Capstone Strategic Management - DOC

Document Sample
scope of work template
					                                                       Final Project Analysis

    C a p s t o ne : S t ra te g ic M a n age me n t

                       May 13th , 2008

Robert Gibson – Scott McDaniels – Jonah Nelson – David Stark

                                                                    Final Project Analysis

Table of Contents:
Strategic Profile                                                                3
     Company Introduction
Situational Analysis                                                             4-15
     External
            o PEST Analysis
            o Porter’s 5 Forces
                    Bargaining Power of Suppliers
                    Bargaining Power of Buyers
                    Threat of New Entrants
                    Threat of Substitutes
                    Competitive Rivalry between Existing Players
            o Competitor Landscape
                    Alaska Airlines
                    Southwest Airlines
                    United Airlines
                    Air Canada
            o Key Success Factors
     Internal                                                                   16-23
            o Resources
                    Tangible
                    Intangible
            o Value Chain Analysis
                    Primary Activities
                    Secondary Activities
            o Capabilities
            o VRIN Testing
            o Core Competencies
SWOT Analysis                                                                    24-25
     Strengths
     Weaknesses
     Opportunities
     Threats
Strategy Formulation                                                             26-28
     Strategic Alternatives
     Alternative Evaluation
     Alternative Choice
Strategic Alternative Implementation                                             29-31
     Action Items
     Action Plan
References                                                                           32

                                                                                Final Project Analysis

Strategic Profile:
Company Introduction

Alaska Air Group is made up of two principle subsidiaries Alaska Airlines and Horizon Airlines.
Alaska operates all jet engine aircraft with average mid-range flight distance of 1,051 miles
while Horizon is a short distance carrier averaging around 386 miles. Horizon also uses both
turbo prop and jet engine aircraft. Alaska Airlines respectively has 115 jet engine aircraft in the
form of 737’s and MD-80’s.1 The two carriers operate in an integrated fashion allowing for a
broader range of service. The Alaska Air Group is based out of Seattle, Washington and services
the west coast of the United States including Alaska, Hawaii and Mexico. Alaska’s primary hub
is the Seattle-Tacoma international airport. Alaska serves approximately 25 million passengers
per a year. The group also employees 14,710 full time. 2

Alaska Airlines has a dominant market share serving Alaska. Unlike the rest of the economy
Alaska has been seeing increasingly significant revenues from oil business and tourism. Air
travel is the states largest form of transportation because of the geography of the state and its
arctic climate. There are over 1,100 airports in Alaska and over 3,000 landing strips in the state.
Thirteen percent of revenue generated by tourism goes to air travel. Alaskan travelers fly on
average nine times per a year compared to the main land US average of twice a year. Alaska
maintains a 50% market share based on passenger enplanements at Seattle, Los Angeles,
Portland and Anchorage airports. When looking at industry as a whole very few airlines realize a
profit. Alaska did have a positive net income of 125 million last operating cycle. 9 However, in
2006 they had a net income of -52.60 million.9

Mission Statement

caring, friendly and professional service that we are known for.”3

                                                                                Final Project Analysis

PEST Analysis:
Political & Legal:

Increasing safety concerns have led toward the Federal Airline Association (FAA) to enforce
safety regulations more strictly and add future reforms. The recent news of airline companies
forgoing service intervals has led to an increase in the amount of inspections to ensure better
analysis and completeness of data collected.

There is also expiring taxes that would make it hard for the Airport Improvement Program (AIP)
to fund its expected funding of $42 billion for 2007 to 2011. 4 Taxes related towards the Airport
and Airway Trust Fund are also due to expire. Overall this makes a very difficult situation for the
FAA to handle with the ongoing safety concerns and management issues. Just recently the FAA
after improving inspections fined Southwest Airlines 10.2 million and grounded 38 planes
because of the skipped maintenance intervals. 4 With recent filings of bankruptcy and ATA
airlines going under we should wonder as passengers just how many corners airline companies
are cutting.5 The inspections could lead towards losses in revenue due to increased fines.

Political support for the airlines has allowed the industry to cut cost associated with labor. Just
recently US Air was given permission by a bankruptcy judge to cut union pay by 21 percent back
in 2004.6 To the current date many of the US airlines benefit from operating under chapter 11
bankruptcy protection.6 This protects them from hostile take over’s and allows for the company
to restructure. However, a company filing chapter 11 has no equitable financial capacity.

The US Government has recently lifted several of the regulated extremities with regards to the
airline industry. One of these features includes the regulation of independent negotiations of
operating arrangements (DataMonitor, 2007). Some of these contractual agreements include
airport entrance and exit routing. This resource allows airlines to set up and maintain contracts
with individual airport hubs.

Political barriers have also included the regulation of Open Sky treaties with in the US.
Individual Airlines, as well as, airline alliances are required to maintain contracts with the FAA.
The events pertaining to 9/11 have caused political uproars with regards to security regulations
of the airline industry (Shaw, 2008). As a result, airlines have been required to take proper
safety precautions to ensure safe passenger travel. Increased security is the main way airport
hubs and airline companies have worked to help travelers feel secure. The increased security has
not only burdened passengers, but has also extended the time and labor requirements for the
individual airlines.

                                                                                  Final Project Analysis


Due to the current economic situation in the United States, with regards to the recession, the
airline market may see declines in leisure travelers. The recent plunge in the US market has led
towards a 0.6 percent decline in average seat occupancy. This is the largest drop in a three year
period with a drop of 0.9 percent in December of 2004. The economic levels of household and
businesses rely heavily on the amount of disposable income and company transportation expense
for air travel. Our current economic state yields households and businesses to hold on to their

Recently oil prices have surged to over 100 dollars a barrel. Airline companies are seeing
significant declines in earnings based on this expense. Shares of Air France- KLM Group are
down 26 percent. British Air is down 24 percent and United Airlines is down 41 percent. Airlines
will need to find non monetary methods in order to fight this expense. Some of these techniques
could include price hedging or joining an airline alliance/ partnerships in order to increase fuel
buying power. This will allow airlines to buy fuel in larger quantities and create contractual
agreements with oil suppliers.


The airline industry faces many up and coming social issues in the next couple of years. A recent
prediction by the United States Government Accountability Office says that 70 percent of Air
traffic controllers will retire within the next 10 years due to age.4 This will potentially harm the
US air industry because of the cost associated with staffing and training of new employees. Air
traffic controllers work for the FAA and are paid through a ticket tax that goes to the Airport and
Airway Trust Fund. These taxes increase the prices of tickets based on the percentage of the
ticket price. An overall increase in this tax to pay for staffing and training of new air traffic
controllers would raise the cost of tickets for all airline companies but more importantly the ones
with higher ticket prices.

