Can Alaska's Big Bets Pay Off?

0:09Hello and welcome to Window Seat, Aviation Weeks Air Transport Podcast. I'm David Casey, Editor-in-Chief of Roots. Welcome aboard. On this week's episode, we're talking about Alaska Air Group's biggest push yet into premium travel and its plans to expand its international network. Two years after buying Hawaiian Airlines, it's now giving us a much clearer picture of where the airline wants to be, and there's a lot to unpack. At its investment in Media Day in Seattle, the company outlined new premium cabins, live flat suites on some of its future Boeing 737 MAX 10s, new lounges and further changes to its loyalty program.

0:48Alongside that, Alaska notes plans to join American Airlines Atlantic and Pacific joint businesses, potentially changing how it develops and competes across its international network. Joining me to discuss what's going on at the airline and how it might influence the competitive landscape our ATW senior editor, Aaron Karp, and contributing editor, Chris Sloan, who is in Seattle reporting for ATW and Aviation Week. Chris and Aaron, great to have you both back on Window Seat. So Chris, for years, Alaska has put a lot of emphasis on keeping costs down, keeping those furs low, but now it is making a real investment in premium travel.

1:27And it sounds like they put on quite a show for you guys out in Seattle. Before we get into the detail of some of those announcements, just give us a feel of what it was like being there, the atmosphere, what was on display, and how the executives talked about their plans. Because I know you've followed Alaska for a long time, and it does feel like a little bit of a turning point for the airline, doesn't it? Yeah, I think that's fair to say. I mean, this was, you know, we've been to a number of these, I have to say, I mean, this was we a lot of people thought it was kind of the engagement coming out party for, you know, if you know the faces of the icons of the airline, Pualani and Chester, the Eskimo.

2:07I mean, it was like it had a it was very glitzy. It was very elaborate. And you're thinking to yourself, you know, this was a as you just were describing it for many, many years. Alaska and Hawaiian were small, provincial, regional carriers. And the level of production value, the level of attendance, you know, it was very audacious and impressive. I mean, I think a lot of people, and they even said, Ben Minicucci, the CEO, said, you know, I know we're probably raising eyebrows here in that fuel is 450 a gallon right now for jet fuel. You know, obviously the financial performance has not been phenomenal.

2:49Alaska was traditionally very profitable and, you know, has not been recently. And they were, you know, certainly there was a, wow, look how far we've come, but there's a humility there. And they literally compared themselves to a gawky teenager with acne who's just now starting to, you know, make their way in the world. And wow, we're 16 now, but wait when we're 18 and graduating. So they were honest in their assessment of how far along the journey that they were. But it was an impressive event. And I think that people walked away. For the most part, we'll talk about some of the news. But for the most part, we've heard a lot of these drips and drabs before.

3:39but seeing it in its totalitarian totalness together was kind of like there was there was definitely they were putting on a show. I do like the gawky teenager comparison, although it does sound like a gawky teenager with expensive taste judging by some of the announcements they did make. Because let's get into what the passengers can expect from some of the premium makeovers they've announced because there's a lot of changes coming inside the aircraft. We've heard of live flat suites in some of the 737 MAX 10s that are going to be serving the Transcon routes, a new premium reserve cabin, a complete overhaul of Hawaiian's A330s.

4:15Talk us through, Chris, what is being introduced, what was said about the gaps that those products fill and the passengers that Alaska is hoping to win. Well, I mean, obviously, I think you nailed it right there. The surprise of the day, I mean, I don't know if it was necessarily a surprise, but the big news was, as you mentioned, the sub fleet of the 25, 737 MAX 10s, and they conceded, They said, you know, when we took over Virgin America, we essentially surrendered that Transcon franchise. As you remember, Virgin America was the disruptor in that franchise. And that ultimately led to, you know, products like Mint and really a change.

4:54And those were the first thing they did is they removed that. And that obviously, you know, lost them a lot of that national, that premium relevance, probably at the wrong time. So this sub fleet is very much a, they called it Project Gotham. And so Project Gotham, they were very clear that this was about consolidating that West Coast premium market really centered around San Francisco. Surprisingly, they said Los Angeles. I think that was surprising. San Francisco, Seattle, the big hub, San Diego, Seattle, and Portland. They did not really say, obviously, where it was going, but it's called Project Gotham.

5:30So it's obviously starting with New York, but connecting all those East Coast markets. And so that was a big shift. It's a 25 aircraft subfleet. I think the thing that did catch people off guard was that there are not going to be seatback screens in economy, strangely enough, but there will be in premium economy. But the fact that they are running a full four-class cabin premium economy, which they have not done anywhere across their network, and now that'll be introduced on the 7.8s, the A330s. But the premium reserve is a significant subfleet. So I believe they have 162 of these on order, and about 25 will be that.

