Alaska Air Counters Delta Assault With Secret Weapon: Unified Employees

Seattle (TheStreet) -- For Alaska Airlines (ALK), the reality of being under assault by a stronger adversary sank in six days ago, when the carrier reported earnings that beat estimates -- yet watched its shares fall 9% as analysts worried about capacity increases in key markets.

But Delta's (DAL) effort to build a Seattle hub on top of Alaska's Seattle hub is also having a positive impact for the airline, in that it is further uniting Alaska's approximately 10,200 workers, 83% of them unionized.

It has not escaped the workers that Delta is a largely non-union carrier, one that strongly resisted efforts by the International Association of Machinists and the Association of Flight Attendants to organize its workers following the 2008 merger with Northwest. IAM and AFA are the two largest unions at Alaska.

Read More: United Airlines Results Impress Wall Street: Pilots Are Doubtful

The employees "know Delta is anti-union," said Tom Higginbotham, president of IAM District Lodge 142. "Their focus is on making Alaska work better than Delta.

"The company is definitely doing everything it can to bring everyone together for what it believes is a war," Higginbotham said. "Our relationship with Alaska over the last five or six years has been very good, and this has strengthened everybody's willingness to cooperate with each other."

The IAM represents about 3,100 employees, including 2,500 agents and 600 ramp and stores workers.

Jeff Peterson, president of the Alaska chapter of the Association of Flight Attendants, said, "Considering Delta is one of our closest code share partners, Delta management isn't playing very nice.

"Many of Delta's flight attendants seem to have the impression that Delta is going to buy us or run us out of business," Peterson said. "That opinion must be coming from their management [but] I can assure you that's not going to happen. Delta does a nice job, we don't begrudge their employees anything, but we're here to stay."

Alaska has historically scored high in customer satisfaction, which is at least partially a tribute to its flight attendants and agents, the primary contacts for most passengers. In the J.D. Power study of customer satisfaction among traditional carriers in North America, the carrier has scored highest every year since 2009, after tying for highest in 2008.

Alaska also has shown continuing improvement in employee productivity. "Employee productivity as measured by passengers per [full-time employee] continues to be a great story for us," CFO Brandon Pederson said last week, during the carrier's second quarter earnings call.

"The 1.5% increase this quarter marks the 20th consecutive quarter of productivity improvement," Pederson said. "We're now handling 187 passengers for every FTE, a 36% improvement over where we were in 2004."

"We're able to make this kind of progress because of the commitment to high productivity and low cost by our front-line employees, our labor leaders and our divisional management," Pederson said.

A slight blip in the relationship with AFA, which represents about 3,200 Alaska flight attendants, is that contract negotiations are dragging. The existing contract became amendable in May 2012. In February, a tentative agreement was rejected by about 70% of members who voted. Key issues are pay and Alaska's desire to link many benefits to increased flying.

"We very much want to be there for Alaska," Jeff Peterson said. "We also need Alaska to step up and settle this with an agreement that can be ratified with a comfortable majority."

"Alaska Airlines has a long history of employees working together [and] we are continuing to work together to keep Alaska a strong, vibrant airline," said Chris Notaro, chairman of the Alaska chapter of the Air Line Pilots Association.

"We're aware of the increased competition in Seattle," Notaro said. "[But] our focus is on our jobs as Alaska Airlines pilots, and not on Delta or any other carrier. The best thing we can do for our company, our customers and our fellow crew members is to continue to do our jobs safely and professionally, and to continue providing a superior experience for Alaska's customers so that Alaska remains their airline of choice."

Tim Cullen, president of AMFA Local 14, said, "Over the years we've seen a lot of competition, so that in itself is nothing new. Prior to any increased competition from Delta, the entire company had been striving to work more closely, to understand each other's jobs, and to do what each of us can, in each of our areas, to ultimately provide a better product to our customers.

"Most of us have worked for Alaska for many years and have been a part of the operational and cultural changes that have fine-tuned our airline into what it is today [and] AMFA has worked hard to build a unique collaborative relationship with Alaska," Cullen said. "In short, we we're already prepared to defend Alaska Airlines from any competitor."

Historically, Delta is familiar with the impact an aggressor can have on employee morale. US Airways' unwanted 2006 bid to force a merger triggered employee opposition that coalesced into a "Keep Delta My Delta" campaign and contributed to the widespread perception that US Airways' effort, which failed, was seriously misguided.

Subsequently US Airways mounted an effort to merge with United (UAL). That effort also failed. Then it mounted an effort to merge with American (AAL). That one succeeded.

Alaska reported Thursday that it earned $1.13 a share in the second quarter, beating estimates. Nevertheless, shares fell 9.4%, closing at $45.03 after opening at $49.70. Shares have since recovered slightly. They closed Tuesday at $46.18, up 26% year-to-date.

In a report following the earnings call, Deutsche Bank analyst Mike Linenberg reiterated a sell rating. "While returns thus far this year are clearly admirable, our sell rating on ALK shares reflects our view that financial results for the second half of the year and into 2015 may be at risk, given excessive capacity additions in some of Alaska's key markets (e.g. Seattle)," Linenberg wrote.

"Alaska's current capacity plan calls for an 11% increase in Seattle departures by the spring of 2015," he said. "While Alaska will be adding capacity in Seattle, so will Delta; 41% of Alaska's capacity overlaps with Delta's today and that figure is expected to be approximately 50% by next summer."

However, on Tuesday Imperial Capital analyst Bob McAdoo said he is not bothered by the Delta intrusion.

"Record second-quarter results and management commentary continue to suggest to us that investor and media concerns over Delta's increasing activity in the Seattle area are overblown," McAdoo wrote. "Not only is the increased capacity a manageable issue, but it is also likely to be positive for Alaska in the long term."

Contrarian McAdoo increased his Alaska price target to $60 from $56; he also increased his third quarter estimate to $1.50 from $1.48 and his full-year 2014 estimate to $4.19 from $4. Analysts surveyed by Thomson Reuters estimate $1.34 a share in the third quarter and $3.81 for the full year.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.


TheStreet Ratings team rates ALASKA AIR GROUP INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALASKA AIR GROUP INC (ALK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 61.90% and other important driving factors, this stock has surged by 47.25% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, ALK should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • ALASKA AIR GROUP INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ALASKA AIR GROUP INC increased its bottom line by earning $3.59 versus $2.19 in the prior year. This year, the market expects an improvement in earnings ($3.70 versus $3.59).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Airlines industry average. The net income increased by 58.6% when compared to the same quarter one year prior, rising from $104.00 million to $165.00 million.
  • ALK's revenue growth trails the industry average of 39.3%. Since the same quarter one year prior, revenues slightly increased by 9.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.39, is low and is below the industry average, implying that there has been successful management of debt levels.

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