Along with a shortage expected for air traffic controllers the FAA also is expecting shortages of
airline pilots. Recent issues related towards pay and the increasing amount of low-cost carriers
flying shorter routes with larger flight volumes has led towards an increase in pilots needed.
There is also the situation with baby boomer pilots who are reaching the mandatory retirement
age of 60 set by the FAA.4 Just recently the FAA passed a rule to allow one pilot to be over the
age of 60 but fewer than 65.4 Airlines are also being forced to offer big signing bonuses to
employees for referrals. In addition they are starting to pay off some of the newer pilot school
costs if they commit to the airline prior to graduation. Minimum experience requirements have
also been lowered to 250 hours, the FAA minimum. Many low-cost airlines use the bottom line
requirements or the industry average used to be substantially more at around 1500 hours. 4

Another social issue the airline industry will face is the projected increase in flyers. It is expected
that by 2015 around 1 billion people will be expected to fly a year. 4 This will overload the sky,
forcing a major reform in air traffic controlling. This will be another issue that is handled by the
FAA and is paid for by the Airport and Airway Trust Fund.

                                                                                  Final Project Analysis

Business travelers are a major part of airline companies business. The business men of today are
nothing like they were several years ago. Years ago the average business man was just that, a
man. Today, more women are entering the business world and now the business man has
evolved into the business person. Airline companies need to adjust to this growing trend in the
business world and start putting more marketing emphasis on the business woman. The airline
companies need to start catering more towards women within their business class. This will help
the airline companies tap into a new market that is a product of the changing times (Shaw, 2008).

Since the average family structure within the U.S. is anything but average. The average family
used to consist of a family with a father, a mother, and a couple kids. Nowadays, there really is
no average family. The high rise in divorce has led to several single parent families. The airline
industry has really done nothing to reach out to these sorts of families. Therefore, airline
companies need to make more efforts towards appealing to those outside of a typical family.
Airlines need to somehow determine how to better reach out to the single p arent families, single
individuals who are not business travelers, and the gay community (Shaw, 2008).

The airline industry as a whole has a long list of ethical responsibility required for overall
economic success. The make or break scenarios lie within the social and environmental issues
encompassing the industry. One of the major problems deals directly with the service airlines are
giving to their customers. This could include a simple bag of peanuts or an international flight
offered by a US airline. Currently most international flights are offered or serviced by
international carries outside the US. These include several European and Asian carriers. US
Airlines are creating international alliances that are transparent to their customers. The service of
local carriers is not being matched by the alliance partners. If it is, the service is credited towards
the name on the airplane tail or seat cover.

What does customer service mean to the US Airline industry? We have airlines, such as
Southwest hat have set a standard of service, but since it can’t be copied on the same level, it is
the customers that suffer. The idea of frequent flyer programs account for a large amount of
customer loyalty, but primarily applies to business customers. The average American never
accumulated enough miles to take a flight. There needs to be a better way for customers to
capitalize on this service.

A final element of social responsibility lies within the regulations of flight pricing. The business
price structure of most airlines, rely heavily on the majority of capital coming from business
customers. These customers pay the highest for the flights due to last minute meetings. The
second source of profit comes from families or individuals flying for pleasure. These clients
book a while in advance in order to fix plans and guarantee a low cost flight. With the rising
costs of airline travel, it is making it difficult for a family of four to travel to Disneyland for
vacation. Such airlines like Horizon Air and Southwest have implemented plans for these types
of people along with the business class that does not want to sit in traffic for five hours from
Seattle to Portland.

                                                                                Final Project Analysis


With the recent innovation in the airline industry new technologies such as the Boeing 787 and
Airbus A320 offer increases in fuel economy and reductions in green house gases across the
board. The advancement in technology from the 787 has yet to be seen in the air but its carbon
composite body and weight compared to other planes is something notable.

Advancements in the internet have also allowed airlines to cut cost when it comes to ticket sales.
Self purchasing of tickets on the internet has become the primary way of purchasing tickets in
today’s modern age. These systems offer unprecedented data and forecasting abilities that
airlines did not have in the past. This system will allow for load level predictability, which could
be helpful when allocating freight to commercial passenger planes.

                                                                                  Final Project Analysis

Porter’s 5 Forces Model:
Bargaining Powe r of Suppliers:

The bargaining power of suppliers in this industry is relatively low. Since the two main suppliers
of aircrafts used in this day in age are supplied by Boeing and Airbus there is a low concentration
of suppliers in this market. The end effect is that Boeing and Airbus don’t really have a whole lot
of room to leverage against one another like in another industry where there are a significantly
larger amount of suppliers. Since both companies offer relatively the same product at different
magnitudes it’s hard for them to play each other against one another. There is also little to no
threat of either Boeing or Airbus doing forward integration and staffing, maintaining and
operating their own airline in an industry already so established and globa l.

Bargaining Powe r of Customers:

The airline ticket market is purely a buyer’s market. Even with the hike in fuel cost and service
cost airlines are offering tickets at prices that are not even profitable. Airlines have been trying to
combat low budget carriers recently with moves to limit baggage and reduce load levels to
increase profitability. Many carriers have limited the amount of carry-on and checked luggage to
1 in each category with additional fees for additional and overweight items.

However the biggest key factor as to why the buyer has the bargaining power is because of the
internet. Pricing information on tickets is all over the net, so the information is less fragmented. 8
This gives the buyer a huge advantage because they know all the prices. There is very low
switching cost in the airline industry. All the buyer really wants is just a seat on a plane to a
certain destination. This is why airline prices are usually pretty similar to one another in terms of
price. This clearly benefits the buyer.

Threat of New Entrants:

The threat of entry at the current time for the airline industry is pretty high. New value carriers
such as virgin air allow customers to save substantial money on ticket prices and wipe out
industry returns for the already established carriers. Banks at the current times can lend out at
pretty good rates due to the current situation in the economy with the interest rates. Equity
markets don’t look to be very good for raising capital at the moment because of the current
situation with the economy at hand. However, opportunities such as ATA airlines closing down
allow for a potential low fixed cost entry when it comes towards purchasing aircraft. Having a
whole fleet up for potential sale could be a very attractive option for so meone looking to enter
the market when compared towards purchasing all new equipment instead.

Older carriers still have their legacy and brand names however low-cost alternatives provide
customers with better bargains. The biggest benefit the older carrie rs have is their hubs which are
already established.8 It is hard for a new entrant to come into the market and establish a hub
when the market is already oversaturated.

                                                                                                                  Final Project Analysis

Threat of Substitutes:

The availability of substitutes is becoming more of a reality in the transportation industry.
European countries already have bullet trains sending people across the country at 400 mph. The
trains are extremely environmentally friendly when compared to air travel. 18 Environmental
friendliness and reducing greenhouse gas emission could encourage people to ride trains even in
America if they existed in the transportation market like they do in Europe. Airliners fly on
average around 500-550 mph this is not a significant difference between the two speeds of the
transportation. Unfortunately for the US transportation industry we have not seen this mode of
high-speed train transportation finds its way to America. It’s a good thing for airlines that it is
not because of the environmental advantages and potential convenience of not having to deal
with airport security.

