Alaska Airlines Strategic Management Model Linda Gay Cahill Table of Contents: Strategic Profile Company Introduction3 Strategic Analysis PEST Analysis (Political, economic, social & technological factors)4 Resource-Based View6 Value Chain Analysis8 SWOT Analysis11 Strategy recommendations13 References14 Company Introduction Alaska Airlines is the ninth–largest U. S. airline based on passenger traffic and is the dominant U. S. West Coast air carrier. Headquarter in Seattle, Washington, Alaska carriers more passengers between the state of Alaska and the Lower 48 than any other airline.
During recent years it has expanded significantly to serve more U. S. East Coast, Mexican and Canadian destinations. Long know for its Alaskan roots, symbolized by the Eskimo painted on the tail of the aircraft, Alaska Airlines offers a friendly and relaxed style of service, one that passengers have came to appreciate as the “Alaska Spirit. ” The airline is known for embracing innovative technology to improve the customer experience. The carrier traces its roots back to 1932, when Linious “Mac” McGee airways started flying his three-seat Stinson between Anchorage and Bristol Bay, Alaska.
A merger with Star air service in 1934 created the largest airline in Alaska, which eventually became Alaska Airlines. Alaska and its sister carrier, Horizon, are owned by Alaska Air Group. 1 Alaska Airlines has a dominant market share serving Alaska. Unlike the rest of the economy Alaska has been seeing increasing significant revenues from oil business and tourism. Air travel is the states largest form of transportation because of the geography of the state and its arctic climate. There are over 1,100 airports in Alaska and over 3,000 landing strips in the state.
Thirteen percent of revenue generated by tourism goes to air travel. Alaskan travelers fly on average nine times per year compared to the main land US average of twice a year. Alaska maintains a 50% market share based on passenger enplanements at Seattle, Los Angeles, Portland, and Anchorage airports. When looking at industry as a whole very few airlines realize a profit. Alaska Airlines, the smallest of the nation’s nine largest airlines in terms of flying capacity, showed the biggest profit, with $88 million in net income.
Chairman, president and chief executive William Ayers called it “one of the best quarters we’ve had in a very long time. ” He suggested that Alaska’s small size helped it be nimble during a difficult period. “We are closer to our customers and able to make changes and adapt to economic realities more quickly. “2 Mission Statement To have the best people, provide the safest and best service, for the best value, to each customer each day. The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business.
A PEST analysis is a business measurement tool. PEST is an acronym for Political, Economic, Social and Technological factors, which are used to assess the market for a business or organizational unit. Political: The recent increase of safety concerns has led toward the Federal Aviation Administration (FAA) to enforce stricter safety regulations and add reforms. The recent news of airline companies forgoing service intervals has led to an increase in the number of inspections to ensure better analysis and completeness of data collected. Just recently the FAA after improving inspections fined Southwest Airlines $10. million and grounded 38 planes because of the skipped maintenance intervals. 12 With recent filings of bankruptcy and the American Trans Air (ATA) going under on April 3, 2008, we should wonder, as do passengers, just how many corners airline companies are cutting. 11. Expiring taxes would make it hard for the Airport Improvement Program (AIP) to fund its expected funding of $42 billion for 2007 to 2011. 12 Taxes related to the Airport and Airways Trust Fund are due to expire. Overall this makes a very difficult situation for the FAA to handle with the ongoing safety concerns and management issues.
The inspections could lead to losses in revenue due to increased fines. Political support for the airlines has allowed the industry to cut costs associated with labor, mostly due to airlines filing Chapter 11 bankruptcy. In 2008, US Air was given permission by a bankruptcy judge to cut union pay by 21 percent. Many US airlines have benefited from operating under Chapter 11 bankruptcy protection. 12 This protects them from hostile take overs and allows for the company to restructure, but the company has no equitable financial capacity. Political barriers have also included the regulation of Open Sky treaties with the US.
