In this article, we’ll see Alaska Airlines’ (ALK) revenue composition and why management’s implemented strategies to increase ancillary revenue paid off.
For an overview of the airline industry, click here.
In 2Q14 (or the second quarter of 2014), Alaska derived 86% of its total revenue from the passenger segment, 2% from the freight and mail segment, and the remaining 12% from other sources including revenue from the mileage plan, baggage fee, ticket fee, and on-board purchases.
Although passenger revenue is Alaska’s main revenue source, there’s been a significant growth in ancillary revenue in 2Q14.
Segment-wise revenue growth in 2Q14
Alaska’s total revenue increased by 9.5% to $1,375 million during the quarter driven by growth in revenue from all three segments. Passenger revenue increased by 7.9% year-over-year to $1,174 million. Freight and mail increased by 6.7%. Revenue from other sources recorded the highest growth—22.5%.
Alaska’s unit revenue measured as revenue per available seat miles (or RASM) increased by 4% despite higher competition from Delta in Alaska’s key markets. More details on the competitive pressure from Delta in Part 4 of this series.
Growth in ancillary revenue
Because of increasing competition, airlines are relying more on ancillary revenue to increase unit revenue, as ticket prices have to be fixed at competitive rates to attract passengers. Alaska’s ancillary revenue per passenger increased by 9%.
The three initiatives taken by the company to increase ancillary revenue have paid off. The intiatives included the following:
- Modifying the affinity card agreement with Bank of America (BAC) through which Alaska sells miles to BAC and passengers accrue frequent flyer miles based on purchases made on BAC-issued credit cards. This resulted in an increase in the mileage plan revenue by $17 million due to an 11% increase in miles sold and an 8% increase in cash received per mile.
- Revising the bag and change fees charged by the airline. Bag fees increased by 21%, and change fees increased by 11% during the quarter.
- Adding six seats to 737–800 aircrafts and nine seats to 737–900 aircrafts via the seat retrofit program. These seats are currently installed on 40% of the aircrafts and will be installed on all these aircrafts by the end of the year.
We’ll discussion the performance of key drivers of passenger segment revenue in the next article.