Alaska Air’s quarterly profit falls but management insists better results lie ahead

Alaska Air Group’s third-quarter profit dropped 16 percent compared to a year ago as the cost of fuel rose sharply and employee-wage increases kicked in while fares remained low.

But Alaska’s leadership said Thursday the year ahead should see profits rise as the airline puts behind it the major costs of merging with California-based Virgin America and begins to reap the benefit of its enlarged network.

Alaska reported a quarterly net profit of $217 million, or $1.75 per share, compared to $259 million or $2.09 per share a year ago. Total operating revenues were up 5 percent to $2.2 billion.

Management remains tightly focused on cutting costs. And Alaska is joining other airlines in seeking more revenue from fees: In December it raises the cost of checking one bag to $30 and begins offering basic tickets – “Saver fares” – that will be cheaper but will have restrictions, such as no seat assignment until check-in.

In a conference call Thursday about the financial results, Alaska Air CEO Brad Tilden said that almost two years after the acquisition, the integration of the airlines is “approximately 90 percent” complete.

While Tilden said “we are not satisfied with our current financial returns,” he said that starting in the fourth quarter he expects Alaska to “begin a steady climb toward higher margins and higher returns that we believe are achievable with our combined network.”

“Our brand and products are gaining increasing traction in California,” he added.

The remaining major steps toward full integration of the airlines are:

Training flight attendants so they can easily transfer between Virgin’s Airbus planes and Alaska’s Boeing planes. This should be complete in January.

Reassigning the Airbus and Boeing jets from their previous Virgin and Alaska routes to fly routes that better match their seat capacities. This is due to be done by March.

Reconfiguring the Airbus passenger cabins to match the Boeing cabins by adding 10 additional First and Premium Class seats and four extra Economy seats. This is underway and should be done by the end of next year.

Tilden said the implementation of these elements should boost revenue next year by $130 million, with another $100 million added from the introduction of the “Saver” fares and a further $100 million from the higher bag fees and other ancillary charges.

Tilden said Alaska must focus on the basics of the business: “keeping fares low, delivering leading operational performance and offering top-rated customer service.”

The challenge is to maintain operational performance – delivering passengers on time with minimal delays and cancellations – and customer service while pinching pennies because of low fares and rising costs.

One big improvement since a year ago is the operational performance at regional carrier Horizon, which last year was hit by a pilot shortage that resulted in hundreds of flight cancellations.

Last quarter at Horizon, Tilden said, “our on-time performance continues to be the best in the industry and (the) pilot staffing pipeline is full.”

Fares to Hawaii have been particularly depressed because of increased competition flying from the West Coast to the islands.

However, Tilden expressed confidence that Alaska can get through this period of softer pricing to Hawaii better than others because of its well-regarded frequent-flier loyalty program and its recent introduction of upgraded meals and satellite Wi-Fi.

One downside of the merger process and the endless cost-cutting has been a lowering of employee morale, which is a key element of customer service.

For example, many Alaska Airlines pilots are disgruntled at the way the integration of Virgin America pilots into their seniority list happened during the past quarter.

In a process run by the pilots union and an arbitrator, not management, this part of any airline merger always causes resentment because seniority determines the flexibility of a pilot’s schedule. Those at the top of the seniority rankings get to pick when to work or not.

Because Virgin America was a much younger airline, its most senior pilots would have been well down the seniority ranking if a combined list were based solely on hiring date.

To avoid that situation, which could have prompted many to leave the company, about half of the Virgin America pilots were granted boosts in seniority of as much as 8 years’ service. That meant some Alaska Airlines pilots correspondingly lost seniority to pilots with less flying experience.

One senior Alaska Airlines pilot called this “a very bitter pill for the Alaska pilots hired between mid-1998 and early 2012.”

“It’s going to be a really messy time as people vent frustrations,” the pilot said.

Still, at least this discomfiting procedure is done for all employee groups except the aircraft mechanics.

Alaska reported Thursday that its wage-and-benefits expenses were 15 percent higher in the quarter than in 2017. And the per-gallon cost of jet fuel was 34 percent higher than last year.

In the quarter, Alaska spent $520 million on jet fuel compared to $368 million a year ago.

In the two key metrics that are assessed by financial analysts to measure airline performance on revenue and cost, Alaska’s revenue per passenger per mile carried was flat year on year, but cost per passenger per mile carried was up 8.5 percent.

Excluding fuel and merger-related costs from that last metric, the unit cost rose just less than 2 percent.

Alaska shares rose more than $2.38 or 3.9 percent in midday trading to $63.47.