Individual airlines, as well as, airline alliances are required to maintain contracts with the FAA. The events pertaining to 9/11 have caused political uproars with regards to security regulations of the airline industry. As a result, airlines have been required to take proper safety precautions to ensure passenger travel. Increased security is the main way airport hubs and airline companies have worked to help travelers feel secure. The increase security has not only burdened passengers, but has also extended the time and labor requirements for the individual airlines. Economic:
Due to the current economic situation in the United States, with regard to the recession, the airline market may see declines in leisure travelers. The plunge in the US market in 2008 had led towards a 0. 6 percent decline in average seat occupancy. This is the largest drop in a three year period with a drop of 0. 9 percent in December 2004. The economic levels of the households and businesses rely heavily on the amount of disposable income and company transportation expense for air travel. Our current economic state yields households and businesses to hold on to their capital.
Oil price fluctuations have a great impact on earnings in the airline industry. In the past year it has been as high as $128/barrel and is currently at $74/barrel (Feb. 2010). In 2008-2009 several airlines suffered significant declines in their earnings based on this expense. Airlines will need to find non monetary strategies to fight this expense. They could try price hedging or joining an airline alliance/partnership in order to increase fuel buying power. This would allow airlines to buy fuel in larger quantities and create contractual agreements with oil suppliers.
Social: The airline industry will face many social issues in the next few years. The United States Government Accountability Office recently predicted that 70 percent of the air traffic controller will retire within the next ten years due to age. 12 Air traffic controllers work for FAA and are paid through a ticket tax that goes to Airport and Airway Trust Fund so the cost of staffing and training new air traffic controllers will be passed on to passengers through an increase in these taxes. This raises the cost of tickets for all airline companies.
FAA is also expecting a shortage of airline pilots because of retirement at age 60. However, FAA did pass a rule in 2008 which would allow one pilot to be over 60 but younger than 65. The increased number of low-cost carriers flying shorter routes with larger flight volumes has led to an increased need for more pilots. It has been predicted that the number of flyers will increase with around 1 billion people flying a year by 2015. This may cause an overload in the sky, forcing a major reform in air traffic controlling. This will be paid for by the Airport and Airway Trust Fund and handled by the FAA.
There is also the change in the businessman to be considered. Today we have many women in the business world and airlines need to place more emphasis on this market catering toward women within their business class. Another area of social change is the structure of the US family. What was once a mother, father, and a couple of children we now have more single parent families. The airline companies need to better reach out to the single parent families, single individuals and the gay community, who are not business travelers. Consideration needs to be given to ethical responsibility of the airlines.
Airline service for the passenger is often absent on domestic or short routes. Alliances between airlines needs to be apparent to the customer through the services they experience. The regulation of flight pricing is the final element of social responsibility to be considered. The business class pays the highest fare for flight due to last minute meetings and the airlines rely heavily on this capital. Families or individuals flying for pleasure make up the second source of profit. They usually book their flight in advance to guarantee a low cost and to make their plans.
It is however becoming more difficult for a family of four to travel to Disneyland for vacation. More airlines need to implement plans for these types of travelers. Technological: The newest technology in the airline industry are the Boeing 787 and the Airbus A320 which offer fuel economy and reduction in green house gasses across the board. This advancement in technology from the 787 has yet to be seen in the air but its carbon composite body and weight compared to other airplanes is notable. Advancements in the internet have allowed airlines to cut cost when it comes to ticket sales and check-in procedures.
Internet systems offer unprecedented data and forecasting abilities that airlines did not have in the past. These systems allow for load level predictability, which can be helpful when allocating freight to commercial passenger planes. PEST Analysis |Political |Economical | |Safety concerns require stricter safety regulations and reforms. |US recession result in decrease in leisure travellers and | |Expiring taxes for funding of AIP and Airport and Airways Trust Fund. business travel. | |Likelihood of more FAA inspections. |Oil price fluctuations result in need for price hedging | |Political support concerning labor cost for union workers allowed cuts. |and/or airline alliance. | |Open Sky treaties with the US require contracts with FAA. | | |Social |Technological | |Retirement of several air traffic controllers. Boeing 787 and Airbus A320 offers fuel economy and reduction | |Retirement of older pilots. |of green house gasses. | |More people flying by year 2015. |Internet use allows for lower cost and predictions for load | |More women in the business world. |levels. | |US family structure changes, single parent families, single individuals, gay | | |community. | | |Ethical responsibility for service on all flights. | |Pricing in different passenger markets. | | Resources: Tangible: Tangible consists of financial, organizational, physical, and technological resources that are necessary for the overall success of the company. Alaska Airlines’ financial resources are their borrowing capacity and their ability to generate funds. Alaska’s organizational resources are their reporting structure, formal planning, controlling and coordinating systems.