On a local note towards the industry in the United States we could see driving from Seattle to
Spokane as a better option now because of the increases in traffic safety inspection wait times
and other factors. Driving from Spokane takes roughly four and a half hours while a plane takes
almost an hour in the air. However in order to board the plane you have to arrive to the airport at
least two hours early and when you arrive in Spokane you have to get your luggage and might
have to rent a car. Adding the time wasted at the airport and getting a rental car could easily push
the time for air travel over 5 hours. Not to mention it might be more cost effective to drive
depending on when the flight is booked. For longer flights rail travel might be an attractive
option however a significantly limiting factor in the US is the speed at which rail cars travel at
and the fact that the price of rail is not government subsidized like it is in many parts of Europe.

Competitive Rivalry between Existing Playe rs:

Alaska unlike many US airlines is not operating under chapter 11 bankruptcy protection. The US
airline industry as a whole just saw one competitor exit in ATA airlines closing down its doors
last week. Alaska sees relatively good returns in the market when compared to its competitors.
Southwest is Alaska’s largest competitor based on the means of the chart created based of the
stock prices of the past 5 years.

                                                     Stock Price APR 03-08





                         30                                                                           SouthWest

                         20                                                                           Alaska




                         1-Sep-02   14-Jan-04   28-May-05          10-Oct-06   22-Feb-08   6-Jul-09

                                                                                 Final Project Analysis

It’s important to note that the other 2 major airlines noted in this chart don’t have data available
before April 2007. The reason for this is because both Northwest and Delta operated under
chapter 11 bankruptcy. Northwest exited in May and Delta exited in April. Then both started
reissuing stock at that time. Northwest Airlines does not have stock at the current time because
they are currently under chapter 11 bankruptcy. It’s important to notice the only stock coming
out with a total gain over five years is Alaska. It’s important to note that both Alaska and
Southwest the main competitor to Alaska both bought back stock in the recent financial year.
Southwest bought back considerably more stock repurchasing just over 1 billion dollars worth in
2007. Alaska bought back 62 million in 2007 the first time they have ever repurchased. It’s
important to note that Southwest has a considerably larger amount of equity financing through
stock issuance. However, they have bought back a considerably high amount of stock in the past
four years. This only makes Alaska look even better when compared to Southwest their main
competitor when it comes from in an investment standpoint. Reducing the amount of shares
outstanding in the quantity that Southwest did was to increase there share price. Their share price
has not increased at all when compared to Alaska.

Competitive rivalry in the airline industry is extremely high. With such a competitive industry
and the internet providing direct knowledge on prices across the industry it makes the industry
purely a buyers market. Another key factor of the airline industry is that there is very little
differentiation between the products sold between companies. Essentially the airline company is
selling a plane ticket to a certain destination. With value carriers entering the market we see less
importance on service and extra features. Instead customers look for the lowest prices. Industry
growth is also slow in this industry because of its maturity. The industry also has very high
barriers to exit. Selling off whole fleets of airlines in order to exit the industry is not really
realistic. This is why we see so many airline companies operating under chapter 11 all while still
remaining competitive in the industry. It usually takes a very long time for a company to exit the
industry just look at Pan AM or TWA.8 With the possibility of airlines failing like ATA there
might be a chance that it’s easier to gain entry to the industry but leaving the industry will always
be difficult. Leaving the industry in the style ATA did, leaves an incredible amount of asset
losses behind because of the fleet cost.

                                                                               Final Project Analysis

Competitive Landscape:
Overvie w:

The airline industry in the United States has 7 main airlines they are United, Delta, US Air,
Northwest, Southwest, Alaska, and American. For the purpose of this report we will be looking
at Alaska airlines main competitors such as other short to mid-range carriers most specifically
there key competitor Southwest Airlines. Alaska entered competition with Delta and other larger
airlines on a smaller scale when it started offering flights with destinations such as Mexico and
Hawaii. Alaska and Southwest fleets are based on the 737 jet platform while the other carriers
are based on larger ones.


Southwest Airlines (SWA) is a domestic US airline that primarily provides point-to-point, low-
fare services. The company operates only in the US. It is headquartered in Dallas, Texas and
employs about 32,664 people. The company recorded revenues of $9,086 million during the
fiscal year ended December 2006, an increase of 19.8% over 2005. The operating profit of the
company was $934 million during fiscal year 2006, an increase of 28.8% over 2005. The net
profit was $499 million in fiscal year 2006, an increase of 3.1% over 2005 (2007 Annual

Southwest Airlines Co. is a major passenger airline that provides scheduled air transportation in
the United States. Southwest is the largest air carrier in the United States, as measured by the
number of originating passengers boarded and the number of scheduled domestic departures as a
percentage. Southwest commenced Customer Service on June 18, 1971, with three Boeing 737
aircraft serving three Texas cities — Dallas, Houston, and San Antonio. As of December 31,
2007, Southwest operated 520 Boeing 737 aircraft and provided service to 64 cities in 32 states
throughout the United States. In 2007, Southwest recommenced service to San Francisco
International Airport.

Southwest focuses principally on point-to-point, rather than hub-and-spoke, service, providing its
markets with frequent, conveniently timed flights and low fares. As of December 31, 2007,
Southwest served 411 nonstop city pairs. Historically, Southwest has served predominantly
short-haul routes, with high frequencies. In recent years, Southwest has complemented this
service with more medium to long-haul routes, including transcontinental service.

Southwest has a low cost structure, enabling it to charge low fares. Adjusted for stage length,
Southwest has lower unit costs, on average, than most major ne twork carriers. Southwest’s low
cost advantage is facilitated by reliance upon a single aircraft type, an operationally efficient
route structure, and highly productive Employees.

Delta Airlines:

                                                                                  Final Project Analysis

Delta Air Lines, Inc. was founded in 1928 and is one of the largest carriers in the world,
providing services for air and freight to 481 destinations in 105 countries. There are roughly
51,500 employees. Delta Connection is a smaller airline within the company and provides
service to 321 destinations in 58 countries. At the end of fiscal year 2007, 88% of its operating
revenue was from passengers and the remaining 12% from cargo. Delta has added more
international routes in the last year (60) than any other major U.S. airline. Their main hub in
Atlanta, Georgia is the largest airline hub in the world, carrying more passengers across the
Atlantic than any other carrier.

The following components make up the operations section of Delta’s Value Chain: ticket counter
operations, gate operations, aircraft operations, in- flight service, baggage handling, ticket offices
and customer service. Like most industries, the operations section of the primary activities is
among the most important because as processes become more efficient, time and money is
reduced. As these variables take less time and money, more flights and passengers can use Delta
per day. This leads to higher profit margins.

The following components make up the sales and marketing section of Delta’s Value Chain:
promotions, advertising, advantage programs, travel agent programs and group sales. In the
airplane industry, price fluctuation means that the carrier with the lowest prices will sell more
tickets. Selling the most tickets in this highly competitive industry means you survive
bankruptcy and mergers.

The following components make up the human resource management section of Delta’s Value
Chain: flight, route and yield analyst training, pilot training, safety training, baggage handling
training, agent training and in- flight training. What makes Delta stand out from other carriers
within the airline industry is their cross training between job descriptions. This allows for
employees to work in various parts of the company without having to be re-trained. In turn, this
flattens the organizational structure, thus reducing the need for additional management costs.

