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Originally published June 9, 2014 at 8:00 PM | Page modified June 12, 2014 at 3:09 PM

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Corrected version

Alaska Air soars into top 3

Alaska Air Group, which climbed to No. 3 in The Seattle Times’ 23rd annual ranking of publicly traded Northwest companies, is thriving even as the U.S. airline business has turned into a low-fare, low-cost operation.

Seattle Times aerospace reporter

Alaska Air Group at a glance

Headquarters: SeaTac

CEO: Brad Tilden

Employees in 2013: 13,177 (about 6,500 in Washington state).

What it does: Seattle’s hometown airline serves the Pacific Northwest and far beyond.

What sets it apart: A reputation for good service, an extensive hub network from Seattle, and routes to Alaska, the West Coast, the East Coast, Hawaii and Mexico.

2013 cash flow: $415 million

2013 sales: $5.2 billion

Years in ranking: 19

Highest ranking: First (for 2011)

Alaska Air Group annual report

Click to see an enlarged version of the graphic.

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As one U.S. airline after another went through bankruptcy over the past decade, Seattle’s hometown carrier adapted to the new era of low-fare, low-cost air travel, avoided bankruptcy and found a way to thrive.

To cut costs drastically, Alaska Air Group outsourced airplane maintenance, cabin cleaning and then baggage handling.

In tough labor negotiations, it wrung pay and other concessions from its pilots and flight-attendants unions.

It yielded to the industry trend of charging fees for checked bags.

These moves secured financial stability. When competitors pulled back, Alaska Air took opportunities to grab new and profitable routes, opening more than 60 in the past five years. Its performance over the last two years propelled Alaska Air Group to No. 3 in this year’s Best of the Northwest survey of publicly traded companies.

The growth, in turn, restored labor relations and employee morale, essential to delivering quality passenger service.

“The transformation over the last decade has been all about cost,” Chief Executive Brad Tilden said. “We’re trying to balance low fares and lots of service to the destinations (passengers) want, with a strong and successful company that can grow and buy new airplanes and has the capital to add new services.”

The financial results are impressive.

The parent company for Alaska Airlines and its regional sister carrier Horizon Air made a record $508 million profit in 2013, and the stock continued a steep ascent to five times its value from just five years ago.

Operationally, a J.D. Power survey of passengers last month ranked Alaska Airlines No. 1 in customer satisfaction among traditional North American carriers for the seventh consecutive year. It also ranked its mileage plan as the best among all U.S. airlines.

In recent years, reliable on-time performance and good cabin service have helped Alaska Air beat back sharp competitors for market share at Seattle-Tacoma International Airport.

Southwest tried to expand here, but later pulled out of some routes and retreated to the number-three position at Sea-Tac.

Last year, Delta began to mount what may be a more serious challenge, adding new routes out of Sea-Tac.

But in 2013, Alaska Air was by far the dominant carrier at the airport, carrying just over half of all passengers. Delta carried 12 percent of the passengers and Southwest 8.5 percent.

As Delta continues its aggressive expansion plans, “there might be some jostling” for position in the coming months, Tilden said. But he expressed confidence that Alaska can maintain its lead.

“Long-term success is driven by having a low-cost structure, low fares, great operational performance and engaged employees who deliver a great passenger experience,” said Tilden. “Alaska does well on all those fronts.”

And if Delta is angling for a merger, Tilden insists he’s not interested. He reiterated what management has said for years: that despite all the consolidation in the industry, Alaska Air should stay independent.

Michael E. Levine, a former senior airline executive now on the faculty of New York University School of Law, said Alaska Air has fended off all previous head-to-head rivals in its home market by astutely managing its costs and its service and leveraging its dominance at Sea-Tac.

“The Pacific Northwest has been a growth area. Alaska has captured a significant chunk of that growth,” he said.

Getting there was difficult.

Among several tough confrontations with its unions as it slashed costs, in 2005 the airline outsourced 472 baggage-handling jobs.

Yet “it never turned so ugly that it destroyed their business,” Levine said. “They convinced their labor force they’d have to become competitive. ... They got their costs low enough so they could compete with Southwest.”

The key financial metric used in the industry to compare airline cost structures is “cost per available seat mile,” or CASM, reflecting the cost in cents to fly a single seat one mile.

Alaska Air’s costs are much closer to those of the low-cost carriers than to the big network carriers.

In 2013 financial filings, Alaska Air reported CASM of 12.82 cents. That was close to Southwest Airlines at 12.6 cents. Delta’s figure was 14.77 cents.

Tilden stoutly defends the painful labor cuts of the mid-2000s that lowered costs significantly.

“Most airlines made much more severe changes through bankruptcy,” Tilden said. “Alaska did better by our employees by managing the situation ourselves.”

Last year, the airline signed long-term agreements with three of its unions and in April reached a deal with the Machinists union representing 3,000 clerical and passenger service employees.

However, a tentative five-year agreement with Alaska Airlines’ 3,200 flight attendants union was heavily rejected in February.

And in November, the earlier labor cuts seemed to come back to haunt the company and to threaten its friendly hometown image.

A citizen initiative in the city of SeaTac called for a minimum wage of $15 an hour. This could have affected Alaska Air’s airport vendors, including the contract baggage handlers whose work it had outsourced.

Tilden lobbied publicly against the initiative, arguing that it would affect Alaska Air more than competing airlines and harm its business. When the initiative passed, Alaska Air and other airport businesses challenged the legality of the outcome.

A King County court subsequently ruled that the new minimum-wage law would not apply to workers at the airport, which is run by the Port of Seattle, not the city of SeaTac. Yet the minimum-wage campaign gathered steam and soon won the day in Seattle.

In the aftermath, Tilden says the airline broadly supports the goal of raising wages of low-pay workers, but gradually and across the board, not in a single step and in a very limited area as the SeaTac initiative had proposed.

“We want to lean in to the issue,” said Tilden. “Alaska is generally supportive of where we are headed in the city of Seattle.”

In April, Alaska Air negotiated a pay raise of up to 28 percent to a new hourly rate of $12 for entry-level employees who work for its contractors at the airport, including the baggage handlers.

The airline is reimbursing the vendors for their additional labor costs.

Alaska Air Chief Financial Officer Brandon Pedersen says the focus on cutting costs has built a stronger company that is a boon to the Pacific Northwest.

Not only is the airline doing well, but with its growing fleet of jets, it’s boosting local airplane manufacturing.

It will take delivery of 10 new 737-900ERs from Boeing this year and 11 more next year. And from 2017, it will take the first of 37 new 737 MAXs on order.

“We have been growing. We’ve been hiring people, creating good-paying jobs and buying airplanes from the Boeing Company,” said Pedersen. “All in all, it has worked out.”

Dominic Gates:

Information in this article, originally published June 9, 2014, was corrected June 12. A previous version of this story referred to “tentative” labor agreements with the Machinists union and the union representing Alaska Airlines’ flight attendants. The status of those agreements has been updated.

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