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STRATEGY PROJECT

Aman verma
Venkateshwara koushik
Yash arora

INTRODUCTION
BACKGROUND

Alaska Air Group (Air Group) operates Alaska Airlines (Alaska) and Horizon Air (Horizon),
which together with its partner regional airlines serve more than 100 cities through an expansive
network in Alaska, the Lower 48, Hawaii, Canada and Mexico. During 2014, Alaska carried 29
million passengers while earning record full-year adjusted earnings of $571 million.
Alaska Air objective is to be one of the most respected U.S. airlines by their customers, employees,
and shareholders. Alaska believe their success depends on our ability to provide safe air
transportation, develop relationships with customers by providing exceptional customer service and
low fares, and maintain a competitive cost structure to compete effectively. It is important that they
achieve their objective as a socially responsible company that values not just their performance, but
also their people, community, and environment.
Alaska Airlines is the seventh largest airline in the United States, based in Seattle, Washington.
The airline is classified as a major carrier and operates its largest hub at SeattleTacoma
International Airport. The airline is a major air carrier and, along with its sister airline Horizon Air
is part of the Alaska Air Group. Alaska Airlines is not part of any of the three major airline
alliances. However, it has codeshare agreements with a few airlines including its Ally turned
competitor Delta Airlines. Delta, despite cooperating through codeshares, is a major competitor to
Alaska Air in its Sea-Tac market
Corporate Image
Building on its good financial performance, Alaska Airlines has seen its stock price rise more than
300% since 2008. It has also built an excellent reputation for serving the people of Alaska. Because
of the climate, terrain, and vast distances between locations, Alaska Airlines is one of the preferred
options for transporting people and goods around the state. For example, Nome residents regularly
fly to Anchorage to buy what they need in the better-stocked stores, and since its hospital services
are limited, patients are often flown to Anchorage for operations and emergencies.
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Positioning and Product
Building on its good corporate image, Alaska has incorporated unique advantages into its service
offerings that are represented by its Eskimo logo on the tail of the plane. Its pilots are given
extensive training and practice under severe weather and terrain conditions. This contributes to the
safety of Alaskas airline service. Terrain and weather also make it difficult to use traditional
ground-based radar. As a result, Alaska pioneered the latest satellite navigation technology further
contributing to the safety and reliability of its service. It was also one of the first airlines to offer inflight moves in the 1950s, and during the cold war, it was one of the few airlines to offer charter
flights to the Soviet Union.
Because of the high cost of operating an airline over the distances, terrain, and weather of the state,
Alaska has little or no serious regional competition. Deregulation enabled the airline to expand into
other markets that include the West Coast, Mexico, Hawaii, and Salt Lake City generating
additional revenue and profits

THE PROBLEM
Longtime partners are slugging it out in a battle for Seattle that is turning into one of the U.S. airline
industry's nastiest turf wars in years. Seattle is not only Alaskas home base, it is also the biggest
revenue generator in terms of the route network it houses.
Delta, the No. 3 U.S. airline by traffic, and Alaska Air Group's Alaska Airlines are going head to
head, pouring money into improvements at Seattle-Tacoma International Airport and touting their
civic credentials as they fight for market share.
The contest alarms some investors, who fear a big buildup of flights at the airport would put
pressure on profits, particularly for smaller Alaska Airlines, the sixth-largest U.S. carrier.
THE BUILD-UP
Delta, which has worked for the past year to expand Seattle into a hub, has added flights to
London, Shanghai, Tokyo, Seoul and Hong Kong, and dozens of domestic flights to feed those
services. By December, Delta expects to offer 95 flights to 33 destinations from Seattle, which it
also considers its gateway to Asia. In the third quarter, the airline expects to be Sea-Tac's biggest
revenue producer.

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But despite Alaskas admirable strategic positioning and focus on winning customers with quality,
at the end of the day, its victory thus far has been almost entirely about fuel, more precisely the
rapid fall in fuel prices over the second half of 2014 and the uneasy plateau at $60-65/barrel of WTI
crude in 2015. Alaskas first quarter 2015 numbers were certainly pretty: $238 million operating
profit, 18.8% operating margin, 20.1% ROIC. But beyond the headlines, two numbers stand out:
5.7% and $123 million. The former is the decline in PRASM for Alaska in Q1 and the latter is the
savings it accrued from the drop in fuel prices YOY. Alaskas net profits (pre and post tax) would
have declined substantially YOY if not for fuel to $117 million and $23 million respectively. A year
and a half ago, I said that all of the Delta capacity being added in Seattle would harm yields and
compress margins at Alaska because Seattle was its most important and highest margin hub.
Thats exactly what happened in Q1. But thanks to a pissing contest between American shale
producers and the Saudis, Alaska instead gets to trot out a bunch of pretty numbers and go about
its business without an investor revolt.
A more charitable description of Alaskas current position would note that many industry observers
and analysts now believe that the price of oil has settled into a new normal with a peak price
between $60-70 per barrel. And until the next recession, thats probably a fuel price point that will
allow Alaska to sustain its current level of competitive capacity and growth without harming margins
too much. But the threat to its highly profitable core at Seattle is not something that Alaska can
ignore. The reduction in fuel prices has merely bought Alaska more time to respond.

