Alaska Air Slows Its Growth as It Focuses on Absorbing Virgin America

Alaska Airlines has a message for investors who ask if the airline is permanently slowing its growth: It’ll be on the move soon.

“We always said the merger with Virgin America was about growth,” CEO Brad Tilden said Thursday on Alaska’s first quarter earnings call. “However, given our slower growth this year, some investors have asked whether thinking on this has changed. Our short answer to that is, no. We still see a lot of opportunity for profitable growth, especially in California.”

Alaska didn’t grow at all in the first quarter, with flown capacity rising just 0.2 percent, year-over-year. Part of that could be blamed on poor weather — Alaska canceled 1,100 flights in the Pacific Northwest due to a series of storms — but it has also been by design.

Alaska acquired Virgin America two and a half years ago, becoming the nation’s fifth-largest airline. But there are still some kinks to work out, and Alaska executives said they decided to slow growth as they worked to manage the combined airline.

Small Growth in 2019

For the year, Alaska said it plans to grow by just 2 percent, and most of the new capacity will come not on mainline airplanes, but on regional jets. Alaska plans to grow the mainline airline by just 1 percent this year.

The goal, executives said, is to focus on margins. Alaska reported operating margin of less than 3 percent in the first quarter, according to Jay Shabat, senior analyst at Skift Airline Weekly, at the lower end of the U.S. airline range. Delta, Shabat noted, recorded a 10 percent operating margin in the same period.

“As our margins improve, we’ll also get back to growing the airline, albeit at a more moderate 4 percent to 6 percent annual pace that we believe is appropriate given the size of our business today,” Tilden said.

Executives declined to share details on where they’ll put the new flights, other than that they expect to focus on California. One analyst pointed out capacity constraints in San Francisco and Los Angeles, Alaska’s two main California airports, but executives said they can add flights elsewhere.

“We have a broader California network we’re going to look at as well,” Chief Commericial Officer Andrew Harrison said. Alaska has bulked up recently in San Jose and San Diego.

Max Deliveries

Later this year, Alaska might have fewer aircraft in its fleet than expected. The airline has been planning to take its first three Boeing 737 Max aircraft soon, with one delivery slated for June, one in July, and one in October.

Still, even if Boeing does not deliver the aircraft as planned — it has paused deliveries indefinitely after the Federal Aviation Administration grounded the aircraft — executives said they don’t expect major changes to 2019 plans.

“Obviously, we’re watching the situation closely, but we don’t expect much of an impact on the capacity side,” CFO Brandon Pedersen said.

First-Quarter Results

Alaska reported net income of $4 million, roughly the same as in the first quarter last year.

Its revenue per available seat mile, or RASM, a metric that measures how much money an airline makes for each seat it flies one mile, increased 2.2 percent, year-over-year.

The airline said its RASM increased in nine of the 11 geographic areas it tracks. The exceptions were flights between California and Boston and New York, and flights between the West Coast and Hawaii.

Several airlines, including JetBlue Airways, have reported softness in transcontinental markets, saying capacity has outpaced demand.

Other airlines have also noted issues in the Hawaii market. Southwest Airlines began flying to Hawaii in March, and industry fares have fallen. 

Harrison said he’s “cautiously optimistic” transcontinental pricing will improve in the second quarter. But he said it might be a while before Hawaii revenue trends turn.

“I’m not sure that’s going to get a positive unit revenue just given the capacity that came on board and the fare environment,” he said.