Alaska Airlines is facing pricing pressure and rising costs as
it reaches the midway point of its merger with Virgin America, executives said
on the carrier's third-quarter earnings call.
CEO Brad Tilden said pressure on fares has been especially
strong in transcontinental markets, where Alaska competes with JetBlue and
basic economy fares, as well as within California, where the carrier has strong
competition with Southwest Airlines. Together, those two regions represent
about a quarter of Alaska's network.
In some transcontinental markets from California, business
fares purchased within seven days of departure declined between 20 percent and
35 percent year over year during the third quarter, despite strong demand and
flat industry capacity, chief commercial officer Andrew Harrison said.
Similarly, on some routes within California, those close-in fares decreased between
25 percent and 30 percent. "While we believe these prices are not
sustainable, they are nonetheless continuing into the fourth quarter,"
Tilden said.
Alaska's passenger revenue was $1.8 billion in the quarter,
up 6 percent compared with Alaska and Virgin's combined revenues from the third
quarter of 2016. Traffic rose 6.9 percent, and capacity increased 7.2 percent,
contributing to a 0.3 percentage point drop in load factor to 85.4 percent.
Alaska reported a pre-tax income of $427 million for the
quarter, down 12 percent from the two carriers' combined income a year prior.
Operating expenses rose 10 percent. CFO Brandon Pedersen
noted fuel costs increased $70 million and non-fuel costs rose $97 million,
including $6 million in costs from operational disruptions. Costs are expected
to continue to rise in the fourth quarter, he said, in what traditionally has
been a strong area for Alaska. "The company has a history of aggressive
cost management, which is now being questioned," according to a research
note from Cowen & Co. "Since closing the Virgin America merger, the
cost outlook has been less than stellar. Once the bulk of the integration is
done, we expect the company to get back to aggressive cost management and drive
higher productivity, which we believe is a pillar of Alaska's historical
success."
In terms of the merger, Alaska and Virgin in the third
quarter completed reciprocity between the two carriers' frequent-flyer
programs, co-located stations at 11 of 24 airports and launched technology that
enables gate agents to switch between Alaska's and Virgin's check-in and
boarding applications, Tilden said. In January, the carriers will move to
single systems for payroll, HR and finance; will fully integrate their loyalty
programs; and will obtain a single operating certificate, he said. "By the
middle of next year, our most critical integration milestones will be behind
us," Tilden said.
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