The computer systems that coordinate all flights and times and the system that go into navigating and organizing flight patterns should be considered in organizational resources. Alaska Airlines was the first airlines to book flights and sell tickets via the internet. They also feature wireless and web check-in. They were also the first airline in the world to integrate satellite Global Positioning System (GPS) with the latest in Enhanced Ground Warning System (EGWS) technology.
The physical resources for Alaska are their aircraft, terminals and airports in which they operate. Below is a chart of Alaska’s fleet and plans for their future fleet. Alaska Airlines maintains a fleet of 115 Boeing aircraft, with an average age of 7. 5 years. The airline has taken delivery of 10 737-800s in 2009. The airline also has firm commitments for 15 aircraft and options for 40 in 2010 and beyond. Alaska Airlines Current Fleet and Projection; Model |Seats (first class/main cabin) |# in fleet | |737 400 |737 700 |737 800 |737 900 |737 400F |737 00C |Fleet Total | |Boeing 737-400 |144 (12/132) |27 |Fleet at end of 2009 |27 |19 |51 |12 |1 |5 |115 | |Boeing 737-700 |124 (12/112) |19 |Aircraft projected to enter service 2010 | | |4 | | | |4 | |Boeing 737-800 |157 (16/141) |51 |Aircraft projected to leave service 2010 |-4 |-2 | | | | |-6 | |Boeing 737-900 |172 (16/156) |12 |Fleet projected at end of 2010 |23 |17 |55 |12 |1 |5 |113 | |Boeing 737-400C |72 |5 |Aircraft projected to enter service 2011 | | |3 | | | | | |Boeing 737-400F |N/A (freighter) |1 |Aircraft projected to leave service 2011 |-2 | | | | | | | | | | Fleet projected at end of 2011 |21 |17 |58 |12 |1 |5 |11 | | Technological resources are their patents, trademarks, copyrights, livery, and trade secrets they might have. Alaska Airlines is a trademarked name. Intangible: Innovation, human, and reputation are Alaska Airlines intangible resources. Innovation resources for Alaska Airlines are the ideas, scientific capabilities and their ability to innovate. Alaska Airlines must consistently come up with ideas and innovations to adjust to the changing market as the airline industry remains very competitive.
HR management is imperative to ensure that Alaska has knowledgeable and trustworthy personnel who deliver a consistent and pleasant experience for all customers. Reputation resources are the status they have established with customers and suppliers, their brand name, and the perceptions surrounding their service delivery, reliability, and efficiency. Alaska Airlines developed a solid brand name and has a reputation of superior service. Value Chain Analysis: Inbound Logistics: There has been a very large cost associated with maintaining a competitive edge in such an established competitive industry.
Alaska could potentially expand their freight business and strive to set up effective hedges against gasoline prices, one of its primary inputs. In the past Alaska depended upon its cargo business to offset the increasing cost of gasoline. If Alaska were to establish an effective hedge with Southwest and expand its freight operations it could result is more stable revenue. The feasibility of this move is very high since more people enjoy online shopping and the state of Alaska is dependent on freight business to send and receive merchandise. This move could potentially reduce its dependence on passenger revenue, especially in off seasons.
Alaska Airlines competition in the freight business are Lynden, UPS and FedEx, whose primary business is cargo. Alaska has expanded its fleet over the years. Its fleet now consists of 51 737-800s and 21 737-400. It will retire 3 of its 737-400C model in 2011 and add three 737-400Cs. These aircraft are more fuel efficient and have helped Alaska to save on fuel costs in 2009. The cost of insurance premiums since the 9/11 attacks have increased for the airline industry. Insurance costs are government mandated and requirements after 9/11 have also increased. Operations: Alaska has expanded its fleet over the years.
