Alaska Air to add some passenger fees and basic fare, says merger with Virgin on track

Alaska Airlines said it will add some new passenger fees this fall and also introduce a basic fare class, selling cheaper, no-frills tickets for seats at the rear of the plane.

The moves follow airline-industry trends, in response to competitive fare pressure and rising fuel prices.

Alaska announced Monday that it will begin charging extra for exit-row seats and eliminate fee waivers for itinerary changes made more than 60 days before travel.

And Alaska passengers will be able to buy nonchangeable Saver Fare tickets, roughly equivalent to the Basic Economy fares introduced by the three big U.S. carriers, which will have assigned seats but board last. In addition, Alaska said it will begin shifting the pricing for premium seats in real time according to demand, a practice that is standard for coach-class seats.

In a teleconference call with analysts after Alaska Air Group reported a better-than-expected first-quarter profit of $4 million, or 3 cents a share, Chief Financial Officer Brandon Pedersen said management is “not happy with our results” and said the announced steps to add revenue will “improve the profitability of the business.”

Management on the call also gave an upbeat account of progress with the merger of Alaska Airlines and Virgin America, 16 months after the deal closed.

On Tuesday night a key milestone is due to be reached — the first that will be noticeable to all passengers — when the two airlines merge their passenger-service systems. That shift will provide a single reservation system, a single mobile app and a single website to book tickets.

And in a choreographed overnight move, passengers on Wednesday morning should find Alaska branding at all gates, ticketing and check-in areas at the 29 airports in the U.S. and Mexico served by the airlines.

“We’re getting through the most intense part of the merger,” said Chief Executive Brad Tilden. “When that is done, the majority of our systems-integration work will be behind us.”

A bigger airline

Alaska Air Group’s tiny first-quarter profit, on operating revenue of $1.8 billion, was down from $93 million, or 75 cents a share, a year ago.

Yet it was a better result than management had forecast at the end of last year, when the company predicted a loss for the first quarter because of the continuing costs of the merger with Virgin, rising fuel prices and a highly competitive airline market.

Excluding one-time charges, including merger-related costs and $25 million paid out in January to employees in $1,000 bonuses related to federal tax-cut legislation, the adjusted earnings figure was 14 cents a share, which beat Wall Street analyst expectations of 12 cents a share.

Andrew Harrison, Alaska’s chief commercial officer, said Monday that the new Saver Fare is expected to add $100 million in annual revenue in 2019 and projected that the ancillary fees, elimination of fee waivers and other pricing shifts will add a further $50 million.

The news gave Alaska’s stock a boost Monday, pushing it up $3.72, or 5.7 percent, to $69.11.

On the earnings call, analysts focused on how management is controlling costs.

The merger with Virgin swelled the airline’s capacity — measured in seats per mile flown — by 33 percent. With that, plus Alaska’s organic capacity growth, the size of the airline has doubled by that measure in the past five years.

The increase in fixed costs, the one-time charges associated with integrating the two airlines, the rise in fuel prices and intense competition both from the larger U.S. airlines and from low-cost carriers has made cost reduction a focus.

As part of that, management has been trimming the network to cut out unprofitable routes.

Tilden said Alaska Air’s regional subsidiary Horizon Air is “fully stabilized” after last year’s disruption due to a pilot shortage, with no flight cancellations blamed on staffing in the past six months.

However, Horizon has stopped flying a number of underperforming routes out of Seattle and Portland.

And Harrison said Monday that starting this fall, Alaska will give up 20 former Virgin America routes into Love Field in Dallas out of La Guardia in New York and Reagan National in Washington, D.C., and will lease those slots to Southwest Airlines.

Harrison said this will allow Alaska to reallocate aircraft “to more strategic and profitable opportunities on the West Coast.”

Alaska has also stopped flying to Havana, Cuba, and reduced by half its flights to Mexico City.

The merger continues

Meanwhile, there’s been steady progress on the merger front.

In the first quarter, the Federal Aviation Administration (FAA) gave the company a single operating certificate, formally recognizing Alaska Airlines and Virgin America as one airline.

Last month, the operations center that monitors the Virgin fleet of Airbus jets moved from California to Seattle.

And earlier this month, management reached agreement with its 5,700 Alaska Airlines and Virgin America flight attendants on a merger transition plan so that the two sets of crew members will be employed under a single contract.

That followed a similar deal with Alaska Air’s pilots in December.

While those steps toward integrating the two airlines are largely invisible to passengers, the merging of the passenger-service systems on Wednesday will combine them into one from the passenger perspective.

In another cost-saving measure, Pedersen said that job cuts that result from the merging of the separate reservation systems will be accelerated from year end to July 31.

Although passengers will see a single airline inside the airport from Wednesday, they’ll continue to see airplanes in the Virgin livery.

Alaska has started painting some of Virgin’s Airbus jets in Alaska colors and in September will begin installing new interior cabins in those airplanes.

But the remake of the Virgin fleet to make its look consistent with Alaska’s won’t be complete until late 2019, after which the Virgin America brand essentially disappears.