- Feb 14, 2004
- Total Time
By MATTHEW KAMINSKI
Airline business: Mere oxymoron or investor death wish? Cumulatively, America's airlines have lost $34 billion since 1947. In the last decade, five legacy carriers landed in Chapter 11 bankruptcy—US Airways twice. "How do you become a millionaire?" mused Warren Buffett, who had an unhappy dalliance with US Airways. "Make a billion dollars and then buy an airline."
The commercial jet came of age in Seattle, yet when Bill Ayer quotes another Buffettism at a business conference here—"If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down"—the audience erupts in laughter. Mr. Ayer knows his gallows humor. He runs America's seventh-largest carrier, Alaska Airlines.
Based along Angle Lake in southern Seattle, Alaska is an oddity—a smallish, specialized, regional airline in a world of global giants. It shuns cross-continental alliances and mega-mergers. It doesn't make a priority of "market share" or "capacity discipline," the industry buzz words. It's also unusual, in an era of wrenching change at airlines, that Mr. Ayer has worked at the same company for 30 years.
Alaska is unique in other ways. "They seem to be running a business, rather than an airline," says analyst George Hamlin. Take any industry metric—on-time arrival, customer satisfaction, full planes, consistent profitability, passenger growth—and you'll find Alaska at or near the top.
Alaska shares rose 30% last year, making it the only major airline to show a full-year gain. The industry was down 25% on average. Alaska's market capitalization of $2.78 billion compares with $1.56 billion for US Airways, the fifth-largest carrier, whose revenues are three times those of Alaska. Yet, as Mr. Ayer half-jokes at the luncheon talk, "airlines are not a great benchmark" against which to compare yourself.
Later in the day, at his office down I-5 from the huge Boeing plant, he says that airlines have gotten "really good at making excuses." The excuse list is long: Few businesses are as vulnerable to fluctuating fuel costs and customer-demand shocks (think Great Recession, terrorism). Few are so dependent on union labor. Few are—since deregulation in 1978—as volatile and competitive.
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When Mr. Ayer stepped into the CEO's job in 2002, the airline widely recognized by the iconic smiling Eskimo needed excuses. Passenger revenues disappeared after 9/11 and Alaska experienced financial trouble, but it's the sole pre-'78 carrier to stay out of bankruptcy court. The crash of an Alaska plane off the California coast in 2000, which killed all 88 people aboard, exposed shortcomings in maintenance. Its on-time record was one of the worst, but that got blamed on the bad weather, small airports and hard terrain in its largest market—the state of Alaska, where the airline was founded by a fur trader and a bush pilot in 1932.
"It's easy to justify the status quo," Mr. Ayer says. "We fell into that trap. We always had a quick answer. Just that sometimes it was wrong."
The quiet transformation of Alaska Airlines into something of a model is one of the most interesting developments in the industry since low-cost pioneer Southwest revolutionized U.S. air travel in the post-deregulation age. Mr. Ayer, who took up flying as a kid and first came to Seattle to get an MBA, didn't reinvent the wheel. He borrowed from Southwest's playbook and applied practices commonly used in most any business—except, typically, airlines.
Early on in his term, executives brought in management guru Jim Collins, Costco founder Jim Senegal, Starbucks chief Oren Smith and others to talk about their approaches to business. Mr. Buffett was invited but didn't come. "He just got burned by US Air, I think," says Mr. Ayer.
One idea that came from these brainstorming sessions was to pick a new measure of success. Usually, airlines focused on the number of new markets, or the number of new planes or passengers to justify debt-financed investment. Alaska latched on to a different measure: cost per available seat mile, a standard efficiency measure of what an airline spends to do business. As of 2003, Alaska was at 8.73 cents. It set a target of 7.25 cents, a savings goal of $300 million.
"That was one of those things where we didn't know how we're going to do it, but we said to ourselves, that's what we need to do," Mr. Ayer recalls. "A good company would look like that."
Another epiphany came in a meeting with an analyst who inquired about Alaska's return on invested capital. Airlines didn't report this number to Wall Street. "And we said, you know, that's a pretty good idea, so we set the goal and we started reporting on our quarterly calls," Mr. Ayer says.
