For Alaska Air Group, It Pays to Be Nice

In the cutthroat world of big business, it is exceedingly rare to find companies that excel at putting the needs of customers first. For Alaska Air Group (NYSE: ALK  ) , however, being nice is not just a company trait, it is a strong part of the company's moat in the airline industry.

Alaska Air Group's edge in customer satisfaction is what separates the company and its brands from competitors like JetBlue Airways  (NASDAQ: JBLU  ) and Delta Air Lines (NYSE: DAL  ) .

Shaking the bad reputation
Perhaps no other industry is as despised by the consumer as the airline industry. Whether it is slapping passengers with extra fees for baggage, requiring overweight passengers to purchase multiple seats, or just aggravating travelers with delays and attitude, the industry can't seem to catch a break when it comes to perception.

However, not all brands are equal. When it comes to customer service, Alaska Air Group's main flight brands Alaska Air and Horizon Air are the clear leaders. For years these flight brands have excelled at putting customers first and foremost.

A 2013 North America Airline Satisfaction Study conducted by JD Power & Associates revealed Alaska Air to be the top 'network' carrier among consumers, beating out Delta, Air Canada and American Airlines, owned by AMR Corporation. The most impressive feat is that Alaska Air has won the prestigious title for six years straight now. 

Additionally, FlightStats.com named Alaska Air the No. 1 on-time major carrier in North America for the third year in a row. In 2012, Alaska Air achieved an 87.26% on-time arrival stat, significantly better than the industry region average of 79.62%. FlightStats' President Jeff Kennedy stated, "It is truly a testament to their ongoing commitment of providing exceptional service to their customers." 

A rare moat in the airline industry
Thanks to years of continued outperformance in customer satisfaction, many travelers now recognize Alaska Air's brands as the most convenient and hassle-free way to travel in the air. The company's strong brand recognition is now an invaluable asset, and the impact it has on Alaska Air Group's industry positioning is immense.

The primary benefit is that these brands bolster the company's already formidable leadership position in the important Alaskan flight market, which has recently come under threat of being poached by discount airliners like JetBlue. While JetBlue offers a few flights into and out of Alaska, Alaska Air's heavy volume of flights simply overwhelms the discount competitors, all of which are reluctant to commit serious capital to a niche market. 

More importantly, customers who have a choice will choose to fly with the brand that offers more suitable departure times and is known for its customer focus, as it is simply more convenient. In this way, Alaska Air Group has a stranglehold on the Alaskan flight market.

Not just about Alaska anymore
Despite the name, Alaska Air Group is becoming less dependent on the last frontier each year. The company has launched 27 new routes in the last 24 months, branching out into mid-continent and trans-continent categories.

As a destination, Alaska currently makes up approximately 15% of the company's total network composition, down significantly from 21% in 2003. Hawaii now represents 21% of network composition, while trans-continental flights have grown from 7% to 21% in the last ten years.

The increasing diversity of Alaska Air Group means that the company is becoming less dependent on any one individual market, which decreases overall risk significantly. The expansion has also been driving revenue and EPS growth as well. The following is a breakdown of the company's projected growth in 2014 compared to peers Delta and JetBlue.

Company

Alaska Air Group

Delta

JetBlue

Revenue Growth 2014

5.3%

3.8%

8.6%

EPS Growth 2014

20.8%

-2.3%

34.7%

Although Alaska Air Group is projected to offer significantly better growth than Delta next year, the company's growth falls short of discount airliner JetBlue on both a revenue and an EPS basis.

However, management at Alaska Air Group recently demonstrated its commitment to creating shareholder value by announcing the initiation of the company's first ever dividend. Shares of Alaska Air Group now pay an annual dividend of $0.80, equal to a yield of 1.00%, which leads almost all other competitors in the industry. 

Flying high
Alaska Air Group is in a sweet spot right now. The company excels on numerous levels and also benefits from an industry that is currently undergoing serious consolidation.

As the company continues to dominate the flight market in Alaska, it is also decreasing its dependence on this market by significantly expanding routes to locations like Hawaii. As long as the company remains dedicated to putting the needs of customers first, Alaska Air Group and its investors should enjoy clear skies ahead.

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