ALASKA AIRLINES: TAKING FLIGHT Presented to Bradley Tilden, CEO of Alaska Air Group Seattle Washington // January 2017 Allison Lennox Kenny Laurin Abeer Habibullah Kenny Laurin
PROBLEM Should Alaska Airlines keep the VA brand alive or get rid of it when the merger is approved? It is the thing I am losing the most sleep over with the merger. ALASKA AIRLINES 2
EXECUTIVE SUMMARY Issues Operate under one brand or two? Risk of alienating Virgin customers Need to manage fleet integration Need to address cultural differences Different in-flight entertainment Need to integrate IT Need to address loyalty programs High competition Recommendation Absorb Virgin Airlines into Alaska Airline brand phased approach for feasibility Identify common values (low price, customer service, and innovation) and incorporate Virgin best practices (Red inflight entertainment) into Alaska Airlines Gradual phase out of Virgin fleet Careful change management program and development of Alaska Airlines Academy for training Move to Virgin Airline s Red system Update to Virgin s enhanced Sabre Integrate into one program with options: collects based on miles or ticket price Merge brands to gain economies of scale and compete $1.7 billion profit by 2020 ALASKA AIRLINES 3
WHAT DOES THAT REALLY MEAN? Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that will serve both company s customers Common values of low fares, customer service and innovation ALASKA AIRLINES 4
WHY DID YOU BUY? To gain key destinations and slots (SFO and LAX) It s high time the airline strengthened its network beyond its core routes Both airlines are known for strong growth, distinct styles and outstanding customer service Expanding route network and access to the west coast was the key reason for the acquisition ALASKA AIRLINES 5
CROWDED SKIES Highly competitive space the Big Four as well as lower cost airlines (Delta and Jet Blue) Merger will bring together two profitable airlines to create strong competition for the big four The only way to fight competition is by achieving significant scale, which would be difficult without consolidation The best way to realize advantages is to merge to gain economies of scale ALASKA AIRLINES 6
SEEMINGLY DISPARATE BRANDS VIRGIN Cool, hip, bicoastal urban traveller ALASKA Tech savvy, west coast leisure traveller This addresses who they are, not what they want: Innovation Affordable prices Customer service You can make a long flight feel short with the right customer experience ALASKA AIRLINES 7
PRACTICAL, REAL WORLD, IMPLEMENTABLE We re not going to rip the Band Aid off we re going to take a good look at what Virgin does and try to adopt what s best. We are recommending a realistic and phased implementation ALASKA AIRLINES 8
FASTEN YOUR SEAT-BELTS KENNY WILL PROVIDE FURTHER DETAIL ON THE RECOMMENDATION
ALASKA AIRLINES & VIRGIN AMERICA Alaska Airlines For the same price, you just get more Friendly & traditional service High customer focus - lowest complaint rate in the US Streamlined cost structure from efficient operations 20 minute baggage guarantee Custom leather seats, larger overhead bins Innovation department Pioneered bag tagging, accept Goggle wallet, biometric ID in board rooms Virgin America Hip image, chic service, innovative Enjoyable customer experience Low fare airline with efficient operations Red innovation with inflight entertainment system Interactive safety video & inflight social network Information technology expertise ALASKA AIRLINES 10
MERGED - ALASKA AIRLINES Alaska Airlines Friendly & traditional service High customer focus - lowest complaint rate in the US Streamlined cost structure from efficient operations 20 minute baggage guarantee Custom leather seats, larger overhead bins Innovation department Pioneered bag tagging, accept Goggle wallet, biometric ID in board rooms Virgin America Hip image, chic service, innovative Enjoyable customer experience Low fare airline with efficient operations Red innovation with inflight entertainment system Interactive safety video & inflight social network Information technology expertise Brands have many similarities focused around customer experience ALASKA AIRLINES 11
ALASKA AIRLINES & VIRGIN AMERICA Better value proposition High customer service focus Lower price than legacy carriers Improved performance metrics on-time, baggage, complaints Leverage Alaska competency in timing Leverage Virgin competency in handling baggage Innovation Capability of introducing and adopting new technology Leverage Virgin s Red inflight system & technology Combining competencies will serve all customers ALASKA AIRLINES 12
