During the third quarter, Seattle-based Alaska Airlines earned a 12% operating margin (excluding special items), boosted by strong premium demand, contributions from its loyalty program, and growing revenue from its many airline partnerships. Still, the airline’s performance fell short of even its own expectations, challenged by several unanticipated headwinds.
One was a sharp spike in jet fuel prices along the U.S. west coast, where Alaska does most of its flying. For the quarter, it paid an average fuel price of $3.26 per gallon. Delta Air Lines, by contrast, its closest rival in Seattle, paid just $2.78. In addition, Alaska’s Hawaii network, responsible for about 12% of its capacity, took an unexpected hit from the wildfires that disrupted tourism in Maui.
“The devastating Maui wildfires,” said chief commercial officer Andrew Harrison, “impacted third quarter revenue and therefore profit by approximately $20 million.” Excluding one-time accounting items, Alaska’s total operating profit for the quarter was $332 million.
Thanks to its Oneworld alliance membership, as well as its marketing ties to American Airlines, Alaska was able to capture some of the extremely robust international demand that larger carriers enjoyed this summer. But most of its revenue comes from domestic routes, which were not nearly as strong. In fact, demand across the Alaska network softened during the final month of the quarter, affecting close-in bookings.
“The strong close-in revenue performance we saw from April through most of August moderated as we moved into September,” Harrison said.
Based on bookings for upcoming travel, demand remains strong during peak periods but less so during “shoulder” periods (those immediately following the peaks). Close-in demand for leisure travel has “normalized” following abnormal strength during the latter half of last year and the first half of this year. Management designed a schedule for September, specifically, that assumed leisure demand would look like it did last September. But it didn’t. It came in weaker. The result: “Modest load factor weakness in areas of our network where we deployed more capacity than we normally would during the shoulder.”
Business demand, meanwhile, has not recovered beyond about 85% of the level it reached in 2019. In response, Alaska is trimming capacity from some of its high-frequency business routes, including those linking Seattle and Portland with California’s major business markets. The airline, keep in mind, is also a big player in the transcontinental market connecting the west and east coasts. But it competes with a lower-yield premium product, in contrast to the lie-flat transcon seats offered by rivals American, United Airlines, Delta, and JetBlue Airways.
Executives are now preparing for the offpeak winter, and specifically the January-to-March quarter, which tends to be Alaska’s worst. It’s looking to be “more surgical” in its approach to matching planes with routes but still planning overall year-over-year capacity growth of 11-14% in the current October-to-December quarter. Revenues, it says, will likely increase just 1-4%. Comments from CEO Ben Minicucci suggest Alaska will scale back capacity plans for 2024, particularly during offpeak periods.
“This industry is very capacity-dependent, and it has a huge leverage on profitability. So, we’re going to take a hard look. The teams are out there looking at next year’s capacity.” Minicucci added, “Capacity discipline is the most relevant lever our industry has and will be necessary to support off-peak periods going forward.” Carriers appear more reluctant to over expand, he said, because “the whole industry has a new set of structural unit costs.”
Disappointing though its third-quarter results were, they likely were among the best across the U.S. industry (only four U.S. carriers have reported thus far). That suggests Alaska will be well-positioned as the Hawaii market recovers, as its fuel disadvantage normalizes, as the international boom shifts back to domestic, as west-coast corporate demand potentially recovers, and as capacity adjustments bear fruit.
“One of the things I think you all should be thinking about in terms of Alaska,” said Chief Financial Officer Shane Tackett, “is we’re still in the least recovered portion of the country and still fighting for the industry’s best margins. So, I just think there’s goodness to come overall for the company.”
One reason for optimism is its all-Boeing 737 mainline fleet. It recently retired its last Airbus narrowbodies, having reached an agreement to sell its remaining 10 A321neos to American. More 737 Maxes are coming, including large Max 10 versions once they’re FAA certified. “We’ve been really clear on how much we like the Max 10, and we want to take as many of those as we can,” said Senior Vice President Nat Pieper. As for smaller Maxes, Tackett said “We’re still working on our Max 8 interior, and we would love to get 16 first-class seats … our [737-800s] carry 12 today.”
Offering more premium capacity is clearly a priority as “travel preferences continue to move in a more premium direction,” according to Harrison. Premium seats now account for about 25% of Alaska’s total seats today, yielding 31% of its total revenue.