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CEO Interview: Original Thinking

Brad Tilden, President and CEO, Alaska Air Group, says that innovation will remain a cornerstone of the airline’s strategy

February 2013 issue cover

How did you achieve record earnings in 2012, which was a very difficult time for the industry?

The industry is doing a better job all the time of matching supply with demand. That has certainly been helpful. And while the economy and fuel have been difficult, they’re stabilizing, and that is also helping all of us.

With regard to Alaska Air Group specifically, a major reason for our success is the long-term focus all our employees have had on the areas that drive our success and make us a fundamentally good business—things like safety, reliability, and customer service.

The company has a great record of caring for its customers, focusing on low fares, having a cost structure that supports those low fares, being good to our employees, and rewarding investors. We’ve been working on these issues for 10 years and we try to get a bit better every year.

Also, it wouldn’t be fair if I didn’t acknowledge the fact that we’ve had some very good fortune along the way.

You have achieved your target of a 10% return on invested capital. What made this possible?

We came up with that goal in June 2003 and a lot of people chuckled at the time because it had never been done—at least not on a sustainable basis. We’ve exceeded the 10% goal for the past three years, with a return on invested capital of 13% in 2012. This industry has been characterized by ups and downs, or boom and bust, and we’re working hard now to sustain strong performance over time.

Would you characterize Alaska Airlines as a niche player?

It’s a fact that there are not a lot of other airlines in the United States that are our size, but I don’t think we are a niche player. I think our size is interesting.

We’re big enough to have buying power with our partners and to have the resources we need to do things right, but small enough to have a sense of teamwork and a sense that we’re all in it together—trying to create the best experience we can for our customers. People here care a lot about us doing things right—right by each other and right by our customers. Our size makes it easier for us to hang on to and even grow this culture.

You have grown your presence in Hawaii from the West Coast. How does that align with your strategy of bilateral relationships rather than being in a global alliance?

We’ve received great support from our customers and the residents of Hawaii. Our expansion there has been unlike anything we’ve ever seen. Hawaii flying now represents 21% of our network, up from zero five years ago.

Our alliance relationships are also very important. We have two big domestic partnerships with Delta Air Lines and American Airlines, as well as relationships with some international airlines. All of these relationships help us fill airplanes headed to Hawaii and elsewhere in our network, and I hope the relationships are also helping our partners to be successful.

Alaska Airlines invented Required Navigation Performance (RNP) as a result of its experience in Alaska. How does it help you elsewhere?

We developed RNP for the special challenges of flying in Alaska, specifically into Juneau—one of the most weather and terrain-challenged airports in the world. The technology has worked really well for us. Since then we’ve expanded its use to 10 other airports in Alaska. It’s also at Washington Reagan National Airport, Palm Springs, Los Angeles, and 13 other airports in the Lower 48, where it saved us more than $17.6 million last year. More importantly, RNP has increased our margin of safety and improved our operational performance.

Are you satisfied that the Federal Aviation Administration is moving fast enough with NextGen to get the full value of your onboard avionics?

There is enormous potential with RNP and NextGen to create more capacity, reduce separation, and shorten travel times. And when we shorten travel times, we reduce fuel consumption and environmental emissions. Everything gets better.

We’ve partnered with the FAA on a project we call “Greener Skies Over Seattle” to fly more efficient routes using RNP and Optimized Profile Descents (OPD). These are shorter arrival routes that also allow the pilots to reduce engine thrust to idle and descend continuously, saving fuel and reducing emissions and overhead noise. The FAA should have these procedures finalized in April.

The FAA has done great, particularly with Greener Skies, but we should all think about the opportunity to act—and the waste and environmental impact from not acting—every day, and continue to try to accelerate NextGen.

Alaska Airlines has been a leader in introducing passenger-friendly technology. What trends do you see?

We are based on the West Coast of the United States where being a leader with technology is very important to our customers. Technology should be used to take the hassle out of flying. We have done a lot with mobile devices in the past year (to check-in, pay for bags, upgrade seats, buy tickets) and you’ll see more of this in the future. Roughly 6% of our check-ins today take place over mobile devices and we see that growing rapidly.

We are doing a trial where customers can print their bag tag on their printer at home. In addition, customers checking in at a kiosk in Seattle and Portland can print their own bag tag. You’ll see us innovate more of that technology to give travelers more ways to be self-sufficient if they want.

We’d also like to work with the Transportation Security Administration on projects that would give our customers information about security checkpoint line lengths. I can see us doing this on both video screens and mobile devices.

And we were also the first airline to use iPads on the flight deck. We will enhance the use of that device on the flight deck. And I think you’ll see our flight attendants using tablet devices to enhance the experience for our customers.

How important are global standards to technology in other projects?  Do they compromise innovation?

Global standards are very important. We are going to have a tough time convincing larger customers to connect directly with us if every airline has a different protocol.

Can you discuss your efforts on sustainability?

Alaska Air Group originally got into this area mainly for safety and economic reasons—new fuel-efficient airplanes with really advanced flight decks offered a higher margin of safety and lower operating costs. We wanted to be able to get into terrain-challenged airports such as Juneau and to reduce our costs.

But we’ve realized more and more that part of our culture includes caring about the impact we have on the environment. Our CO2 emissions per revenue passenger mile decreased by 30% from 2004 through 2011 and Alaska and Horizon Air [Alaska’s regional affiliate] are the leaders in their respective peer groups in terms of emissions on a per-passenger basis.

We’ll continue to lower emissions with more new aircraft deliveries and are looking into replacing our ground vehicle fleet with electric-powered vehicles.

We did a project in late 2011 where Alaska  Airlines and Horizon Air operated 75 flights with biofuels. The cost of the biofuel was $17 per gallon versus the average $3 per gallon for jet fuel we typically pay. But we wanted to demonstrate that if the cost was right, we would do our part and help establish a marketplace for alternative fuels. It was a very successful test and we’ve been looking forward to the supply chain making more biofuels available for us to use.

There’s another thing that’s important. A couple of years ago we were not recycling all of the aluminum cans, bottles, newspapers, and plastic that came off our aircraft. Today we help divert more than 800 tons of waste from landfills every year, and I’m really proud of the effort our folks make to recycle onboard our aircraft.

We are seeing a surge in passenger rights regulation and legislation. Is there a point where governments need to step back and let the marketplace work?

There are places where it is really appropriate for the government to be involved, such as safety standards and oversight, and there are places where it is appropriate to let the marketplace work.

I think we’d be smart to spend our precious government resources where the money is most needed and to step back and let the marketplace work in areas such as customer service and operational performance.

www.alaskaair.com

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