FLEET Standardize fleet move to all Boeing aircraft Remove the need to cross train crews Eliminate need for high amount of parts inventory Lower maintenance costs overall with streamlined operations Sell 35 owned planes and lease back from financing firm Plane transition Do not renew Airbus aircraft leases - lease new Boeing aircraft to operate on Virgin routes Transition over time 6 per year for 7 years, training completed at same rate Retrofit existing Boeing aircraft with in-flight entertainment systems Younger planes, under 12 years old Standardizing the fleet over time will best position for Alaska Airlines for the future ALASKA AIRLINES 13
ROUTES Transition Alaska to take over Virgin routes Align with fleet transition and crew training Steal market share from Big 4 with value proposition Alaska Airlines will take over existing Virgin routes ALASKA AIRLINES 14
SUBSIDIARY CONSIDERATIONS Issue Loyalty plan Pricing Information technology Non ticket revenue Recommendation Merge both loyalty plan and offer customers the option to earn cash rewards & mile rewards Maintain Alaskan Airlines dynamic pricing model, below legacy carriers Migrate to using Virgin America IT system given enhanced functions Not a large challenge to migrate given the same Sabre system Charge for meals, seat selection, baggage, fuel surcharge Creating the optimal experience for the customer will realize value of acquisition ALASKA AIRLINES 15
PREPARE FOR TAKE-OFF ABEER WILL EXPLAIN THE FINANCIALS
Alaska has one of the highest margins in the U.S.; you need to capitalize on your business model s efficiencies ALASKA AIRLINES 17
As your gate and route access increases your focus should be grabbing market share from the Big Four and other airlines. ALASKA AIRLINES 18
Need a strategy to control reduce debt and interest expense ALASKA AIRLINES 19
ASSUMPTIONS 2016 onwards financials are consolidated with Virgin Airlines (based on seat miles) Available seat miles increase at CAGR (5 year average) of 7.7% Average load factor of 85% Operating revenues per ASM of 14.6 (5 year average) Net income margin of will improve to 15% by 2020 ALASKA AIRLINES 20
2015 2016 2017 2018 2019 2020 Available seat miles (000,000) 39914 57597 62052 66852 72024 77595 Load factor 84% 85% 85% 85% 85% 85% Revenue passengers miles 33568 48980 52744 56824 61220 65956 Operating revenues per ASM (RASM) in 14.0 14.6 14.6 14.6 14.6 14.6 Operating revenues 5600 8414 9065 9766 10521 11335 Net Income 672 1052 1178 1318 1473 1700 ALASKA AIRLINES 21
Net income will increase to $1.7 billion by 2020 ALASKA AIRLINES 22
SELL-AND-LEASEBACK STRATEGY Assumptions: $5 billion out of $6.5 billion total assets are aircrafts Average value per aircraft of $28.5 million (based on 175 fleet) We recommend you sell-and-leaseback 35 aircrafts over 3 years, helping you raise $1 billion to reduce debt level This strategy offers a tax advantage as well ALASKA AIRLINES 23
COST OF IMPLEMENTATION Initiative Type Cost (US$) Creation of AAAcademy program - Facility retrofits Marketing - Merger of loyalty and booking technology - Consumer facing internal - External facing Hiring AAAcademy staff - 1 Sr. Manager - 3 Regional Managers Outfitting new planes One-time On-going (3 years) One-time Yearly 8 per year for 3 years 6 per year for 4 afterwards Installing Red in existing AA planes 1 per month for 3 years 1M 10-15M 1M 1M 4M $150k $115K $1-1.5M per plane $250k per plane ALASKA AIRLINES 24
ALTERNATIVES Don t merge Virgin America operations Expand Internationally STOP! Merge the two companies immediately ALASKA AIRLINES 25
DON T MERGE VIRGIN AMERICA OPERATIONS VA market is small, you should target the bigger pie Forgo cost efficiencies you may actualize from merging Passengers are increasingly price and efficiency sensitive Paying 0.7% revenues in perpetuity to Virgin Group Airline industry has consolidated over the past decade because the business model lends itself to it STOP! Do not keep Virgin and Alaska seperate! ALASKA AIRLINES 26
EXPAND INTERNATIONALLY Different operational mode and more complexity (turnaround time, cabotage, customs) Slot acquisition is difficult in international airports Fleet is not optimal for long-haul international flights STOP! Do not expand internationally! ALASKA AIRLINES 27
MERGE THE TWO COMPANIES IMMEDIATELY Capital intensive Risk of alienating current customer base Impact of cultural differences on employees STOP! Do not rush combining the two companies! ALASKA AIRLINES 28
