There's no doubt U.S. airlines are spooked by higher oil prices. By historical levels, they're not that bad. But perhaps they're catching carriers by surprise.
As frequent flyers know, U.S. airlines usually make available few free seats for loyalty program members during the busy summer season. And when do, they often jack up prices, so a flight that might ordinarily cost 12,500 miles could go for 30,000.
But Alaska Airlines customers this spring got an unusual benefit. After merging the Alaska and Virgin America reservations system in April, the combined airline mistakenly opened its award inventory, offering 40 percent more availability at the lowest levels than a year ago. And customers, including American Airlines’ loyalists, who have access to free seats on Alaska, pounced on them.
It was enough to affect the carrier’s second quarter earnings, executives admitted Thursday on Alaska’s second quarter earnings call.
“We were way too open,” said Andrew Harrison, the company’s chief commericial officer. “We are about generosity but we have the inventory misaligned with the demand.”
Alaska had other issues in the second quarter, too. But its revenue per available seat mile, which measures how much an airline makes for each seat flown one mile, decreased 4.8 percent-year-over year. And the airline attributed 1.5 points of that drop to allowing too many award bookings.
“This was a miss on our part but it’s behind us now and we feel good going forward,” Harrison said.
Some U.S. airlines, particularly Delta Air Lines and Southwest Airlines, tell analysts they don’t mind whether passengers pay with miles or cash, because both produce revenue. But Alaska has a different model loyalty model— it’s more generous in how it awards miles to customers – so passengers who pay with cash remain more profitable for the airline, Harrison said.
“We’re not indifferent,” he said. “We’re trying to balance two very important economic drivers of our business. One is obviously selling revenue tickets and the other one is to continue to grow the loyalty program.”
So far this year, Alaska has been on a growth binge, adding 7.7 percent capacity, year-over-year, despite rising fuel prices.
But the growth amid higher costs has hurt profitability, and on Thursday Alaska reported second quarter net income of $193 million, down $100 million, year-over-year, even as total revenues grew 3 percent, to $2.16 billion.
Now Alaska is the latest airline to say it soon will slow its growth, telling investment analysts it expects to increase capacity only 2 percent for 2019, as it tries to boost profit margins to pre-2018 levels.
“We believe the slower growth rate makes sense because with fuel and industry capacity at current levels, we just don’t see the same opportunity to produce the returns we’re seeking,” Alaska Chief Financial Officer Brandon Pedersen said.
Demand remains high in most markets, Alaska executives said, but by reducing capacity growth, the airline expects it can increase pricing power. Still, Alaska executives told analysts they expected the reduction will be temporary, saying they plan to resume 4 percent annual growth in 2020.
“These results are not the new normal for Alaska,” Pedersen said. “We are working hard to improve the returns that this business can generate.”
Generating Higher Revenues
As they seek to improve profitability, executives said they will focus on revenue, promising to introduce the airline’s answer to basic economy fares by December, reiterating the “Saver Fare” initiative should produce $100 million per year in extra revenue, even though passengers will be able to stow bags in overhead bins and choose seats in advance. Alaska has also tweaked change fees, charging many passengers more money to alter flights.
Additionally, Alaska will focus on selling premium seats, both economy seats with extra legroom and first class seats.
As part of that focus, the airline increasingly plans to fly Boeing 737s on its longest flights, because they have more seats than aircraft flying the routes today, both in regular and premium sections. The Boeing jets will replace former Virgin America Airbus A319s and A320s, which will be transferred to other routes, executives said.
Of their 200 transcontinental and Hawaii flights daily, about 70 percent of them will be flown by Boeing aircraft by this fall, executives said.
Photo credit: Alaska Airlines was unusually generous with its loyalty program in the second quarter, and the move was costly to the carrier. Alaska Airlines