[UPDATE, Jan. 19, 2017: American Airlines as of Feb. 1 will cease code sharing on several Alaska Airlines’ routes. Affected markets include: Seattle to/from Chicago O’Hare, Dallas/Ft. Worth, Newark, Los Angeles International, New York JFK, Philadelphia, Phoenix and Washington National; LAX to/from Baltimore/Washington, Portland, Ore., Salt Lake City and Washington National; and Portland, Ore. to/from Chicago O’Hare, Dallas/Ft. Worth and Washington National. Effective June 2, AA will stop placing its code on Alaska’s flights to/from Anchorage and LAX and Chicago O’Hare. According to AA, Alaska will stop placing its code on AA flights to/from LAX (18 routes), Seattle (eight), San Francisco International (seven) and Portland, Ore. (five). An Alaska official wouldn’t say when those take effect.]
[UPDATE, Dec. 6, 2016: Alaska Airlines said the U.S. Department of Justice approved the Virgin America acquisition after Alaska agreed to “limited changes” to its American Airlines codeshare pact. Alaska said it expects the transaction to close “in the very near future.” DOJ said Alaska must “significantly reduce” AA code sharing to “ensure that Alaska will have the incentive to vigorously compete with American as Virgin does today.” More specifically, DOJ said Alaska and AA would be prohibited from sharing codes on routes where Virgin currently competes against AA “and on routes where Alaska would otherwise be likely to launch new service in competition with American following the merger.”]
Alaska Airlines has a lot to sort out if its proposed acquisition of Virgin America is approved. It’s already thinking about working more closely with travel management companies.
Alaska in the past had account managers for some of the bigger TMCs but more recently focused its business travel sales efforts directly. “As we expand our national footprint we know we’ll need robust relationships with the TMCs,” said SVP Joe Sprague. “We’ll assess from a sales structure standpoint if we should have people dedicated solely to the agency side.”
According to an Alaska financial filing, “traditional” agencies accounted for 23 percent of the airline’s 2015 ticket distribution, down from 28 percent in 2011. Alaskaair.com accounted for 60 percent last year.
Alaska also will reconsider the agency role in its small business program, currently only accessible on the carrier’s site. EasyBiz was one of the first Web-based corporate booking programs when it launched around 2000. It targets businesses with at least five frequent travelers or those spending at least $20,000 annually. Both travelers and their companies earn reward points in the Mileage Plan loyalty program. EasyBiz provides some reporting and traveler profile capabilities. Sprague said Alaska sometimes offers discounts within EasyBiz. Those usually apply for customers with large volumes of simple itineraries on just a few routes.
Image: Alaska Airlines
Virgin’s Elevate Inc. also is for companies that spend at least $20,000 a year. They earn back 2 percent redeemable for future travel. That rises to as high as 4 percent when spending hits $100,000. The program allows for direct or TMC reservations.
When asked if EasyBiz one day would include the TMC channel, Sprague noted that Alaska has experimented in a few cases. “We would be open-minded on that,” he said.
Virgin also sold about 60 percent of its 2015 tickets directly through its website. Virgin likes using GDS technology, too. It signed up for Travelport’s Rich Content and Branding solution to better display its products to travel agencies. It also became the first airline to use Sabre’s Customer Data Hub and Customer Experience Manager to better understand customers. In June 2015 it began using Electronic Miscellaneous Document functionality as a means to sell ancillary services via GDS channels. Those channels, according to a Virgin financial filing, “generated average fares 41 percent higher than those generated through other channels in 2015.”
In addition to its approach to TMCs, a larger Alaska would have to decide how to structure or revise its corporate sales force, contracts, underlying technology and loyalty programs. Alaska’s Mileage Plan still is based on miles flown. Virgin’s Elevate program is based on dollars spent on base fares.
Like Virgin, Alaska uses the SabreSonic reservations system. “That is good,” said Atmosphere Research Group’s Henry Harteveldt, “but they may be using Sabre in different ways. While not quite as dramatic as [res system integrations for other airline mergers], it is nonetheless moving reservations from one partition of Sabre to the other. It is not a risk-free endeavor.”
The company also would have to overcome challenges in integrating cultures and products, and determine how best to grow partnerships with American Airlines and a bunch of foreign flag carriers.
At Sea-Tac International Airport, Alaska accounts for about 42 percent of all enplaned passengers, according to the Port of Seattle. It flies nonstop from there to 80 destinations. Outside Seattle, Portland, Ore., and Anchorage, corporate travel isn’t a big part of Alaska’s revenue mix, according to Sprague.
Even so, Alaska’s 22-person corporate sales team also is present in the Bay Area, Southern California and New York. “We call on a lot of companies based in New York even though our flight presence is limited — at least today, it will change over time — to a couple of flights to Newark and one to JFK,” Sprague said. “There is an element of wanting to have some options.”
He added that Alaska structures corporate deals in the typical way — upfront discounts for volume or market share.
“Because Alaska is so strong where they fly, companies that need them tend to really need them,” said TCG Consulting partner Barry Rogers. “So they generally have pretty high marketshare requirements on standalone agreements.”
