Alaska Air Group SWOT and PESTLE Analysis

Strength

1. Long track record of financial outperformance: Alaska Air Group has a long track record of financial outperformance compared to the airline industry in general, over 2010-2018. Pre-tax margin of the airline industry was 10.4% during this period, whereas Alaska has seen a margin of 15.1%. Free cash flow margin of Alaska was 7.8%, very much higher than the industry figure of 2.1%. Alaska has shown a return on invested capital of 16.7% compared to 13.6% in the industry. The adjusted net debt to EBITDAR ratio of 0.9x compared to the industry figure of 1.8x. Alaska has also shown 9 years of positive free cash flow compared to just 6.2 years of the industry. Alaska Group has seen a stellar 2018 with a market capitalization of $7.5 billion, revenue of $8.3 billion, passenger traffic of 46 million and 1300 departures per day.

2. Customer friendly loyalty program: Alaska Airlines keeps improving its frequent flyer program, unlike other airlines who are actually devaluing their programs. Alaska’s program is one of the few programs that still awards miles based on the distance flown, irrespective of ticket price, which makes it easier for customers to win the perks of the program. Alaska’s partnership with multiple airlines like American, Fiji, Emirates and Finnair allows customers to use their Alaska miles to fly with many other airlines around the world. Alaska miles are also cheaper than most other carriers. Their parental leave policy puts the loyalty status of new parents or any others undergoing big life changes on hold for a year. The mileage plan of Alaska allows customers to earn and redeem to more than 900 destinations, with low redemption prices. The Alaska Airline Credit Card has many benefits compared to the Credit Card of Delta. The annual fee of Alaska Credit Card is $75, compared to $99 of Delta. The $99 companion certificate of Alaska Credit card is also popular, whereas Delta does not have any such offer. After the Virgin America merger, the loyalty revenues have increased by $280 million to $1 billion annually. The Group has won 11 consecutive JD Power awards for high customer satisfaction.

3. Competitive advantage through low-fare and high value model: The company’s low fare model is a source of competitive advantage by providing high value to the customers. Alaska provides the highest guest relevance in the West Coast due to its cost structure being 20% lower than legacy carriers. The Saver Fare product introduced in 2018 offers greater choice for passengers by allowing them to buy and pay for the ticket type and amenities that they want. Products like these, as well as enhancements to onboard products, will enable the company to deliver significant value to passengers. The high value that Alaska provides has won many awards for the company. The passengers also get generous rewards and the feel of a premium product at a lower price.

4. Focus on continuous improvement and cost efficiency: Alaska Air’s young fuel-efficient fleet of aircraft cuts fuel costs and reduces investments on new aircraft for a few years. 60% of the company’s fleet consists of the new Embraer 175 aircraft whose operational efficiency helps the airline cut costs. This is a part of the company’s focus on continuous improvement which helps in keeping costs low and enhancing customer experience. Upgrade of interiors, addition of new food and beverage to the in-flight menu, expansion of in-flight entertainment options are other ways of fostering customer loyalty. Alaska is among the most fuel efficient carriers in USA, with a value of 81.4 ASMs per gallon, behind only Spirit. The average fleet age of Alaska is just 8.3 years, again trailing only Spirit.

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Weakness

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Opportunity

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Threat

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Political

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Economic

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Social

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Technological

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Legal

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Environmental

1. Reduction in plastic usage: Plastic use is rampant in the in-flight food service of airlines, in the form of cutlery, straws, stir sticks etc. These are typically single use items that are thrown away after usage and add to the burgeoning plastic waste on the planet. The awareness of the harmful effect of plastic has led to airlines making efforts to reduce plastic use on board their flights and they are making pledges to be plastic free within a few years. The on-ground initiatives by food service outlets and cities to eliminate plastic use are important factors that have led to similar initiatives in the air. Alaska has partnered with an organization named Lonely Whale that focuses on protection of oceans and marine life. As part of this initiative, the airline has replaced plastic stir straws with marine-friendly alternatives on all flights and also in airport lounges. The airline has also replaced juice boxes with aluminium cans.

2. Aircraft emission reduction through alternative fuels: Emissions from aviation account for more than 2% of emissions across the world, making it one of the top 10 emitters had it been a country. As per International Civil Aviation Organization forecasts, global aviation emissions are expected to be 70% higher in 2020 than in 2005, and increase by 300-700% by 2050. Rising air travel around the world is contributing to this trend, as more and more people are opting for air travel in recent years. This has led to a need for possible alternative fuels for aircraft to reduce emissions. Alaska became the first airline to use a jet fuel blend having 20% renewable biofuel made from leftover wood. This was used for the first time in 2016 for an Alaska flight from Seattle to Washington DC. However, biofuel remains much more expensive than regular jet fuel, though there are efforts being made to reduce prices so that more flights can be operated using this fuel, reducing emissions significantly. Alaska has joined with the Port of Seattle, Boeing, and the FAA to improve navigation in a project called Greener Skies, which “aims to improve the efficiency of flights landing at Seattle-Tacoma International Airport by decreasing fuel usage, carbon emissions and noise pollution.

3. Upgraded fleets to result in fewer emissions: The U.S. airlines and aircraft operators have been able to recently overhaul their fleets with newer, quieter aircraft that are more environmentally friendly owing to improved finances. Billions of dollars have been spent in 2017 to purchase more than 480 new aircraft and almost 1,550 more planes are expected to join the fleets in the near future. Alaska Airlines itself has finalized installation of split scimitar winglets on all 737 of its suitable aircrafts in 2017. This will enable its flights to be around 4.5 percent more fuel efficient and will result in Alaska Airlines saving over 34,000 gallons fuel per aircraft each year.