6:11So they felt that obviously this premium push is going to be huge, a huge demand. And and then, you know, elsewhere throughout the market, you know, this premium sweet spot, they you know, the it's interesting. They they've kind of they bit a lot off to chew, but the it's kind of been a soft launch in pieces. But there is a roadmap there where the seven eights on the Alaska side and big seven eight seven tens, they will now have a premium economy product, a large premium cabin with lie flats. And then they're going to be retrofitting the A330. So the idea is that the cabins are going to be roughly 40 % premium up from 30 % today.

6:52So that was really the notion of where they were. The one thing they did rule out that I think a lot of us were interested, they did rule out following the trend of any sort of basic business cabin at the moment. So they still seem to be just kind of dipping their toes in. And I will say, they did have visual representations and demos of all this. and very, very, you know, it is a gorgeous product for sure. It's interesting to hear about that premium sweet spot that you mentioned, Chris, where 40 % of revenue is expected to come from premium products by 2030. How do you assess that bet, Aaron?

7:33Is there still a demand for airlines to capture or are we getting to a point where airlines across the industry could be adding more premium capacity than passengers are actually willing to pay for? Well, Alaska is echoing really what the rest of the industry has been saying, that the growth is in the premium revenue. Alaska President and CFO Shane Tackett, who was speaking at the Investors Day, was saying that the increasing revenue is coming from outside the main cabin, especially when it comes to international. And I think that's such a key here is Alaska building this long-haul global international network, and they feel like they really have to have premium seating for that.

8:14And the premium revenue is simply higher margin revenue stream, less dependent on the ebbs and flows of domestic airfares and different cycles. And this has been going on for several years, that the majority of the revenue growth is coming from premium. One thing that was really interesting that I saw that Ben Minenucci said was that being a low fare, low cost, high productivity, high utilization airline was, as he said, burned in our brain. And they now realize that, you know, that they have to pivot from that and think of themselves really as a global international airline and with premium products.

8:58And I think that was what you hear from pretty much every airline in the US market is that premium is where it's at, premium economy, the passengers are upscaling and want to pay for that. And that the weakness that we've seen most recently has really been more in the main cabin and that the premium revenue is still coming in. And in terms of that premium revenue, they want to extend it not just to the aircraft, but also to the airport? And they've already established a dedicated premium check in Seattle, but they've outlined plans for a new two-story lounge, which was going to take that further.

9:37And there's going to be a separate Aurora lounge above the main Alaska lounge. Just quickly, Chris, what did you learn about how Alaska wants that airport experience to feel? Well, I think you, I mean, you nailed it. I mean, it's a, they are positioning themselves as a global flagship carrier. And right now, the current lounge situation in Seattle, which will be their global hub, is, you know, it's beautiful. It's overcrowded. There's a number of them, but there is no true international lounge. And so, I mean, again, they're moving quickly. You almost can look at what happened with the launch of London and Rome.

10:14It's a soft launch. They have that exclusive check-in, but now they're going to have that true 200-seat Aurora Lounge with a la carte dining and wellness and showers and all the things that were there at that expectation. A lot of that, obviously, is not only being driven by the premium cabin, but also by the real emphasis on the loyalty program, which we'll get into a little bit later. But that Bank of America, Atmos, titanium, platinum card, loyalty, you know that that's really driving this expense. But the notion is doing something, I think overall, a bit kind of tearing a page from the Delta One book.

10:53So it's not just Seattle, but they're going to launch a premium lounge in Honolulu, though that one will be much smaller, I think 13 ,000 square feet. It doesn't necessarily have the showers and the amenities. There's only going to be one of these real big global flagship Aurora lounges, which is their brand. But they're going to do this as well in San Diego. And they feel like they've really set the new San Francisco lounge has really set the template. So they're really, really upping the ante on the ground experience, because what's happening right now is there's a bit of a disconnect between everything that seems to be happening in parts.

11:33And so and by the way, just want to preface this, this is not snap your fingers. This is this these things happen. You know, the flagship lounge is later in 2027. This is going to happen all over a number of years. So it does take about four or five years. It seems to fulfill some of these aspirations. and in terms of those airport investments they're obviously part of the push to make Alaska a more international airline we've seen some long-haul route launches from Seattle over the past 12 months or so there was Tokyo, Seoul earlier this year London, Rome and Reykjavik and the next year we'll obviously have the new routes to Paris and Athens as well.