Its fleet now consists of 51 737-800s and 21 737-400. It will retire 3 of its 737-400C model in 2011 and add three 737-400Cs. These aircraft are more fuel efficient and have helped Alaska to save on fuel costs in 2009. The cost of insurance premiums since the 9/11 attacks have increased for the airline industry. Insurance costs are government mandated and requirements after 9/11 have also increased. Alaska airlines is the ninth-largest U. S. airline based on passenger traffic and is the dominant U. S. West Coast air carrier. In January 2010 Alaska told investors its January traffic soured 9. percent on a 1 percent increase in capacity. Its load factor increased 6 points to 77. 7 percent. Its major competitor, Southwest ranks number 3 in the U. S. domestic market and operates a much larger flight network with significantly more revenues. Alaska could suffer from significantly less resources than other airlines. Alaska should continue to manage their niche advantage in the state of Alaska. Freight services could all significant revenues to Alaska especially from the seafood industry. Alaska can now maintain parts inventories a lot more effectively because their fleet is based on 737 models.
Outbound Logistics: Aspects pertaining to outbound logistics would be baggage system and connecting flights. It is somewhat difficult to improve baggage systems and connecting flights. Today people want to save money and enjoy getting rewards for flying on a certain airline. Alaska has one of the best frequent flier programs in the industry with a vast amount of partners including Delta, American, Northwest, and British Airways. Marketing and Sales: Alaska Airlines has marketing alliances with other airlines that provide shared frequent flyer mileage credit, redemption privileges, and code sharing on certain flights.
Alaska distributed tickets through alaska. com, travel agents and telephone reservations. Alaska does promotions and advertising online, in magazines, and on billboards. They also have travel agent programs, and package deals with car rentals and hotel reservations included. These forms of promotions, advertising and sales techniques are all different ways in which Alaska Airlines gets its name out to the public in order to create brand equity. Service: As a service industry Alaska Airlines’ prime objective is commitment to their customers in achieving success.
Their mission is to always provide safe, reliable transportation for a reasonable price, while still providing caring, friendly and professional service. Alaska prides itself on its award winning customer service and they intend to maintain this service by; offering their lowest fares, guaranteeing fares within 24 hours, processing refund requests quickly, providing clean and comfortable aircrafts, show care for the customers’ needs, offering choices during delays, caring for the customers and ensuring their comfort during delays, returning checked baggage quickly, and listening to what the customer has to say. Procurement:
The section of the company that oversees the purchasing of materials that are necessary for the company to operate is procurement. The main materials vital for the success of Alaska are the aircraft and fuel. Currently Alaska Airlines has a fleet of 115 aircrafts all Boeing 737s. It is therefore dependent on Boeing for all its aircraft and aircraft parts. The airline industry is always concerned with the fluctuating fuel costs. Alaska was able to profit from low fuel prices in 2009. In order to remain competitive and successful within the industry, Alaska needs to maintain the highest quality materials at the lowest possible price.
Human Resource Management: Alaska’s human resource management is responsible for their award winning customer service. Alaska promotes their “Alaska Spirit”, which is the employees pride in Alaska’s heritage and passion for shared values. Alaska attracts, develops and empowers individuals to share a passion for genuine, caring service. Alaska has two unique incentive programs; 1) Performance Based Program (PBP is based on goals set by the board in the fall and is designed to align employee actions on safety, customer satisfaction and unit costs. Each of these factors is weighted at 105.
Achieving goals toward profitability is weighted at 705 Achievement of goals employees earn 5% of pay, exceed goals employees earn maximum of 10% of pay and miss our goals no payout, and 2) Operational Rewards Program (ORP) every employee participates allows a payout of $50 per month when they achieve customer satisfaction and $50. per month for on time goals. Alaska provides their employees with a competitive rewards package as well as travel benefits. They also provide career development programs, training opportunities, as well as mentoring and coaching opportunities.