Delta ranks as the largest airline in the United States with the total number of international
destinations served, second largest in the world for total passengers and fourth largest when
referring to revenues. This strong presence in the global airline industry has allowed Delta to
become one of the leading carriers during the economic slowdown in the United States post
September 11th . Delta is the only carrier to offer services in all 50 states and has just recently
won the American’s Leading Business Class Airline for the second year in a row.

Two of the largest airports in the world are central hubs to Delta Airlines. First is Atlanta’s
Hartsfield Jackson International Airport. In terms of passengers, Atlanta is the world’s busiest
airport. Because this is one of the central international starting points, Delta has capitalized on
the European markets. In New York, Delta has a hub at John F Kennedy International Airport.
This airport is the leading airport for international air and cargo. As you can see, Delta has
aligned its bases towards international clientele, giving itself an advantage over smaller carriers.

Delta already has the world’s number one position in Europe and p lans on taking the same
approach with Asia. According to Datamonitor, “Delta in order to expand its network in these
regions has announced non-stop flights between New York’s JFK and Mumbai, India.

                                                                                Final Project Analysis

Moreover, the company has already filed an application with the US Department of
Transportation to offer customers the first and only nonstop flights between the airline hub in
Atlanta and China’s commercial and financial capital of Shanghai.” This increase in destinations
to the Asia Pacific would only drive revenues for the long term.

United Airlines:

United Airlines is one of the largest airline companies within the United States and it operates
out of the UAL Corporation. The company transports people, cargo, and mail with more than
3,600 flights daily to more than 200 destinations throughout the United States and
Internationally. United Airlines mainly operates within North America, with their main hubs in
Los Angeles, San Francisco, Denver, Chicago, and Washington D.C. United Airlines also runs
about 1,550 flights to 120 destinations within the Pacific, Atlantic, and Latin American regions.
This makes United Airlines one of the largest international carriers within the United Sates.
United Airlines is also a member of Star Alliance which connects to 855 destinations within 155
countries. In 2006, United Airlines recorded a net profit of $22,876 million which was a huge
increase compared to a net loss of $21,176 million in 2005.

United Airlines was financially at the point of near extinction back in 2002. Since then they
have gone through a restructuring period that has made them overall more financially stable.
This stability has United Airlines looking to the future with confidence and an eagerness to
compete in the U.S. and international markets. United Airlines objectives for the future are to
continue their financial growth, continue to be successful in the Global market, and to capitalize
on opportunities that can be beneficial to the overall success of their company.

United Airlines plans on increasing their financial growth by continuously improving their
performance across the company. They consistently restructure their fares to keep up with the
changing market. They work to offer products and services that demand a premium price, such
as their Economy Plus service. They consistently eliminate unprofitable flights and look for new
routes that could be successful, whether in the U.S. or internationally. They are also working on
increasing their freight traffic in order to consistently remain competitive within this aspect of
the market. All of these things are ways in which United Airlines is working to improve their
network, products and services in order to increase their financial status.

United Airlines has been very successful within the global market. They feel that the global
market still has a lot of potential and they feel that continued growth in this market is vital
towards the future success of the company. United Airlines is continually looking for ways to
improve their products and services in order to be more appealing to their international travelers.
Competing in this market will put United Airlines in the position to be even more successful
within this market as it consistently changes and grows in the future.

United has worked hard over the years to get to where they are within the industry today. They
plan on working towards improving the company and they consistently are looking for
opportunities that could be beneficial to their overall successful. United Airlines believes that
there is always room for improvement and they will look for that which they can do better in
order to be more competitive within the ever changing airline industry.

                                                                                 Final Project Analysis

United Airlines current strategy is first off to increase their focus on their customers. United
Airlines is looking to deliver a consistent experience for their customers every time they fly.
They are doing this by focusing on such things as reliability, cleanliness, courtesy, etc. United
airlines does not believe that they are only in the transportation business, but rather that they are
in the service industry. Therefore, their customers should be delivered service that goes above
and beyond what they normally expect from an airline company. United Airlines is going about
this by improving the consumers experience from the moment they have their first interaction
with United, until their time with United Airlines is finally completed. United Airlines is making
changes to their in- flight service for both U.S. and international passengers, they are making
improvements to airport lobby and gate areas, and they are putting a focus on responding to
customer feedback. United Airlines realizes that they cannot be successful within the industry
without their customers, so therefore they have made their customers the number one priority
within their current strategy.

Another current strategy of United Airlines is to execute their performance agenda. United
Airlines feels that the safety of their customers and employees is vital towards their success in
the industry. Therefore, they are refining and investing more into their safety programs. United
Airlines has established a standard work practice throughout their entire company that will
hopefully lead towards improvements within the future. Making the jobs standard, allows for the
company to deliver a consistent product or service that will lower costs, and lays the groundwork
for future improvements.

United Airlines realizes that they are competing within an industry that is facing a majority of
issues such as: increasing domestic and global competition, rising fuel costs, and consistent
security and infrastructure issues. With all these issues confronting the airline industry, United
Airlines still feels that they are well positioned to succeed within this market. United Airlines
has recovered from a rough financial time after 9/11, but they are in great standing now within
the market. They are looking forward to increasing their market share within the U.S. and
international markets and they are well established to continually succeed within the airline

                                                                                 Final Project Analysis

Key Success Factors:
The key success factor for airline companies is customers. The attractiveness of the airline to the
customer and the ability to get the customer onto the plane is the main key success factors of this
industry. In order to fill a plane full of passengers and have minimal open seats the airline must
find ways to bring customers on board. Promotional items such as frequent flier miles and
business member’s class allow airlines to create repeat customers. 10 The main thing influencing a
travels decision on which airline he/she chooses is the price of the ticket. As seen above in the
bargaining power of buyers the airline market is completely a buye rs market. Ticket information
is available all over the web there is very little that’s not known about prices in this industry. The
Airline industry as a whole has to really manage its fleet’s better with the recent information on
the FAA and the fines issued to select carriers seen above. These fines are extremely costly and
should be avoided at all cost based from an operating standpoint.

Another key success factor to the airline industry is also the service provided. Most recently
however there has been a drop in demand for services with the amount of passengers selecting
low cost carriers such as Southwest. Service still remains a key success factor because of the
image portrayed by the staff. A larger trend in the industry is the family image. Slogans such as
from our family to your family are often seen in this industry. Airline companies like to brand
their employee base as a family rather than just an employee base. Southwest has been able to
avoid offering many services that other airlines offer through this method of friendliness and
being part of their family when you fly with them. Lastly an additional key success factor could
be the financing side of the airline operation. In an industry with such large equipment cost the
ability to finance with both equity and debt markets is a key. Fleet synergy is also a key
component to profitability managing large amounts of maintenance parts with large cost
associated with them can be difficult.

