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Alaska’s cost structure boosts advantage against network carriers

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Alaska Airlines’s cost structure

Alaska’s Airlines competitive advantage with regard to its cost structure is another benefit that shareholders of the company can look for in the long run. It not only contributes to margin improvement, but also allows the company to offer lower fares and attract customers. Its cost structure is now closer to its low-cost competitors, including JetBlue Airways (JBLU), Southwest Airlines (LUV), and Hawaiian Airlines (HA). Plus, Alaska Airlines successfully reduced the gap from 35% in 2002 to 7% in 2014.

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The gap between Alaska’s unit cost adjusted for stage length and that of network carriers increased, offering a significant cost advantage. These network carriers include Delta Air Lines (DAL), American Airlines (AAL), and United Continental Holdings (UAL). The legacy carriers’ cost is 23% higher than Alaska’s. The SPDR S&P Transportation ETF (XTN) and the iShares Transportation Average ETF (IYT) invest in Alaska Airlines’s stocks.

Saving costs by saving time

Alaska Airlines’s efficient operations contribute to significant cost savings. Alaska not only keeps its passengers happy, but it also improves margins and provides higher returns to its stakeholders. Among the strategies used to achieve this goal are maintaining high on-time performance and high completion rates. Plus, Alaska works to reduce block time, or the scheduled time it takes for a flight to leave the departure gate and reach the arrival gate

Alaska has been able to improve aircraft utilization rates merely by trimming the time it takes to open the aircraft door from four minutes to one minute. According to management, this three-minute savings extended over 500 departures a day saves 25 hours per day of utilization. This equates to two airplanes’ worth of utilization and a positive impact on the ROIC (or return on invested capital).

According to the company, improving the completion rate by 1% to 99.3% translates into 2,000 flights per year. Reducing block time also results in significant cost savings. Later in this series, we will explore how improved employee productivity and fuel efficiency contributed to cost savings.

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