Firm Infrastructure: The infrastructure is composed of financial policies, accounting, compliance to regulations, corporate strategies, legal issues, and community affairs. Changes in government regulations that could lead to increased operating cost and the increase in insurance cost and reduction of insurance coverage could have damaging effects on their infrastructure. A failure to successfully implement their growth strategy and related cost reduction goals could affect their firm’s infrastructure. SWOT Analysis: Strengths:
Alaska’s key strengths are its consistent stock performance, consistent growth, its niche in the state of Alaska, its overall position in the market, its award winning customer service, and its “Alaska Spirit”. Although it is a smaller airlines than its chief competitor, Southwest, it has always offered strong revenue. The increase in flight capacities has substantially benefited the airline with the addition of new jets and the retirement of older ones. Its niche in the state of Alaska is its greatest strength along with 50% market share based on passenger enplanement at Seattle, Portland, Los Angeles and Anchorage airports.
Their route selection is very well planned and their expansion of destinations of Hawaii and Mexico from Alaska benefited the firm and the sun seekers in the Northwest region. (see charts on page 11) Weakness: When compared to its competition Alaska’s key weakness is its size. It does not bring in the same amount of revenues as Southwest, Delta, United or American. They have incurred additional costs in purchasing new aircraft so it is more difficult for them to reduce fares. The fluctuation of fuel cost causes increase costs that are difficult to predict.
It is harder for them to grow nationally and internationally with their dependence on their niche in the state of Alaska. Opportunities: There is significant opportunity for Alaska Airlines to become more freight oriented offering Alaskans freight services. Internet buying has increased significantly over the last decade and could spur this transition. It can diversify its routes increasing flights to Hawaii and Mexico. Their increase in capacity aircraft also allows Alaska to serve longer routes to Hawaii and Mexico with better effectiveness and fuel efficiency.
Their larger aircraft could take on more freight when necessary. They can also increase their freight business with local fisheries in moving fresh seafood throughout their routes. Threats: The greatest threats to Alaska Airlines are competition from larger airline companies, increasing insurance costs, fuel cost increases, and stricter FAA regulations. Larger airlines have better purchasing abilities and operate in wider route patterns across the United States. Since the 9/11 attack insurance costs have affected the whole industry and places a threat based on the risk coverage and premiums.
Raising fuel cost across the whole travel industry has caused concern. FAA inspections have become more frequent and stricter since the 9/11 attack and increase threats from terrorists. The recent decline in the American economy has been a significant threat to the airline industry. The future retirement of older air traffic controllers may result in increased airport taxes. [pic] Top 10 city pairs by capacity and frequency share [pic] Source: Centre for Asia Pacific Aviation & OAG Current as of 24-Jun-09
Strategy Recommendations: Increase Freight Cargo: The freight market is predicted to grow steadily over the next several years so increasing freight would be a successful strategy for Alaska Airlines. The global air freight industry showed a significant growth in 2006 at $99. 9 billion in revenues and is predicted to increase by 2011 to revenues around $145. 4 billion, an increased 7. 8%. There has been a very large cost associated with maintaining a competitive edge in such an established competitive industry.
Alaska could potentially expand their freight business and strive to set up effective hedges against gasoline prices, one of its primary inputs. In the past Alaska depended upon its cargo business to offset the increasing cost of gasoline. If Alaska were to establish an effective hedge with Southwest and expand its freight operations it could result is more stable revenue. The feasibility of this move is very high since more people enjoy online shopping and the state of Alaska is dependent on freight business to send and receive merchandise.
This move could potentially reduce its dependence on passenger revenue, especially in off seasons. Alaska Airlines’ competition in the freight business are Lynden, UPS and FedEx, whose primary business is cargo. On-line sales are constantly growing, especially in the state of Alaska and there is a growing need for transporting these goods. Focusing on freight would lower Alaska’s dependency on passengers filling their aircraft and may reduce the number of workers required to manage freight. Expansion of International Flights:
Mexico was the top U. S. international destination prior to the H1N1 virus, when travel declined significantly. Since the vaccine distribution and risk reduction more people are back to traveling. Mexico and Hawaii are popular destinations for Alaskans, who need a break from the winter weather. Canada is the second international destination for U. S. travelers. The popularity of Mexico and Canada makes them a lucrative market for Alaska to compete in. References: 1) 3 of 9 big airlines profit as industry improves in 3rd, Trading Markets.
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