrorist attacks and the fear of flying. “We’re far removed from that portion of the world that was affected,” Kelly said.

Conversely, Alaska’s service could be appealing “this summer to all the [West Coast] vacationers who want to stay local” because the Sept. 11 attacks are still on their minds, S&P;’s Snyder said.

For now, though, Alaska is expected to report today a fourth-quarter loss of about $60 million (excluding its portion of the federal bailout program enacted after the terrorist attacks). It’s forecast to lose about $30 million for all of this year, according to analysts polled by Thomson Financial/First Call.

But some on Wall Street see Alaska returning to the black faster than most carriers. And analysts are quick to note that, before Sept. 11, Alaska was one of the few airlines that was profitable as the others struggled in the face of the weakening U.S. economy.

Alaska joined Southwest and Continental Airlines in posting a second-quarter profit last year, and Alaska made a $25-million profit in the horrendous third quarter. The latter earnings included Alaska’s portion of the federal bailout cash, but even without the aid Alaska earned $7 million in the quarter.

The airline also has about $670 million in cash, and currently sees no need to apply for a federal loan guarantee, another part of the bailout package. Some analysts also are recommending Alaska’s stock, which has jumped 38% since Sept. 11 to outpace both the airline industry as a whole and the benchmark Standard & Poor’s 500 stock index. Alaska’s shares Thursday dipped 25 cents to close at $30.43 on the New York Stock Exchange.

Alaska is a buy “as a result of the carrier’s good niche in the Pacific Northwest and their relatively good liquidity position,” analyst Raymond Neidl of investment firm ABN Amro said in a recent report.

Alaska was still recovering from its own travails when Sept. 11 struck. Two years ago this month, an Alaska MD-83 crashed into the ocean off Ventura County, killing all 88 people aboard.

The crash led to findings of lapses in Alaska’s maintenance and training (along with criticism of the Federal Aviation Administration’s oversight), but Alaska says it has adopted all the new procedures mandated by authorities.

“We produced an extremely comprehensive plan” to fix the problems and “we have only one objective in mind: that’s to be a model of safety and compliance,” Kelly said.

But Kelly has other objectives, such as redirecting airplanes to new routes where Alaska thinks it can turn a better profit. He’s taken some jets out of frequently served routes and used them to create service between Los Angeles and Cancun, Mexico. In April, Alaska will launch nonstop service between Orange County and Vancouver, Canada, and will begin serving Denver.

The plan is to build up service to “growth cities on our hit list that are ... strategically important to us,” Kelly said.