12:12Chris what did you hear in Seattle about the performance of that long haul operation the airline has talked about some strong participation from Atlas members and improving the corporate demand did you get a sense of how that network might develop as they push towards 15 intercontinental destinations by 2030 for sure I mean this was all about the battle of Seattle if there was one airline that was consistently mentioned, it was the D, the D word, Delta, Delta, Delta, and Seattle, Seattle is that they really, that Seattle represents 41 % of the capacity. And there was obviously not, they were obviously not able to participate in a number of corporate accounts and a number of, you know, they kept using the word flywheel.

12:59So this obviously has unlocked the corporate accounts. This is unlocked a lot more in terms of that high, the credit card at most, which, you know, they say 46 % of the metro in Seattle in some way participates in that rewards. And so this is really, they say that the seat base in Seattle, this is essentially the largest West Coast hub of any airline. And so they feel that international is really, really the missing piece. So as far as where it's gone, they have 17 787s that'll be in the fleet with 30, I mean, with, I believe what they said, what they say, 15 international destinations by 2030, long haul destinations.

13:41So they believe that this layer is really a significant key. And as far as the way it's gone, they actually say so far that their market share in managed corporate is up by about 30%, you know, and 30 % actually leisure guests are actually new to Alaska. And then, you know, half of the intercontinental guests are Aptos Atmos members. So they really believe that it's driving that whole loyalty thing. And as far as the profitability and the routes, what we've heard is that some of the profitability is, these are very competitive except for the notion of Rome, but the loads have been ultimately very, very strong.

14:21So they're moving at speed. And furthering that international push was another announcement, which as someone who writes about network news all day, was probably the most interesting thing that caught my eye, which was the potential joint ventures with American Airlines, Atlantic and Pacific joint businesses. CCO Andrew Harrison said this was a way of putting Alaska on a more level playing field with some of its competitors. Aaron, what is the thinking behind this move? Why do you think it wants to join these businesses now? And what could it help Alaska to achieve that it might struggle to do on its own?

14:59Well, Alaska's view in itself is becoming essentially the fourth global long haul US carrier along with American, Delta and United. And as Ben Minenucci pointed out, all of those others are part of JVs, international immunized JVs. And so American, for example, is part of one with BA, Iberia, Finnair, Aer Lingus and Level going across the Atlantic and with Japan Airlines going across the Pacific. And Alaska wants to join those two JVs in which they could share revenue and planning in terms of these long haul flights. And they view it as just nothing different than what the other majors have. I mean, 85 % of the capacity going across the Atlantic and the Pacific coming from the U.S.

15:52is part of these JVs. And they just believe the international strategy they have will be so much better supported if they can be part of the JVs, if they can participate. Just throwing one thing out there, that if that had been in place this summer, for example, Alaska and JAL would have had 49.2 % of the capacity going between Tokyo and Seattle would have been part of the JV. Now, the odd thing here and where this is going to come into a potential regulatory problem is that in all these other joint ventures, there's one U.S. carrier that's a partner. And Alaska is basically wanting to join in with two JVs that American Airlines is already a partner in.

16:39And I think regulators are going to take a very hard look at, well, now you have two U.S. carriers in one antitrust immunized joint venture in terms of American competing against Alaska. How does that figure? I mean, it's one thing for there to be antitrust immunity to work with foreign airlines, but to work with another U.S. carrier. I think that's something that's going to be a big deal here. And that's something they're going to get past. But I really think it comes down to them saying, look, we're not flying near international. We're not doing the sort of thing that JetBlue is doing where we're flying from the East Coast to the U.S.

17:19to select destinations in Europe. We are flying long haul from the U.S. West Coast to Europe, from the U.S. West Coast across the Trans-Pacific. And in order to do that, we have to be on the same playing field as the other big three that are doing that. It's just a matter of the strange fit of putting two U.S. carriers into antitrust immunized JVs. And I think that's where we'll see a lot of the discussion going forward. Yeah, it'll be certainly interesting to see what the regulators have to say about that and whether there's any pushback. Let's turn to the numbers though now, because ultimately all of this investment has to pay off.

18:01Alaska's looking to premium travel, international flying, loyalty cargo to bring in more revenue. It says it's already captured roughly two thirds of its$1 billion incremental profit target, but earnings are still under pressure. And we know fuel costs are obviously a big part of that at the minute. Now, this was an investor day, Chris, as well as a glitzy media event, as you said. How much time did the management team spend on the financial picture? Did you come away with a clearer sense of how that underlying business is performing? Yeah, I mean, they spent a lot of time on it. They spent a good hour and a half.

18:37Really, the afternoon program was about this. And so they remain committed to 11 % to 13 % pre-tax margin. And that's even in the face of oil at 83%, 85%. And Jetfield's already at four per gallon, 450. 50. And so they believe that their term they kept saying is we have the winning ingredients regardless of cycle. I mean, they said this is not about the now. This is about the then and the future. And I would say there was some skepticism about that. I mean, in a research note, Savani Sith of Raymond James said, you know, they still understand why the earnings haven't performed better. They say we've got two thirds of this one billion incremental, you know, why your profit levels, you know, not where they where they should be.

