Alaska’s New Cabin Seats Can Help Lift Growth

by Trefis Team
+6.10%
Upside
44.90
Market
47.64
Trefis
ALK
Alaska Air Group
Rate   |   votes   |   Share
    Quick Take
  • In April, Alaska started to retrofit its 737-800s, -900s and -900ERs with slimmer Recaro seats which allow for installation of additional on-board seats.
  • The increased passenger carrying capacity due to retrofitting is aiding growth in Alaska’s top line and margins.
  • Higher margins in turn are helping the carrier drive down its fares profitably on routes where it is facing rising competition from low-cost carriers.

Alaska Air Group‘s (NYSE:ALK) ongoing installation of slimmer Recaro seats on all its Next-Generation 737 aircraft is aiding its growth through top line and bottom line improvements. The slimmer design of Recaro seats along side re-positioning of literature pocket at the top of their seatback allows for installation of a greater number of seats on board without compromising on passenger seating space. In all, the retrofitting has enabled Alaska to add six more seats on its 737-800s and nine more seats on its -900s. The additional seating space is aiding its top line growth by raising the aircraft’s passenger carrying capacity.

Additionally, as this increase in passenger carrying capacity is being achieved without any corresponding major increase in operating costs, Alaska’s unit costs – operating costs per airplane seat per mile of flight – are also declining, allowing for margin expansion. This bottom-line improvement in turn is helping Alaska compete more effectively with low-cost carriers, particularly JetBlue (NASDAQ:JBLU), which in recent months expanded to Alaska’s core markets of Alaska and the Pacific Northwest.

We currently have a stock price estimate of $66.35 for Alaska, around 10% ahead of its current market price.

See our complete analysis of Alaska Air Group here

Recaro Seats Could Add Around $47 Million To Alaska’s Top Line

Alaska has a total of 73 737-800 and -900 aircraft and retrofitting them with Recaro seats will add 6.5 seats on average per aircraft. After 2014 when the entire cabin retrofit is expected to complete, around 474 seats will be added to Alaska’s fleet. On average, an Alaska airplane makes 3.1 trips per day, which means 1,469 additional seats will be up for sale from Alaska per day as a result of the retrofit. Assuming a conservative occupancy rate of 50% for these additional seats around 735 more passengers will fly with Alaska per day. [1]

Taking into account the $177 average mainline passenger and ancillary fare for Alaska, these additional passengers will contribute around $130,000 per day to Alaska. On an annual basis, this translates to around $47 million additional revenues of the 73 Next-Generation 737s with Recaro seats. [1]

Bottom Line Gains Will Help Compete With Low-Cost Carriers

Separately, Alaska anticipates the additional flying capacity created by installing these seats will lower its unit costs – operating costs per seat per mile of flight – by around 3%. [1] Though in absolute terms these top line and bottom line gains seem small, their effect on margins is significant as airlines operate under thin margins of around 10%.

Margin expansion resulting from this cabin upgrade will help Alaska compete more effectively with low-cost carriers (LCCs) especially JetBlue, which started non-stop flights on the crucial Seattle-Anchorage route at fares as low as $119 from May earlier this year. [2] This route in 2012 was the leading non-stop route for Alaska in terms of revenue generation. [3] Higher margins will enable Alaska to drive down its fares profitably on such routes and thereby compete more effectively with LCCs.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Alaska Air Group’s capital allocation and business update form 8-K filing, July 11 2013, www.alaskaworld.com [] [] []
  2. JetBlue’s Anchorage to Seattle Route is Now On Sale for as Low as $119, December 17 2012, www.jetblue.com []
  3. Alaska’s 2012 10-K, February 14 2013, www.alaskaworld.com []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!