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Alaska Air chief says carrier will remain independent

Melissa Allison
Bill Ayer addresses a news conference prior to the Alaska Air Group annual meeting June 12, 2007, at the Hotel Captain Cook. Ayer is president and chief executive officer of the company.

Alaska Airlines CEO Bill Ayer pilots a rarity in the airline industry -- a carrier that has made it through a turbulent decade without filing for bankruptcy or merging with another airline.

He plans to keep it that way, despite speculation that the Seattle airline is too small to operate alone.

"The history of mergers in this industry is not a good one," said Ayer, Alaska's CEO since 2002 and CEO of Alaska Air Group. "There have been rumors about somebody buying Alaska Airlines as long as I've been here, and probably longer than that."

Indeed, airline mergers have become a hallmark of U.S. economic downturns.

The companies that ferry us through the air for hundreds of dollars a pop have an extraordinarily difficult time making money.

Any instability -- fewer fliers, higher oil prices -- and the result is a series of shotgun weddings.

In the latest recession, United Airlines hooked up with Continental Airlines, Delta Air Lines merged with Northwest Airlines and -- earlier this month -- Southwest Airlines bought AirTran Airways.

That trend leads some investors to believe Alaska, which holds its annual shareholders meeting today at the Museum of Flight in Seattle, will merge eventually.

Strong profits and a high stock price keep the airline and its 7,700 jobs in Seattle safe for now.

Alaska made money in the first three months of this year, when many airlines were bleeding because of the higher fuel costs.

Its shares trade so dearly that Alaska's worth based on its stock price is $2.5 billion, almost $1 billion more than US Airways, whose revenues are triple Alaska's.

"Alaska continues to sit in the catbird seat given its attractive West Coast niche," analyst Daniel McKenzie of Hudson Securities wrote in a recent research report.

Alaska's financial muscle "leaves management in the enviable position of being able to call the shots."

That does not keep McKenzie and other Wall Street analysts who know the airline industry well from speculating about future mergers.

Southwest's acquisition of AirTran "ultimately forces Alaska to become part of a bigger airline," he wrote.

The reasoning: The smallish carrier will face challenges competing with the low prices, stronger network and more powerful balance sheet of a super-sized Southwest.

US Airways certainly feels a threat from airline consolidation and is practically begging for a partner.

'ONE BIG DEAL LEFT'

"There is one big deal left, and that's with US Airways," Doug Parker, the airline's CEO, said last month.

It does not consider Alaska a good fit, according to US Airways' Scott Kirby, president of the Tempe, Ariz.-based airline.

The only outcome of that merger would be to "take a cost structure that's profitable (Alaska's) and make it unprofitable," Kirby said at the Phoenix International Aviation Symposium in April.

Other airlines are not courting Alaska, either, partly because they know Ayer has no interest.

Its lock on the state of Alaska is lucrative but is not a huge draw for tourists.

"They've got our 49th state sewn up, but except for (Sarah) Palin, it's not a top-10 destination," said Tom Parsons, CEO of discount travel site bestfares.com.

Alaska also maintains a pleasant demeanor in the skies, not threatening competitors with its fares or routes.

It did not make a big move into Hawaii until after the demise of Aloha Airlines and ATA Airlines left a vacuum there.

"We think of them like Switzerland in terms of being neutral," said Helene Becker, an analyst at Dahlman Rose & Co. in New York.

Still, in the next downturn she expects midsize carriers such as Alaska to merge, and named American, Delta and Hawaiian Airlines as possible partners for it.

Alaska and American fly a lot of 737s and have a business relationship that allows them to sell tickets on each other's flights.

Alaska also has that relationship with Delta, and might merge with another midsize carrier such as Hawaiian, Becker said.

Ayer rolls with the conjecture and keeps setting an independent agenda for Alaska.

In 2003, when United Airlines was in bankruptcy court and Southwest Airlines was poised to steal customers with its low-fare model, Alaska launched a plan to save itself.

Called "Plan 2010," it aimed for 10 percent return on invested capital (ROIC) -- a complicated measure involving adjusted operating profits that accurately sums up how a company is faring.

More important, 10 percent ROIC is an ambitious goal in an industry with high overhead and unions representing 85 percent of its workforce.

"People said, 'No airline has ever done this. What are you smokin'?' " Ayer recalled.

Alaska achieved it in 2010 -- and posted a solid profit of $251 million.

Wall Street rejoiced and has sent Alaska's stock price up 57 percent during the past year.

"Now we have to prove to the world that we can sustain this," Ayer said during an interview in his office, which faces a small lake beside Interstate 5 and near Seattle-Tacoma International Airport.

He's shaved more than 2,000 positions from the payroll in recent years, bringing Alaska's employment to roughly 12,800.

He also brought all six unions at Alaska under the same profit-sharing plan, making it simpler and more transparent.

Employees in February received an average 9 percent bonus because they reached the airline's safety, financial and customer-service goals -- helping make Alaska second in the nation for on-time arrivals in 2010, behind only Hawaiian Airlines.

All is not completely rosy, though.

Some pilots have been furloughed for more than two years and do not expect to be back on the job until next year, said Paul Stuart, head of the Air Line Pilots Association for Alaska Airlines.

Flight attendants are flying more hours with the same number of people, which creates scheduling complications for some, said Kelle Wells, the Association of Flight Attendants president for Alaska Airlines.

Still, many appreciate working for a carrier that's making money, she said. "We work for an airline that is hiring, and over 100,000 airline jobs were lost in the last decade."

ROOM TO GROWGrowth is key to Alaska's future but a merger isn't necessary to achieve it, Ayer said.

The airline does not even need to add whole new regions or countries to reach the 3 percent to 6 percent growth promised to Wall Street, he said.

"Adding three to six long-haul trips a year would give us 3 to 6 percent growth," Ayer said. "And we have just one or two flights a day in a lot of markets."

That is true for many cities Alaska serves on the East Coast.

Most of those 90 cities are west of the Mississippi River, including 20 in Alaska, where the airline began with a three-passenger propeller plane in 1932.

Alaska became an international cargo carrier in the 1940s and carried food in the Berlin Airlift and refugees to the settlement of Israel.

Despite its financial chops, Alaska remains a midsize carrier and a merger with another airline its size makes the most sense, said aviation consultant Scott Hamilton of Leeham Co.

He named JetBlue Airways, Frontier Airlines and Spirit Airlines.

And in another bit of conjecture for Ayer to ignore, Hamilton said: "Somebody might come in and try to acquire them. You just never know."


By MELISSA ALLISON
Seattle Times