Having complete fleet synergy can significantly minimize cost. Southwest and Alaska primarily
use one aircraft the 737 opposed to the others that have planes ranging from low, mid and long
range. The company’s filing for chapter 11 above are losing the abilities to access equity markets
which are extremely harmful to their business from a financing standpoint. You can see this in
the stock diagram above with Northwest and Delta with how they have just started issuing
equity. It’s important to note that United is under chapter 11 and has no stock equity. Fleet age is
also a significant threat to many companies in the industry with fleets averaging over 20 years
old. This brings financing into the question because the companies in bankruptcy may not be
able to cover cost associated with replacing aircraft at this time.

                                                                                Final Project Analysis


Tangibles for Alaska Airlines consist of financial, organizational, physical, and technological
resources that are necessary for the overall success of the company. The financial resources for
Alaska are their borrowing capacity and their ability to generate funds. In 2007, Alaska
borrowed $149,700 and they generated total revenue of $3,506,000. The organizational
resources for Alaska consist of the reporting structure and the formal planning, controlling, and
coordinating systems. A couple of the things that are considered organizational resources are the
computer systems that coordinate all the flights and times, and also all of the systems that go into
navigating and organizing flight patterns. The physical resources for Alaska are such things as
their aircrafts, the terminals, and the airports in which they operate out of. The technological
resources for Alaska are such things as patents, trademarks, copyrights, and trade secrets that
they might hold. For example, Alaska Airlines is a trademarked name.


Intangibles for Alaska Airlines consist of human, innovation, and reputation resources. Human
resources are the knowledge, trust, managerial capabilities, and organizational routines that are
necessary for Alaska Airlines to be successful. HR management is vital towards ensuring that
Alaska has a knowledgeable and trustworthy staff that delivers a consistent and pleasant
experience for all of their customers. Alaska Airlines prides itself on its superior customer
service and this is a major part of their human resources.

Innovation resources for Alaska Airlines are the many ideas, scientific capabilities and their
ability to innovate. The airlines industry is consistently changing and in order to remain
competitive Alaska Airlines must consistently come up with ideas and innovations to adjust to
the changing market. A few things that can be categorized as innovation resources are such
things as having the idea to open up new flight routes or the innovation that Alaska Airlines has
just initiated with cargo tracking.

Reputation resources for Alaska Airlines are their reputations with their customers and their
suppliers, their brand name, and the perceptions surrounding their service delivery, reliability,
and efficiency. Alaska Airlines has built a solid brand name over the years and they have
established a reputation for delivering superior customer service.

                                                                              Final Project Analysis

Value Chain Analysis:
Primary Activities:

Inbound Logistics:

Alaska Airlines has very large cost associated with maintaining competition in such a mature and
competitive industry. They could potentially expand freight operations and seek towards setting
up effective hedges against gasoline prices one of their primary inputs. At the current time fuel
cost are extremely high and Alaska in the past has used mostly its cargo business to offset these
increasing cost.15 With an effective hedge system like Southwest and expanded freight system
they could bring in more stabile revenues. 16 With the increases in online purchases in the past
decade Alaska could increase freight traffic and reduce its dependence on passenger revenues. 15

Alaska has also expanded its fleet with the larger variant of the 737-800 offering capacity growth
over the ageing and retiring MD-80 aircraft fleet.15 The aircraft is more fuel efficient than the
MD-80. Alaska and the rest of the airline industry has also seen increases in insurance premiums
following the 9/11 attacks. Insurance cost are also government mandated and having incre asing
requirements after the 9/11 attacks more coverage is required. Insurance prices have shot up
significantly because of this.

Ope rations:

Alaska airlines sees significant revenues in 2007 but does not match the competition. 2 Alaska
accounts for just 3.3% of all US domestic passenger traffic. 15 Alaska also sees a lot of
competition from Southwest airlines who consistently undercuts their prices. Southwest also
operates a much larger flight network and sees significantly more revenues. Alaska could
potentially suffer from significantly less resources than other airlines. Information from their
financial fillings shows Alaska earns significantly less revenue than its competitors. Alaska
airlines could see significant increases in revenues with the possible slow expansion rate and the
retirement of older aircraft such as the MD-80 fleet. However, Alaska airlines should continue to
manage their niche market advantage of operating in Alaska. Freight services could add
significant revenues to Alaska because of service to this niche market area. The retirement of the
MD-80 has also led towards high synergy across the maintenance network. Now that Alaska’s
fleet is based on an all 737 model variety Alaska can maintain parts inventories a lot more
effectively and can cut down cost on maintenance because they can sell off all of their MD-80
maintenance parts inventory.

Outbound Logistics:

In a developed market such as the airline industry outbound operations is an area that is hard to
improve. The aspects pertaining towards outbound logistics would be the baggage system and
connecting flights. In an industry that is as advanced in age as the airline industry it’s hard to
improve baggage systems and connecting flights when they have been around since the first days
of air travel. However there is only so much service an airline can offer after the initial flight
with the current trend of low-cost carriers. People these days don’t want added services they

                                                                                 Final Project Analysis

want cheap flights. Southwest airline’s offers no connecting flight baggage service to its
An area that could potentially lure customers is an airlines affiliation with hotels, restaurants and
car rental businesses. People like to save money and enjoy getting rewards for flying on a certain
airline. Alaska has one of the best frequent flier programs in the industry with a vast amount of
partners including Delta, American, Northwest, and British Airways. 17

Marketing & Sales:

Marketing and sales is achieved through Alaska Airlines doing promotions and advertising
online, in magazines, on billboards, etc. They also achieve this with such things as frequent flier
miles, travel agent programs, and package deals with car rental and hotel reservations included.
Alaska has marketing alliances with other airlines that provide shared frequent flyer mileage
credit, redemption privileges, and code sharing on certain flights. Tickets are distributed through, travel agents and telephone reservations. In 2006, about 40% of Alaska’s total
ticket sales came through These forms of promotions, advertising, and sales
techniques are all different ways in which Alaska Airlines gets its name out to the public in order
to create brand equity.


Alaska Airlines is in the service industry and a commitment to their customers is a prime
objective towards achieving success. Their goal is to always provide safe, reliable transportation
for a reasonable price, while still providing caring, friendly and professional service. Alaska
prides itself on its award winning customer service and a few ways in which they intend to
maintain this service is by:

      Offering their lowest fares

      Guaranteeing fares for 24 hours

      Processing refund request quickly

      Providing clean and comfortable aircrafts

      Show care for the customers’ needs

      Offering choices during delays

      Caring for the customers and ensuring their comfort during delays

      Returning checked baggage quickly

      Listening to what the customer has to say

                                                                                 Final Project Analysis

Value Chain Analysis:
Secondary Activities:


Procurement for Alaska is the section of the company that oversees the purchasing of the
materials that are necessary for the company to operate. The main materials that are vital
towards the success of Alaska are their aircrafts and fuel. Currently, Alaska has a fleet of 114
aircrafts and they are dependent on Boeing for all of their aircrafts and aircrafts parts. The rising
costs of fuel over the past several years is becoming a major concern for Alaska and utilizing
such techniques as fuel hedging may be one way in which to cut some of their costs. In order to
remain successful and competitive within the industry, Alaska needs to obtain the highest quality
materials at the lowest possible price.