Building on your Competitive advantages.

1. Costs
Alaska has lower unit costs than its legacy competitors. The slide that is shared below is
comparing Alaskas unit costs, both including fuel and excluding fuel, but this is including fuel since
thats a big piece of it. Alaskas unit costs to the low cost carriers back in 2003 versus its costs
compared to the legacy carriers back in 2003. And then The slide compares that same differential
as on last quarter year end. If you look back at what was the case in 2003, there was a 35% cost
gap, unit cost gap, between Alaska and the low cost carriers. And a 12% differential between
Alaska and the legacies. Today, that gap is closed significantly because of all the work that Alaska
has done improving productivity, making changes to the fleet, other changes to the business,
keeping a tight focus on overhead, so that right now, the cost difference between Alaska and the
LCCs is 11% and the cost difference between Alaska and the legacies is 22%. That cost
advantage will be a significant competitive advantage that it has as it battles any competitor that
comes into Seattle that wants to build market share. Cost matters. Customers want low fares.
When you have lower costs, you can offer lower fares.

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2. Operational Excellence
Alaska Air was named by FlightStats, which is an independent organisation that tracks on time
performance, just recently, as the best operation, or the best on time performance in the US for the
fourth year in a row. And on time operation is by definition a low cost operation. Its also one that
builds customer preference, because customers can count on your reliability. And this is something
thats been a great story for the company over the last five or six years. In 2005, Alaska Airs
operation had an on time performance rating of 69%. And again Alaska leads the majors now with
an on time performance of 87% recognised by Flight-stats.
3. Being Nimble
Small Is Beautiful.
Size is an advantage. When youre smaller, you can act more nimbly, you can redeploy capacity
easier. You can connect with your customers in a way that larger carriers cannot, and I think you
can connect with your employees in a way that larger carriers cannot. All of Alaskas employees
participate in a common, gains-sharing plan, and so theres significant alignment in the company
around a common set of goals that driving us to a winning position.
4. Code share Strategy

The strategy has long been one of what we call Swiss Neutrality or maybe open architecture is a
way to think about that. Over the last 20 years or so, or perhaps even longer, the company has had
this policy of Swiss Neutrality or open architecture, really as a way to make sure that it was not
dependent on one, big, global airline. But instead had this virtual portfolio, or virtual network of
airlines that would do two things that were very important for its business. One, they gave its
customers the opportunity to book flights to places that Alaska didnt otherwise go. The second,
and just as important, it gave customers an opportunity to use Alaska frequent flyer miles to
redeem travel to places that were aspirational in nature that Alaska didnt want to go. An example
might be, Alaska doesn't fly from Seattle to Nashville but a customer can book on [Link]
Seattle to Nashville by flying Alaska to Chicago and Eagle over to Nashville, something like that.
Similarly, customers might accrue miles up and down the West Coast on business, but might want
to redeem miles for vacation on travel over to London. British [Airways] is a great partner for
something like that. The reason that it would not want to have a policy where it aligned with only
one domestic carrier is that a domestic carrier essentially competes with Alaska. And if Alaska
aligned with one specific carrier, it would violate this principle that they have long held that it was
the best principle for its shareholders of Swiss Neutrality. Because what happens is that, that
Alaska brand, the Alaska name, the service that they bring, the connection that Alaska has with its
customers; would begin to diminish. Another example might be with its affinity credit card, which is
a very valuable thing for the company. It generates significant amounts of annual cash flow, a
significant amount of revenue. If the Alaska brand were relegated to a number 2 position, why
would a customer have its card? Why wouldnt they choose the card of the larger carrier? So its
very important for Alaska to have this position of neutrality; this position of having a multitude of

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partners around the industry, to keep the Alaska brand the forefront brand, the premier brand in the
Pacific Northwest. To have a vibrant program, not only frequent flyer, but credit card, and a
presence in Seattle. Alaskas portfolio of alliance relationships has ebbed and flowed over the
years.