19:22But they claim to their point that you have to give us a moment here. I mean, we're upscaling the premium, the global connectivity, we're scaling loyalty. They're doing a significant change in cargo. I mean, again, they actually claim the loyalty program is going to be$4 billion. By 2030, they're actually valuating like$16 billion, so pretty significant. And so they believe that that is really where a big driver that is going to be. And, you know, there was some questions being like, well, if it's at$4.50, it's at$5. Is this really, really going to work? But they still, you know, believe it will.

20:04And this is, again, a long-term play. But they do concede. I mean, obviously, Alaska has been hit harder than anybody else, at least as far as fuel costs. Yeah, it's such a lot to execute, though, all at once. new aircraft, new cabins, larger international network, deeper partnerships. And all of this is going on while they're still trying to integrate the Hawaiian business as well. Just before we finish, what do you think is the biggest thing that Alaska has to get right to make this strategy work? Chris, let's start with you. Well, I mean, as you just said, they are, you know, that they don't get ahead of their skis and fly too close to the sun.

20:45I mean, this story feels a bit like, you know, years ago, like Virgin Australia, WestJet, these kind of regional or carriers have had a very specific brand. And now, you know, the world has changed, obviously. It's a different story, but there's a lot to bite off here going from this quirky regional carriers to this one global massive with two brands. I mean, two existing, two completely different brands. And you could actually say four because there's also regional, which they have and they're evolving. And then this kind of sub brand, this Aurora, this international long haul brand. So but they and the other thing is it's kind of a throwback.

21:21Right. Right. I mean, we're talking about a global carrier, but this kind of goes back to the days when like Northwest Airlines, where they were, you know, at a big, strong Midwest and Northwestern. And then they had Asia and Europe. But at the end of the day, Alaska is really, really strong. They're essentially the number one carrier on the West Coast. But the relevance is in the United is not the rest of the United States. So that's a big difference between these everybody else and the global aspiration. So I think, look, these are very smart, creative, bold people. It feels like one battle after another.

21:54They just keep, you know, they keep taking their looks and they stand right back up and just move. But the spoils go the bold. So I can't think of a more fascinating story really to watch in this country. For me, at least, this is the one I eat a lot of popcorn watching. And Aaron, what about you? How convinced are you that it can become that global premium player that it wants to be? Well, Chris mentioned their position on the West Coast. And I think that's really the key here is that they are, in many ways, the top airline on the West Coast in terms of their market share. They serve 60 airports on the West Coast.

22:32They have a 21 % market share on the West Coast. San Diego, which we haven't talked about, they've turned into a big hub. with adding Hawaii. There's so much traffic going back and forth between Hawaii and the West Coast. So I think for them, they want to leverage this strength on the West Coast. And they believe the demand is already there, that the demand in Seattle to fly Trans-Pacific is there. It's just, you know, Delta has been operating it and JAL has been operating it and airlines like that and not them. And so if they put the network in place, then they can have the customers that maybe operate, you know, are loyal to them on domestic flights, loyal to them flying from the West Coast to Hawaii, will now fly internationally with them.

23:18But I think really what they're trying to do is something that no other U.S. carrier has really been able to do. And that's become the fourth global international airline. You know, Southwest, we consider them one of the big four. And of course they are, but all their international flying is near international. JetBlue does near international and some limited transatlantic narrow body flying. They want to have, you know, 15 international long haul routes by 2030. And these are real long haul routes. And so that's their ambition. And I think, I think the thing is for them is to focus on the strengths as they build that.

24:04And that's the West Coast, lean into the West Coast, lean into Hawaii, where they continue to strengthen the Hawaiian brand. And then one other thing I'll throw in there that we haven't mentioned is that they believe 20 % of the revenue from the trans-Pacific flights will come from cargo. And so I think cargo is sort of an underappreciated element of where they need to be generating revenue, and that could make a difference on some of these flights. So I think it is possible but you know it's a very ambitious plant absolutely definitely very ambitious and there's a lot for us to keep an eye on as journalists so we'll see how this all comes together and whether this gawky teenager can develop and deliver the stronger profits that the line is counting on so chris and aaron thank you very much for joining me and thanks to our producer natalia paleo thanks also for listening you can find chris's reporting from seattle along with our wider coverage of the global airline industry on aviationweek.com.

25:05If you enjoyed this episode, please subscribe to Window Seat wherever you get your podcasts. Until next time, this is David Casey disembarking from Window Seat.