Welcome back to the second half of my interview with Andrew Harrison, Alaska’s Executive Vice President and Chief Commercial Officer. Yesterday we talked about the genesis of the Virgin America merger, why Alaska was willing to pay so much for it to happen, and how it is going to think about a combined product going forward. Today we’ll finish up by looking deeper at the LA Basin and Bay Area markets as well as loyalty and domestic partners.
Cranky: I want to get a little more specific in geographies here. If we talk about the Bay Area, Virgin America is a one airport airline. They tried San Jose and it didn’t work. They’ve grown all around SFO. You are probably the only 4 airport airline if you consider Santa Rosa. So how important is the multi-airport strategy?
Andrew: I think one thing we bring to the table that I shared with you earlier in the loyalty program is we are in all the airports. There’s Silicon Valley as defined
by the chamber of commerce at about 3 million people and total Bay Area is about 7.6 million people. One of the things we’ve prided ourselves on in Seattle is we provide nonstop service to our customers to wherever they want to go.
At the end of the day, we’re gonna have to work out where we want to be. But what I can tell you is that clearly Virgin America provides a very good footprint at the San Francisco Airport. We already have a very decent presence at San Jose. And in Oakland, north and south. So we’re going to look at what we need to do from a utility and a network perspective to ensure we serve the Bay Area and the loyalty members better than anybody else.
Cranky: Does this merger allow you to consider expanding further at other airports? You talk about New York and how there are so many frequencies out of SFO. There are almost none out of San Jose. Is that something you look at and say “well now we have JFK slots so this might make sense”? I don’t expect a specific answer on a single route, but the idea in general.
Andrew: What you’re really saying too is that San Francisco is really, if you want full utility, there’s only one airport that provides that. You want international, there’s only one airport that provides that. So I think San Francisco is always going to serve the purpose that it serves. But you also see other international carriers like our partners British Airways and Hainan start service out of San Jose where we have a presence. So what we’re going to be doing is looking at 7.6 million people in the Bay Area and look at building an airline and a network that serves that community as best we can serve it.
Without getting into specifics about whether we’ll do all this in Oakland or San Jose or not, I will tell you obviously, San Francisco will be crucial for us. We want to continue to grow San Francisco. We have a very different fleet, we have an Embraer order in. We have [those] jets in our 3 class configuration. We have very fuel efficient short hop Q400s. We have big [737-900]ERs to 737-700s. We believe our fleet combined with Virgin America’s, we have a lot of tools in the tool chest to serve California that Virgin America did not have on its own.
Cranky: Let’s move down the coast here to LA. Obviously you don’t feel the need to serve every airport in LA, *cough* Long Beach *cough* [laughing]. But the point about LA, it’s a very different market. In San Francisco, excluding Virgin America, you have United. In LA, you have everybody. Even after you’re combined, you’re still gonna be, depending upon the metric, a fifth behind American, Delta, Southwest, and United. How do you view that market in the sense that you’re not going to replicate the network of one of the global carriers in LA? How do you view your way of serving that market best?
Andrew: We’ve been very successful in Los Angeles, obviously flying to the Pacific Northwest but also our Mexico franchise. As you know we started Costa Rica. What this also does for us in a consolidated industry with limited resources and constraints is we’ll have 12 gates. We’ll have critical mass there to be able to provide utility and our brand and our product and our service and our low fares to the Southern California marketplace. So we can be relevant.
I don’t believe anyone can really dominate Los Angeles because it’s so fragmented. It’s a massive global gateway for every flag carrier on the face of the earth. But I do believe that at 12 gates with a fantastic and competitive product, especially when you compare us to the network carriers where our costs are going to be 30+ percent lower, I think there’s a lot of opportunity for us.
Cranky: What does relevance look like? Is it “we want to serve all the big points” as Virgin America’s strategy has been? Or is it really more about strategic value, Q400s can serve some places, we can look at all these different markets? Even with 12 gates, you have to pick and choose, so what does it mean to be relevant?
Andrew: What that means to us is that we are going to play to our strengths, what we do well. We are going to serve the markets that we believe are relevant to Southern California but also we are able to provide the product and the fares and the loyalty program such that we will continue to provide the returns to shareholders that we’ve built up all over these years. And we will be profitable and continue to grow.
You know the world changes so much. We don’t know where the world will be in 20 years time. We’re pretty sure Los Angeles is going to be there and we’re pretty sure it’s going to be extremely important. We’re pretty sure that no-one is building any new airports anytime soon. And in a consolidated industry where attention is being turned to limited resources, limited infrastructure, and producing products, this gives us a platform to play in that game and be relevant and continue to grow and be healthy.
Cranky: You’ve talked about loyalty a lot on this call. The airline has made very strong statements before the merger about how the way the structure of the loyalty program is today is important and you support it despite the changing tides at the big 3 to go revenue-based. Virgin America is revenue-based. Has any thinking changed post-merger?
Andrew: From the Virgin America standpoint, it doesn’t change our thinking. What I mean by that is we are basically the only carrier left in the US that has a miles-based program. What we’ve shared with Wall Street and what we continue to believe, is we’ll continue to study and understand the benefits and even opportunities we have by staying in a miles-based program. But to the extent that we get to a point where we believe a revenue-based program is better for our customers then we would obviously make that change. But I think there’s a very real argument today especially in a declining yield environment that we have something really good here.
And we have a fantastic program that we, even with all the competitive capacity that’s coming to Seattle, our program has done noting but continue to grow at a very high rate. We also know that the vast majority of customers when you look at the average fare are well-rewarded on a miles-based program in our program. We have boosters for the very high end.
And yeah, we’ll never likely get the top 5 percent that the big global players do but at the end of the day we like to play where our strengths are which is the largest market. That’s leisure travel obviously but also providing something good for the business. That’s a long way to say that clearly changing to a revenue-based model, that’s a lot of time and a lot of research. So we are miles-based today, we are going to continue to be miles-based today. If we need to change we’ll do that at the right time.
Cranky: Ok last question. How important are your domestic partnerships in the face of this new combination. You will have a lot more overlap with American… and Delta, if they’re still considered a partner, in Los Angeles. In San Francisco it’s a very different dynamic. How do you view these?
Andrew: It’s interesting, especially what we saw in Seattle as we expanded our network. The vast majority of our customers are earning and redeeming miles on Alaska Airlines’ network. Vast majority. Really the domestic partners, the big primary help has been to be able to serve cities beyond their hubs. Whether it’s beyond Minny, beyond Chicago, beyond Atlanta, that we couldn’t serve on our own. That’s been one of the biggest benefits. But as we’ve grown ourselves. Just take Seattle for instance. We’ve started to serve a lot of these points so our customers don’t have to connect anymore.
So specifically to American, they’re a great partner. We do believe we have a lot of alignment and that together we can provide greater utility to customers on the West Coast. As you know with Delta, I don’t believe we have any codesharing at all with them anywhere in Los Angeles, nothing in Southern California. And what’s up in the Pacific Northwest is declining rapidly. But again as we move forward, we’re going to be looking at all of this and how can we work with our partners both domestic and international as we put these two airlines together to build a better, stronger airline of choice for our customers going forward.
Cranky: Thank you very much, Andrew. I appreciate the time.
If you missed the first part where we talked about the genesis of the Virgin America merger, why Alaska was willing to pay so much for it to happen, and how it is going to think about a combined product going forward, you can find it here.