Human Resource Management:

Alaska Airlines is well known for their award winning customer service and this is due to their
HR management. Alaska promotes what they call their “Alaska Spirit”, which is basically an
employees pride in Alaska’s heritage and a passion for shared values. These types of employees
are brought about by Alaska attracting, developing, and empowering individuals to share a
passion for genuine, caring service. Alaska Airlines provides their employees with a competitive
rewards package, consisting of market based pay, annual gain sharing programs, and travel
benefits. They also provide their employees with many unique benefits such as career
development programs, training opportunities, and also mentoring and coaching opportunities.
These many different types of services and benefits that Alaska provides for their employees are
just the many different ways in which they run the company through their HR management.

Firm Infrastructure:

The infrastructure for Alaska Airlines is composed of financial policies, accounting, compliance
to regulations, corporate strategies, legal issues, and community affairs. A couple things that
could be damaging to Alaska’s infrastructure are first off changes in government regulations that
can lead to an increase in operating costs and it can even result in service delays and disruptions.
An increase of insurance costs or reduction in insurance coverage could be harmful to the
financial condition of Alaska and it could be damaging towards operations. Also, a failure to
successfully implement their growth strategy and their related cost reduction goals could leave a
damaging effect on the firm’s infrastructure.

                                                                              Final Project Analysis

Technology Development:

Technological developments that Alaska Airlines has developed over the recent years are:

     A new extension of aircrafts with their first 747-400 freighter and four new 747-400
      combination passenger and cargo aircrafts.

     An interactive website that allows for a consumer to view flights and purchase tickets
      from the comfort of their home.

     Ticket less check- in systems that allow for a customer to check in without even having to
      go to the ticket counter.

Baggage/cargo tracking systems that allows for a customer to have their luggage/freight tracked
so that they know where it is at all times.

                                                                               Final Project Analysis


Alaska does not distribute any physical products and only offers services. Their route distribution
includes several destinations but is primarily based on servicing the Northwest section of the
United States; they also offer flights to Hawaii, California, Arizona and Mexico.

Technological Advances:

The addition of new era 737’s has allowed Alaska to keep down its operating cost by increasing
earnings per a seat mile. This is a result of simply having more seats and better fuel efficient
aircraft. These planes also allow them to service longer routes such as the ones to Hawaii and


Alaska does not manufacturer any physical products its a service based business.

Organizational Culture:

Alaska’s culture is one that is proud and very service based. They offer more services than
budget carriers including baggage swaps and transfers. They also have in flight meals and a
personal selling touch with additional flight attendants when compared to other carriers. Their
culture is based on the family style and instilling that once you board their plane your part of
their Alaska Airlines Family. Alaska continues to dominate the service based Freddie Awards the
most prestigious consumer-generated honors in the travel industry. Recently this last year they
received the program of the year award and mileage plan of the year. They also received second
place for the "Best Customer Service," "Best Member Communications" and "Best Award
Redemption." This is the second year in a row that Alaska has achieved the most awards in the

                                                                                Final Project Analysis

VRIN Testing:

Alaska has a very valuable market share in the Pacific Northwest however they struggle with
growing outside of this market. They make significant revenue from freight and servicing Alaska
where the average citizen fly’s 9 times a year compared to the US mainland average of twice a


Alaska is rare because of their niche market of Alaska and Seattle but as mentioned above they
struggle to expand outside of this area.


Alaska would be costly to imitate because of the lack of revenues firms entering the Alaska and
Seattle market would make. In short Alaska offsets operating cost with freight cargo mostly to
and leaving Alaska. Alaska provides many not profitable flights in order to maintain its niche
advantage in Alaska. Outside of Alaska and Seattle Alaska airlines would be relatively easy to
imitate as shown by the success of low budget carriers over Alaska on similar routes.


When looking at the market in Alaska alone they are very hard to substitute because of the
offerings of non-profitable flights at times. But as seen above they can easily be substituted for
when leaving that niche market area.

                                                                              Final Project Analysis

Core Competencies:

Core competencies are a combination of company resources pared with company capabilities.
Each of the three capabilities presented above, link together Alaska and Air Canada’s synergistic
actions by means of a profitable corporate buyout. The combination of Alaska’s VRIN analysis
and corporate competencies work hand and hand with Air Canada’s current strategy. Each
company is very similar when it comes to their service oriented culture. Air Canada’s current
strategy places high regard on their service model and corporate culture. This model represents
how this synergistic merger can have a positive outcome.

                                                                                 Final Project Analysis

SWOT Analysis:

As seen above we see that Alaska’s key strengths are its consistent stock performance, consistent
growth, its niche market Alaska the state, and its overall position with in the market. Alaska
airlines is the only stock out of the four that we analyzed that had grown over the 5 year period
not even Southwest showed growth from starting point to ending point. Alaska airlines has
always offered strong revenue although they are on a much smaller than competitor Southwest.
Increases in flight capacities have also substantially benefited the airline with the addition of new
jets and the retirement of older ones. Alaska’s greatest strength is its niche market of the state
Alaska along with 50% market share based on passenger enplanements at Seattle, Los Angeles,
Portland and Anchorage airports.15 Their niche market location and service of Alaska and the
Northwest keeps them alive. Their route selection is extremely well done. The expansion
destinations of Hawaii and Alaska have greatly benefited this company and the sun seekers in the
Northwest region.


Alaska’s key weaknesses are its relative size when compared to its competition. Alaska does not
bring in the same amount of revenues Southwest, Delta, United and other competitors do. Alaska
also has troubles lower flight prices due to the purchasing of newer aircraft like the 737-800’s
mentioned above. Additional capacity allows for them to make up some of the cost but they are
still incurring the cost of buying brand new aircraft. Fuel costs have also increased in 2006 by
59%. 15 Remaining small and serving the niche market of Alaska and the northwest has also
made it harder for them to grow nationally and internationally.


Alaska has some great opportunities as seen in the inbound logistics side of the value chain.
There is a significant opportunity for Alaska to become more freight oriented offering Alaskans
freight services. The ability to buy goods on the internet due to the increase of internet buying
over the last decade could significantly spur this transition. 15 Alaska also has opportunities when
it comes towards diversifying its routes. With recent successes in Mexico and Hawaii there is
room for improvement. Increased destinations with in Mexico could significantly increase
revenues. The increase in capacity aircraft also allows Alaska to serve these longer routes to
Mexico and Hawaii with better effectiveness and fuel efficiency. Not to mention these larger
more powerful aircraft could take on more freight if needed too. Alaska Airlines does a
significant amount of freight business with local fish companies moving fresh seafood
throughout their route pattern. We would like to increase these opportunities if possible.

