Unlike some of its peers, Alaska Airlines is striking a note of caution on the trajectory of the recovery, predicting that it will be “choppy,” despite reporting its first quarterly profit since the pandemic began. Bookings for travel in the fourth quarter fell off in September and October and only now are beginning to show signs of strength.
“The consequences of the Delta variant have not yet dissipated,” Chief Commercial Officer Andrew Harrison told analysts during the company’s third-quarter earnings call on Thursday. The airline expects the decline in bookings will cost it $200 million in the fourth quarter. Alaska reported Fourth of July and Labor Day travel almost approaching 2019 levels. But, starting toward the end of July and ramping up through August, Alaska saw demand take a precipitous drop in September and October.
Only now, in the last few weeks of October, has the Seattle-based carrier seen demand start to return. When the Delta variant began to spread, fourth-quarter bookings fell to half of 2019 levels. They’ve now recovered to 10 percent below 2019. “We hate that we aren’t getting the fourth quarter we reasonably expected to have thanks to the Delta variant,” added Chief Financial Officer Shane Tackett.
“The recovery will be choppy at times as we learn to live with Covid,” CEO Ben Minicucci said. Still, Alaska expects to return to its pre-Covid size by next summer and is poised to grow after that, if demand warrants. The carrier has firm orders for 93 Boeing 737-9s, including 63 due in 2022-23, and has options for a further 52 if needed. Some of these aircraft will be arriving to replace Alaska’s remaining 24 Airbus A320-family fleet, a legacy of its merger with Virgin America. These aircraft, after undergoing engine modifications and maintenance, will be returned to lessors in 2023.
To prepare for a choppy recovery, Alaska is focused on keeping costs low. Its headcount is now 16 percent lower than it was pre-pandemic, which aligns with its capacity reduction, and it expects to keep headcount “downish” even as demand starts to return, Tackett said. Fuel costs remain a worry, with Alaska now paying 25 percent more for fuel than it was at the start of the year.
The restoration of capacity has varied by region for the carrier. Its main Seattle hub is operating at pre-pandemic levels and is expected to exceed that soon. Portland is almost at 2019 levels. Alaska’s California network is at about 65 percent of its 2019 capacity, reflecting a sharper drop in demand there. Hawaii, which is 16 percent of Alaska’s capacity, was its weakest performing region, due to stricter travel restrictions that were implemented as the Delta variant began its spread, Harrison said.
Looking forward, Alaska plans to grow at its four main hubs: Los Angeles, Portland, San Francisco, and Seattle, with a renewed focus on leisure destinations from LAX. Its focus cities in Boise, San Diego, and San Jose will be important to the airline’s future growth. But management touted the primacy of the four main hubs and stressed the connectivity afforded by its new partnership with American Airlines and Alaska’s entry into the Oneworld alliance. In particular, Harrison singled out Qatar Airways’ flights from Seattle, Los Angeles, and San Francisco to Doha as providing strong growth opportunities for Alaska. American’s planned launch of flights to Shanghai and Bangalore from Seattle also will provide Alaska with more connectivity — and more opportunities for corporate sales, Harrison said.
Another growth opportunity for Alaska, and a trend it noticed during the pandemic, is the strength of premium demand, despite the near-total absence of business traffic. The airline plans to capitalize on premium leisure demand as the recovery takes hold and to more aggressively market its premium cabin to business travelers. The challenge is balancing the number of seats available for sale versus those reserved for upgrades, Harrison said, and those plans will be ironed out in the next few months. Alaska is not, however, planning to add more premium seats to its aircraft to meet this demand.
Labor increasingly is an issue for Alaska. The carrier is struggling with hiring and retaining airport employees, particularly in Seattle, where the job market is especially tight, Tackett said. Trends are improving, though, and he expects hiring to become easier in the coming months.
But the main labor issue Alaska faces is its increasingly contentious negotiations with its pilots, represented by the Air Line Pilots Association (ALPA). The carrier asked the National Mediation Board (NMB) to mediate the contract talks, which have stretched on since April 2019. “We are confident we’ll get to a deal,” Minicucci said. Pointing to the aircraft Alaska plans to add, he said, “This will be a phenomenal place to spend their careers.”
But the head of Alaska’s ALPA Master Executive Council (MEC) had a different take on the matter. The union is pushing for more scheduling flexibility and job protections in the new contract, but the carrier isn’t budging. “The company has shown no willingness to address pilot concerns,” Will McQuillen, chair of the Alaska MEC, told reporters after the earnings call. “Pilots want job security provisions similar to those in every other mainline pilot contract.”
McQuillen said the MEC requested private mediation, and the NMB process is “notoriously slow.” If contract negotiation drag on, Alaska risks losing pilots and will not be able to compete for new talent, he said, adding that attrition already is worrisome. And exit interviews with pilots leaving the airline reveal that job security and flexibility are the top concerns. “If Alaska wants to attract pilots, it will have to address the pilots’ concerns,” McQuillen said.
Despite these stormclouds, Alaska had a good quarter. The carrier reported third-quarter revenues of $1.9 billion, up 179 percent from last year, yielding a profit of $194 million and a 12 percent pre-tax margin. Costs rose 33 percent to $1.7 billion. The carrier flew 83 percent more capacity than it did last year, and traffic was up 204 percent from 2020. Alaska expects fourth-quarter capacity to be 13-16 percent below 2019 and said it expects a breakeven pre-tax margin in the quarter.