Not so at Virgin America, according to Rogers. “They do corporate discounting, and they tend to not be real aggressive in terms of marketshare requirements,” he said. “They tend to contract with companies with travelers that just like the product.” Rogers said TCG has many such clients that have preferred deals with American or United.
Virgin America is a favorite among many business travelers. They make use of the long-haul, point-to-point operation connecting primary business markets. They come back for a well-liked product and an ethos befitting its famous umbrella brand.
Some travel managers think that’s OK. “It is a market disruptor so it made sense to try to give them some business just to help keep them in operation,” said a travel manager at a multinational company with a big Portland office, requesting anonymity due to an existing Alaska Airlines contract. Virgin’s flexible ticket transfer policy and change fees well below those of the Big Three don’t hurt.
Virgin’s eight-member corporate sales team has attracted as clients big companies in financial services and the tech sector. According to Virgin, first-quarter volume among the 10 largest accounts jumped 27 percent.
Portland-based Schnitzer Steel Industries travel program manager Steven Bossard said adding Virgin to his company’s Alaska deal “should enable us to get our negotiated discount/rate on some additional routes up and down the West Coast, and San Francisco to the three major cities on the East Coast (Boston, New York City and Washington, D.C.).”
That’s an exemplar of how Alaska and Virgin become more relevant to corporate buyers. California is the linchpin. “Virgin is not a hub-and-spoke network,” said TCG’s Rogers, “and that complements Alaska without a lot of overlap.”
“For the business traveler, fundamentals still rule,” said Harteveldt. “Route networks, nonstop flights, on-time performance and the loyalty program.”
Friends And Foes
Buying Virgin puts Alaska in more direct competition against United, especially in the Bay Area. According to San Francisco International Airport, a United hub, the airline in 2015 held a 44 percent market share of combined domestic and international seats. Meanwhile, Alaska and Delta are about done as partners. They square off in Portland and Seattle for corporate business and their rivalry up and down the West Coast only will intensify. Last week, Delta said it is expanding the Shuttle brand there.
American Airlines, on the other hand, could further assist Alaska’s corporate sales. The carriers already share codes and offer reciprocal lounge access. Executives at the two are contemplating a deeper relationship.
To compete against major global alliances, ties with international carriers also are important. Alaska and Virgin each have several. The newest is Alaska’s code share and frequent flier program partnership with AA Oneworld partner Japan Airlines, set to take effect June 29.
Sprague said Alaska in the past year or two strengthened the global network it can offer to Seattle companies. For example, a pre-existing frequent flyer program partnership with Emirates expanded to include code sharing. Icelandair also came on board as a codeshare and frequent flyer program partner.
“Virgin America has had similar a similar approach in San Francisco and Los Angeles, and our partners also serve San Francisco and Los Angeles,” said Sprague. “There are opportunities to grow the bases of operations and jointly serve corporate customers.”
Following The Cult
An obvious challenge Alaska faces is retaining Virgin’s culture and its fans. “As a New Yorker, I grossly underestimated just how strong of a cult-like following Virgin has built out there,” said J.P. Morgan analyst Jamie Baker during an Alaska conference call last month. “Does your analysis still assume that you retain 100 percent of the Virgin loyalists? It really seems to me that you might want to be modeling for some spill there.”
Alaska CEO Brad Tilden acknowledged the “strong allegiance” from Virgin’s customers and employees. That was part of the attraction. “We’re going to go into this with a humble approach,” he said.
Product integration would be a tall task. Disparate fleets make it complicated. Virgin only flies Airbus A320-family airplanes. Alaska flies only Boeing 737s, putting aside regional subsidiary Horizon Air. Inflight, Virgin created a unique experience. Design and style are paramount. Seating is less cramped than on larger competitors. There is an inflight entertainment system with on-demand food and drink ordering and even mood lighting.
Schnitzer Steel’s Bossard said Virgin “definitely raised the bar of expectation when it came to domestic flights. Without Virgin America, what airline will push a product with these kinds of things in mind?”
He likes both airlines. “Virgin America has the hip and sexy vibe of Los Angeles and San Francisco,” he said, “while Alaska has the more laid back and friendly attitude of Portland and Seattle.”
Sprague said Alaska is “going need to figure out what the right product mix is, and for sure keep alive some of the more popular features they have.”
Harteveldt said “there is no question” Alaska would have to explore a response to premium lie-flat transcon seats offered by American, Delta, United and Delta and JetBlue. “Maybe Alaska also can leverage a premium transcon product from Seattle to New York and Boston.”
Additional info: Alaska and Virgin America this week received second requests for information from the U.S. Department of Justice’s Antitrust Division. The airlines still expect the deal to close “no later than Jan. 1, 2017.” Harteveldt said if DOJ doesn’t block the merger, it later might tell Alaska to carve out certain legacy Virgin America routes from potential codeshare cooperation with AA. Alaska expects a single operating certificate from the U.S. Federal Aviation Administration at least a year after the merger transaction closes.
Alaska Airlines is usually at or near the top of the punctuality rankings. It was tops among major carriers in the 12 months through March 2016, according to the U.S. Department of Transportation, and second overall among the 13 U.S. carriers covered in DOT reports. This month, it won a ninth consecutive J.D. Power customer satisfaction award.