The airline industry in the United States is expected to grow by 32 percent from 2006 to 2011. 18
The market segmentation of flights in the United States is 81.6% domestic and 18.4%
international.18 The US airline segment makes up 42.6% of the global airline industry’s value. 18

                                                                                Final Project Analysis


Alaska’s key threats are competition from larger airline companies, increasing insurance cost and
fuel cost increases. The larger airline companies poise a threat to Alaska because of their
purchasing abilities and the significant differences in the revenue amounts between them and
Alaska. These other airlines also operate in wider route patterns all across the United States.
Low-cost carriers such as Southwest poise the most threat to Alaska because of the similar route
distances. Alaska’s average route distance is around 1,000 miles while Southwest is around 600
miles. 15 and 13 The other carriers still poise large threats however they are based mor e on
domestic and international flights using larger aircraft and longer route differences. Insurance
cost post 9/11 has affected the whole industry and poises a threat based on the risk coverage and
preimiums.15 Raising fuel cost across the whole travel industry has also significantly hurt Alaska
and its competitors causing significant increases in operating cost. Another significant threat
across the industry is the increased regulation due to the FAA inspections as noted above. There
is also ATA’s airline fleet which could be purchased for significantly less than new aircraft by a
possible low-cost entering airline. The decline in the US economy could be a potential threat in
the future too along with the ageing working population and air traffic controller situation raising
airport taxes.

                                                                                 Final Project Analysis

Strategy Formulation:
Strategic Alternatives

Increase Freight Cargo:

Increasing freight is a major opportunity that could be a very successful strategy for Alaska
Airlines. Increasing freight would not only lower costs, but it would also lead towards entering a
market that is predicted to grow steadily over the next several years. Alaska already transports
over 500,000 pieces of cargo a year, but this number has plenty of potential to grow. The global
air freight industry has grown by 2.8% in 2006, recording around 99.9 billion in revenue. These
numbers are predicted to increase and by 2011 the air freight industry is predicted to record
revenues around $145.4 billion which would be an increase of 45.6% from 2006. This rise is a
7.8% increase annually which means the industry is steadily growing and it will provide Alaska
with plenty of opportunities for success. On-line sales grew by 25.4% in 2006 and they have
been steadily growing since, which means there is a rising need for transporting these goods.
Putting more focus into freight lowers dependability that Alaska Airlines would have on their
passengers to fill their aircrafts and it also lowers costs because fewer workers are required to
manage the freight.

Expansion of International Flights:

Alaska Airlines has plenty of potential to increase revenues with an expansion of international
flights. International travel increased by 4% in 2006 with about 39.5 million U.S. travelers
flying out of the country. Mexico was the top U.S. international destination in 2006, with about
5.7 million people traveling below the border. Also, Canada is the second largest international
destination for U.S. travelers with about 3.8 million people traveling there in 2006. Alaska
currently flies to eight locations in Canada and ten locations in Mexico. The popularity of these
two countries for international travel makes this a lucrative market for Alaska to compete in.
Consistent flights to popular destination and an expansion to new destinations within these
countries could be very profitable for Alaska Airlines.

Alternative Evaluation

Increase Freight Cargo Evaluation

Alaska Airlines is already the largest passenger airline to transport freight on the U.S. west coast.
They transfer around 150 million pounds of cargo a year with about 30 million of those pounds
being seafood. Alaska has been setting itself up to grow in the freight industry by investing
around $100 million into their cargo fleet. They just redesigned five of their 737-400 aircrafts
which increased cargo capacity by about 20%. As stated by Matt Yerbic the managing director
of cargo for Alaska Airlines, "Our new cargo fleet will allow Alaska Airlines to better serve the
growing needs of our cargo customers throughout the state of Alaska and beyond." Making

                                                                                Final Project Analysis

these adjustments to their fleet has set Alaska Airlines in a position in which they can be
successful in the freight market.

Expansion of International Flights Evaluation:

Alaska Airlines already services flights to several destinations within Canada and Mexico. The
major issue with further expanding to more destinations within these countries is that companies
such as Delta and Southwest already have a wide range of flights to these countries. I f Alaska
expands to more destinations within these countries they will be competing against larger
companies such as Delta and Southwest and they will need to find a way in order to separate
themselves from these companies. The market within Canada and Me xico seems like it would
be very profitable, but the market is overloaded with a majority of different competitors.
Therefore, expansion within these countries would be very difficult for a company such as

Alternative Choices

Southwest Airlines:

Alaska Airlines is a relatively profitable airline company with limited growth potential in a
mature market. We recommend that Alaska Airlines essentially exits the market by positioning
the company for a corporate buyout. Several companies come to mind when thinking about who
would want to add Alaska Airlines to their profile. The first company that comes to mind is
Southwest Airlines with their excellent growth and financial capacity they are primarily the only
airline company from the United States that we would recommend buying Alaska Airlines. There
are few key components to this acquisition that make since for Southwest Airlines.

First is fleet synergy. Alaska Airlines operates an all Boeing 737 fleet which is exactly the same
fleet that Southwest operates and maintains. This would allow for Southwest to take over and
manage Alaska’s fleet substantially effortless. There would be no retraining associated with
operating this fleet. Along with no additional maintenance inventory cost because all the parts
they currently own for maintenance reasons mate up directly with Alaska’s planes also.

The second key component to why this acquisition makes since for Southwest is Alaska’s
corporate culture. Southwest and Alaska are both very upbeat and personal when it comes to
flying with them. Both companies treat customers like family and instill a one family atmosphere
while onboard there planes.

If Southwest buys Alaska the biggest problem they would have is implementing their low-cost
business model. Alaska’s onboard and baggage services would have to be cut back significantly
to comply with the low cost business model.

Another reason why Southwest will not purchase Alaska Airlines is because of the average
distance of their routes being significantly longer than that of Southwest. The expansion routes to
Hawaii and Mexico have been extremely important for Alaska but Southwest is not going to be

                                                                             Final Project Analysis

able to service those routes with its low-cost business model. The strategy would also put
Southwest into direct competition with several legacy carriers if they offered services to Hawaii
and Mexico. With no onboard meals and minimal service Southwest would not be willing to
tailor to the needs of customers on a 5 to 6 hour flight to Hawaii or Alaska. Flights averaging
over 600 miles are not going to be serviceable by Southwest because of their low cost business
model. Since Alaska’s average flight distance is around 1000 miles this is almost twice that of
Southwest’s routes. Southwest’s business model is not compatible with Alaska’s so we are ruling
this strategy out.

                                                                                  Final Project Analysis

Strategic Alternative Implementation:
Action Items:

In the midst of a global recession and the terrorist activities of September 11 th , our economy has
shows signs indicating consolidations in the airline industry is a must. Nearly all carriers are
reporting significant losses, capacity reductions and staffing cutbacks. As we have noticed in the
past decade since the Gulf War, there has been a wave of mergers, which in turn creates a more
competitive and efficient global airline industry. A key partner selection will serve a broader set
of customer needs. The main fundamental issue in deciding a merger selection must answer the
following question: what airline can help build a sustainable competitive advantage? The
merger should enable the new carrier to: first, offer a broader, deeper set of services to its
customers. Second, access an expanded customer base. Lastly, the merger should help the new
carrier realize significant efficiencies and eco nomies of scale. An appropriate partner will
incorporate revenue and cost synergies such as similar brand positioning, complementary
frequent flyer programs, customer benefits and a strong sales team.