Large, unionized companies have a notoriously hard time tackling costs. This reality pushed the other legacy carriers and two of Detroit's big three automakers into Chapter 11. Four-fifths of Alaska's work force is unionized, and Mr. Ayer says, "I don't want to leave you with the impression that it's been perfect."
Pilots resisted a pay cut in 2005. An arbitrator sided with the airline. Alaska outsourced heavy maintenance and baggage handling, forcing steep staff cuts. Other airlines have now done the same. Alaska slowly moved out of a defined-benefit retirement plan—for new hires only. This was gradual, which Mr. Ayer says is "much better than bankruptcy, when you get hit over the head with something."
Airline analysts say labor relations seem smoother at Alaska than at most carriers. Some credit its small size of 10,000 employees. Mr. Ayer points to the company culture: "We all want the same thing in the end, which is a long-term company. That means you gotta be profitable long-term to do that."
As part of its restructuring, Alaska put all staff in the bonus pool. Bonuses are based on earnings (70%) and customer satisfaction, cost discipline and safety record (10% each). Each month, the company tells every sales agent or flight attendant how well the company is doing in the bonus categories. "We say we want to share generously during really good times, rather than lock in really high wages all the time," says Mr. Ayer.
Some cost cuts didn't need union approval. Alaska was the first U.S. carrier to sell tickets online, in 1995, to begin cutting down on travel-agent fees. Borrowing from Southwest, Alaska streamlined its fleet, going only with Boeing 737s to save on maintenance. An operational overhaul in 2007 put in place about 50 different checks to address the airline's poor on-time record. Flight attendants must be on board 45 minutes before departure. According to the Department of Transportation, Alaska had the best on-time record in the country last year. "Historically we were great at customer service," says Mr. Ayer. "We were not that great at operations."
Cost-cutting remains an uphill battle. Alaska has yet to meet its goal of 7.25 cents per available seat mile. Rising fuel prices—up 35% in 2011—kept that figure at 7.6 in 2011. Alaska missed its fourth quarter earnings estimates, even as it reported record income, but the stock price bounced back and hit a new high.
The industry as a whole has come back into the black. As their profits have recovered, the larger legacy carriers have kept in check their urges to increase capacity. "It's a question of CEOs having seen this movie one too many times, so hopefully they don't want to replay it," says Mr. Ayer.
He doesn't necessarily do what he preaches. Four years ago, after a couple carriers went bust in Hawaii, Alaska filled the void aggressively and the islands now account for about a fifth of its business. It has selectively started flights into Boston, Newark and New York to serve its Pacific Northwest clientele without seriously challenging any other airline head-on in the East Coast. Its traffic grew 9.6% last year, the fastest among major U.S. carriers. Capacity has grown 27% since 2003.
Mr. Ayer makes no apologies. "[At] airlines that are profitable," he says, "the business model is there to grow. If you're not profitable you shouldn't be growing. You don't want to grow for growth's sake. You don't want to just grab market share from other people." Note the implied dig at competitors like Delta and JetBlue that borrowed to expand. Mr. Ayer suggests that airline executives need to change their mindset. "If lack of profitability is the core problem, then the central metric ought to be about profitability."
Tan and fit at 57 years old, Mr. Ayer speaks quickly and throws in management bromides with practiced casualness.
On running a business: "Hope is not a strategy. We don't spend a lot of time counting on things we can't control."
On pushing employees: "You can't be perfect. If you insist on perfection with your people you won't do very much."
On why airlines adjusted so slowly after 9/11 ended a good profitable run from the late 1990s: "If you've had some success, it holds you back from making the big changes."
On leadership: "When you're dealing with change, you can say, is it cyclical or structural? Cyclical means it's probably gonna come back and you sort of wait and see." Air travel recovered after 9/11, for example. "Structural means it has fundamentally changed," he goes on. "In the airline business, it fundamentally changed as Southwest grew, as low-cost carriers came online. And we said to ourselves, we need to have a low-cost structure if we're going to be able to offer fares people will wanna buy."
To be continued....