The Eskimo Catches a Cold: Alaska Airlines, a profit superstar for years, is suddenly feeling ill. What’s happening?
As recently as last year’s second quarter, Alaska Airlines was America’s most profitable airline. Its extraordinary 23% operating margin for the spring period didn’t surprise anyone. It was, after all, the most profitable nonultra-low-cost carrier (in other words, aside from all but Spirit and Allegiant) every single year from 2010 through 2016. Alaska would end up with excellent results for all of 2017 too—a 17% operating margin, topped only by Hawaiian and (barely) Allegiant.
But something happened after that second quarter. In the third, margins—although still the envy of many airlines—were down sharply from the previous summer, much more so, in fact, than most of Alaska’s peers. Then came the fourth quarter, in which margins tumbled again, this time to below the industry average. Alaska did worse than Southwest, worse than JetBlue, worse than Delta and barely better than American. The worrisome trend would only accelerate in the first quarter of this year, during which Alaska couldn’t even crack a 3% operating margin. This was the lowest figure of any U.S. airline, and a mammoth drop from the 19% it earned in the first quarters of 2015 and 2016. It was also Alaska’s worst Q1 by far since the thick of the global financial crisis in 2009.
The recent rise in fuel prices partly explains why Alaska’s profits are nose-diving. But this doesn’t at all explain why its profits are falling so much more than the industry average. To understand the reasons for that, start with a look at Alaska’s nonfuel costs. Last quarter, its nonfuel CASM jumped an industry high 5%, despite what are usually helpful effects of rapid capacity growth—Alaska’s ASMs rose 8%, which was double the U.S. industry average. After paying a hefty sum to outbid JetBlue for Virgin America, Alaska is now incurring the hefty costs of integrating it—reconfiguring Virgin’s planes, for one thing. At the same time, Alaska’s airport costs are rising. Operational costs are up as airport congestion and air traffic control delays in Seattle worsen. Alaska has now insourced some ground handling work, meaning higher labor costs. It recently signed a new engine maintenance contract, which is adding costs. Costs are up too at Horizon, its wholly owned regional carrier, which just recently overcame a bout of operational distress due to pilot staffing issues. Like most of its peers, Alas…
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