Airline merger integration can be achieved through establishing fleet synergy, which means a
merger will create a competitive advantage. This can be synchronized in the following business
sectors: pilot training, crew scheduling, maintenance integration and inventory rationalization.
By focusing on airport facility consolidation, our merger will offer cost reduction strategies.
Management will have to plan for future implementation costs such as minimizing labor training
and integration time.

Since the Gulf War started in 1991, fuel costs began to rise along with the number of airlines
filing for bankruptcy. There was a slow rise until the September 11 th terrorist attacks and from
then until the present we have seen a 40% revenue decrease because of a weak dollar and a
bearish economy. Today, integrating airlines is a large-scale project, where the financial
pressures are greater, system integration is more complex and the airlines themselves are much
bigger. To succeed the hurdles of airline merger integration, it is important that customers
realize the benefits soon after Day 1. By moving quickly to establish stable interim processes
and controls to realize cost and revenue synergies, the transition will be frictionless. Lastly, it is
crucial to please the employee, whether they are unionized or not. Each employee must know
what is in it for them prior to the merger.

When a merger begins, there needs to be an integrated team structure that is cross functional,
where it is overlaps, in which upper management will need to anticipate and coordinate. Teams
will need to pay specific attention to what can go wrong in the first few weeks. Developing
contingency plans for each challenge will create a smooth transition, incorporating the culture,
heritage and traditions from the partner company.

Pulling our action items together requires new thinking techniques; new strategies to fix
regulatory restrictions in the US, Europe, and Asia. Airlines need to meet the following
guidelines to consider profitable mergers: secure a good merger partner, which offers
sustainable competitive advantage. Taking advantage of anti-trust rules will help to reduce

                                                                                 Final Project Analysis

regulatory risk in the short-term. Labor will be negatively affected if the merger reduces pay or
career progression, where it will be important for upper management to create new rules and
regulations. Lastly is to focus on the customers perception, where creating a single face to the
customer in the first 100 days is crucial.

Action Plan:

When looking for other companies to possibly complete a buyout of Alaska Airlines we found
Air Canada. Air Canada quickly became our recommendation when looking at the following
aspects adding financial strength, increasing flight routes and integrating similar synergistic
business models. When looking at the financials we took a forecasted look at the future
economic value added. The table below shows the predicted EVA for one year out, two years
out, and finally a third year.

When looking at our EVA we see that Air Canada has a lot higher EVA than Alaska. This is
because Alaska is substantially smaller than Air Canada. The key thing to look at in this case is
the difference between Air Canada and the merged numbers which are both set of financial
numbers for the respective companies added together then inputted into the EVA worksheet. We
see that over a period of three years the EVA to the merged numbers is roughly 520 million
dollars more than if Air Canada did not acquire Alaska. The acquisition of Alaska for this case is
going to be done through a buyout of shares. In this situation Air Canada will buyout roughly
more than 50 percent of Alaska’s stock. In our model we used 51% to show that they are indeed
buying out more than 50%.

The table above shows the acquisition cost of buying Alaska airlines stock at different levels of
goodwill. Goodwill is the amount of money paid over the book value for the stock issued as a
premium to the owners. So we predict that Alaska will be able to be bought for around 440
million to 585 million. Looking at Air Canada’s earnings in 2007 we see that there net income
was 429 million dollars which could possibly be used to pay off some of the acquisition cost.
The rest of the cost we would debt finance by using some of Air Canada’s almost 12 billion
dollars in assets as leverage for loans. Air Canada’s total liabilities for 2007 was around 9.4
million dollars so even when acquire Alaska and all their debt their liabilities will not increase in
large amounts. The deal seems pretty feasible considering the amount of economic value added
over three years is equal to the acquisition cost or greater depending on the amount of goodwill.

                                                                              Final Project Analysis

The synergistic flight plan of Air Canada-Pacific and Alaska is graphed above. This model
represents the current flight routes of each airline. The main turf of Air-Canada is surrounded by
their central hub of Montreal and their largest hub of Toronto. Each of these hubs are directly
linked together for international travel and freight. The current western hub is located in
Vancouver. Alaska currently has their main hub in Seattle with its primary roots spanning from
the very top of Alaska on down to Mexico City. Their flight plans together merge the eastern and
western parts of North America.

Alaska and Air Canada also have very synergistic business plans. The key component at the
heart of each plan is their service. Alaska and Air Canada are service innovators. Alaska Airlines
operates one of the most recognized rewards program known in the travel industry. The Freddie
awards, the most recognized awards in the US travel industry have recognized Alaska’s rewards
program several times including the last year. They even took home the biggest award in the
industry last year “the program of the year award”.20 Air Canada continues to impress North
America also with their service recently being awarded the title of “Best Airline in North
America” in the US based Global Traveler magazine for 2007. 21 Both these companies base their
business models on providing services as their primary objective.

                                                                            Final Project Analysis

1) Alaska Air Group Retrieved April 9, 2008, from Web site:
2) Yahoo Finance, Industry Data. Retrieved April 9, 2008, from Yahoo Finance Web site:
3) Alaska Air. Retrieved April 9, 2008, from Alaska Airlines Web site:
4) Dillingham, Gerald L. (2008).FAA: Challenges Facing the Agency in Fiscal Year 2008.
United States Government Accountability Office.
5) ATA Airlines Discontinues all Operations. Retrieved April 9, 2008, from Web site:
6) Gill, Kathy (2006, Oct, 16). Airline troubles mean job, pay cuts., Retrieved April
9, 2008, from mean-job-pay-cuts.htm
7) (2008, April,1). US economic troubles hurt airline seat occupancy. The Boston Globe,
Retrieved April 8, 2008, from
8) Vecchio, John Del (2008, March 9). The Montley Fool. Retrieved April 9, 2008, from
Analyzing Industries Web site:
9) Google Finance: Industry Data. Retrieved April 9, 2008, from Google Finance Web site:
10) McCabe, Richard M. (2006). Graziadio Business Report, 09, Retrieved April 8, 2008, from
11) Delta Air Lines SWOT. Datamonitor, Retrieved April 8, 2008, from
12) Delta Airlines. Retrieved April 9, 2008, from Delta Airlines Web site:
13) Southwest Airlines. Retrieved April 9, 2008, from Southwest Airlines Web site:
14) United Airlines. Retrieved April 9, 2008, from United Airlines Web site:
15) Alaska Air Lines SWOT. Datamonitor, Retrieved April 8, 2008, from
16) Southwest Air Lines SWOT. Datamonitor, Retrieved April 8, 2008, from
18) Airlines in the United States. Datamonitor, Retrieved April 28, 2008, from
19) How the corporate culture helped Southwest become the best. Emerald Insight.Retreived
May 11,2008 from
20) Top Honors At Freddie’s. Alaska Airlines homepage. Retrieved from
21) Air Canada Awards. Retrieved from


How are you planning on using Docstoc?