Quiz: Aside from the ultralow-cost carriers Spirit and Allegiant, which airline has been America’s most profitable this decade? Hint: There’s an Eskimo on its tails.
It’s true. Every year from 2010 through 2016, Alaska Airlines earned higher operating profit margins than Delta, American, United, Southwest, JetBlue and Hawaiian. During these remarkable seven years, Alaska in aggregate earned nearly $4b in net profits, nearly $6b in operating profits and a spectacular 17% operating margin. It produced strong results in 2017 too— another 17% margin, although in that case that wasn’t enough to beat Hawaiian.
Sounds like a happy story. And it is. But the prevailing mood at the airline’s investor day event in New York City last week was hardly one of celebration. Instead, the airline found itself having to explain a surprisingly steep decline in margins that began late last year and continued throughout 2018. Looking at the most recent 12 months reported (October 2017 through September 2018), Alaska’s operating margin dropped below 10%, barely better than JetBlue, United and American and worse than everyone else. Southwest, for its part, managed 14% in the same period.
What’s going on? Rising costs have undoubtedly played a part. Along with the fuel inflation hurting everyone, Alaska faced additional cost headwinds from new pilot and flight attendant contracts, a new engine maintenance contract and a series of operational challenges including pilot shortages at its regional unit Horizon, unplanned technical stops on transcon flights (because of A319 and A320 range limitations) and increasing congestion at key airports like Seattle and San Francisco. Sharply slowing growth this year also puts upward pressure on unit costs. In 2017, by the way, Alaska’s nonfuel unit costs were flat, breaking a streak of seven consecutive years of declines. This year, they’ll be up by something like 3%, likely followed by another 2% to 2.5% next year.
But Alaska’s uncomfortably steep margin declines aren’t just cost related. They also stem from west coast price wars, arguably instigated by its own aggressive expansion. In a period of just 18 months, the carrier launched 44 new routes, many of them in California, prompting rivals like Southwest to respond in kind. The zealous expansion also left an entire tenth of Alaska’s total capacity in markets less than a year old, significant because…
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