Alaska Airlines: 6 Strategic Themes for the Near Future

"Starliner 75" themed Boeing 737-800. Source: alaskaair.com

Weathering an incursionDespite Delta Airlines' creation of a hub in Alaska Air Group's home base city of Seattle, the company continues to grow.

Alaska increased its operating margin to 26% in Q2 2015, an improvement of nearly 700 basis points from the prior year.

It's even managed to expand revenue 4% during the first six months of this year, from $2.6 billion to $2.7 billion.

How has the company thrived?

Alaska has implemented several strategic themes to support its ability to expand

revenue profitably. Six of these themes in particular will continue to be important in

the near future.

1) Expand domestic capacityDespite larger carriers' capacity cuts this year, Alaska is expanding capacity via new, profitable routes:

•18 new markets added since Q2 2014•18 additional markets to be added by year end 2015

Promo for SEA-RDU route on Raleigh-Durham International Airport's website. Source: www.rdu.com

Supplement with international alliances

Alaska has increased its route partnerships over the last two years with a number of carriers. Management recently mentioned Emirates Airline and Icelandair as two notable examples.

Additionally, in July, Alaska announced a frequent flyer partnership with Chinese carrier Hainan Airlines. This will reduce Alaska's dependence on Delta in feeding passengers from China to Seattle.

2) Upgrade the fleetAlaska will retire 27 Boeing 737-400 aircraft over the next two years:

•Represents about 14% of the total current fleet•These will be replaced by more fuel efficient 737-900 ER, and beginning in 2017, the 737 "MAX."

737 "MAX 8" image source: Boeing Corporation

3) Push ancillary revenue higherAncillary, or non-ticketed revenue, made up more than 12% of total revenue during the second quarter.

Mileage plan members grew by 15%, and loyalty revenue increased 13%.

Alaska continuously looks for new ancillary revenue opportunities. It introduced a new ancillary revenue stream, "preferred seating," during the quarter.

Source: alaskaair.com"

4) Continue with debt discipline

The company has no net debt on its books as of June 30th, 2015:

•Total debt of $745 million•Cash and cash equivalents of $1.2 billion•Net debt is the difference between debt and cash on hand; that's why Alaska is said to have $0 net debt.

5) Add to existing variable payAlaska incentivizes its employees to improve profitability while maintaining superior safety and on-time records. Incentive pay in Q2 equaled an impressive 1/10th of total wages and benefits paid.

The company recently introduced a "productivity premium," which enables flight attendants the opportunity to earn up to $2,500 of quarterly bonuses each year, in return for reducing time missed on "line" ( i.e. routes senior attendants are scheduled for on a monthly basis).

"Employee Powered 737-800" commemorative plane. Source: alaskaair.com"

6) Cash is for CapEx

In a tactic that's absolutely contrarian to much of the rest of the industry, Alaska uses mostly cash (with some leasing thrown in) to pay for its aircraft, rather than leveraging up its balance sheet.

The company projects a total year 2015 capital expenditure spend of $750 million.

6) Cash is also for shareholders

In the first half of 2015, Alaska generated nearly $900 million in operating cash flow, enough to cover the 2015 "CapEx" schedule.

This leaves plenty of cash to fund the quarterly dividend, as well as to buy back shares. Last month the company announced a new $1 billion share repurchase authorization.

Since 2007, Alaska has repurchased an incredible one-third of its outstanding shares. The new authorization, when completed, will equal another 10% of outstanding shares.

For now, a successful strategy

To stay competitive, Alaska Airlines has employed a number of strategic themes which cover its operations, balance sheet, and most importantly, its people.

To the surprise of many, the company is prospering even as Delta has muscled into Seattle. But Alaska has managed to hold its ground with its varied and carefully considered game plan.

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