RECOMMENDATION Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that will serve both company s customers Common values of low fares, customer service and innovation ALASKA AIRLINES 29
CRUISING AT ALTITUDE JEFF WILL RUN THROUGH THE IMPLEMENTATION
CUSTOMER JOURNEY Booking & Collecting Boarding & Flying Landing & Unloadiing ALASKA AIRLINES 31
BOOKING & COLLECTING Booking Merge booking software immediately Update to most recent version of Sabre Make code-sharing agreements immediately Collecting Multi-tier rewards model Offer choice & flexibility to members Combination of software makes a strong new offering ALASKA AIRLINES 32
BOARDING & FLYING Boarding: Both employee groups are happy & productive maintain in short term Look for quick wins in operation efficiency Key indicators: On-time arrivals, load factor, fewest complaints Flying: Gradual turnover of fleet starting with Red in AA planes No clear class divisions offer economy premium seats ALASKA AIRLINES 33
LANDING & UNLOADING Adopt best practices from flight & ground crews in both cultures Must improve baggage consistency currently worst in US Must maintain fewest complaints improve VA operations Reduce VA delays #1 across new company On-ground & in-flight best practices taught to key crew leads ALASKA AIRLINES 34
PRE-FLIGHT ANNOUNCEMENTS (MARKETING) Customers need to be made aware of advantages For the same price, you just get more Highlight advantages of combined loyalty program Demonstrate world class in-flight experience Assuage concerns about pricing changes ALASKA AIRLINES 35
ROLLOUT ITINERARY Phase 1: 18 months Culture & Quick Wins Phase 2: 2-5 years Transition Phase Phase 3: 5-10 years Integration Phase
Task CULTURE & QUICK Responsibility WINS KPI/Criteria Time Code-sharing efficiencies Existing marketing & operations teams - High load factor - Growing revenue seat miles 0-3 months Develop culture program Small cross-functional teams - Consistent feedback - Buy in at top, with key players 0-6 months Merge & launch rewards program Hire AA Academy employees Retrofit existing training facilities Marketing from AA & VA - Clear communication to existing members - Additional buy in from new members HR from VA & AA - Experience in change management - Understanding of industry AAA teams & operations - Consistent branding - Development of a strong new feel 0-12 months 0-6 months 6-12 months Begin training key staff AAA teams & crew leads - Feeling of ownership - Consistent feedback loops ALASKA AIRLINES 37 8-18 months
CULTURE IS CRITICAL Buy in from top management Input from the start Identify champions & resistors ALASKA AIRLINES 38
ALASKA AIR ACADEMY New training program Jointly developed Input from all levels Own it from the start Retrofit existing facilities to create consistency & urgency ALASKA AIRLINES 39
AVOIDING TURBULENCE Risk Mitigation Likelihood Impact Big Four competitors respond Shareholders unhappy with merger Loss of Virgin Atlantic customers Flight crews unionize Better value proposition, more cost efficient operations Reach synergies quickly & carefully M M Integrate the best parts of Virgin into AA Explore employee ownership model such as Southwest, WestJet Fuel prices fluctuate Small fuel surcharges for customers H L H M M H L H
FLYING INTO THE FUTURE These are ideas we are not recommending right now, but should be considered in the future. AA Vacations Partnerships with hotels, taxi companies, tour companies to provide packages
PREPARE FOR LANDING ALLISON WILL WRAP-UP
RECOMMENDATION Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that will serve both company s customers Common values of low fares, customer service and innovation ALASKA AIRLINES 43
EXECUTIVE SUMMARY Issues Operate under one brand or two? Risk of alienating Virgin customers Need to manage fleet integration Need to address cultural differences Different in-flight entertainment Need to integrate IT Need to address loyalty programs High competition Recommendation Absorb Virgin Airlines into Alaska Airline brand phased approach for feasibility Identify common values (low price, customer service, and innovation) and incorporate Virgin best practices (Red inflight entertainment) into Alaska Airlines Gradual phase out of Virgin fleet Careful change management program and development of Alaska Airlines Academy for training Move to Virgin Airline s Red system Update to Virgin s enhanced Sabre Integrate into one program with options: collects based on miles or ticket price Merge brands to gain economies of scale and compete $1.7 billion profit by 2020 ALASKA AIRLINES 44