- In April, Alaska started to retrofit its 737-800s, -900s
and -900ERs with slimmer
seats which allow for installation of additional on-board
- The increased passenger carrying capacity due to
retrofitting is aiding growth in Alaska's top line and
- 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 (
) ongoing installation of slimmer
seats on all its Next-Generation 737 aircraft is aiding its growth
through top line and bottom line improvements. The slimmer design
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
), 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
Recaro Seats Could Add Around $47 Million To Alaska's Top
Alaska has a total of 73 737-800 and -900 aircraft and
retrofitting them with
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.
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
Bottom Line Gains Will Help Compete With Low-Cost
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%. 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. This route in 2012 was the leading non-stop route
for Alaska in terms of revenue generation. Higher margins will
enable Alaska to drive down its fares profitably on such routes and
thereby compete more effectively with LCCs.
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