A little more than two years ago, Alaska Air Group (NYSE:ALK) abandoned an experiment to operate 76-seat turboprops on intrastate routes within Alaska, returning to all-mainline service with Boeing 737s. At the time, the airline said that its regional subsidiary Horizon Air had "struggled to operate cost-effectively in such a remote environment with limited resources."

Now, it is ready to try using smaller planes in its namesake state again. Alaska Airlines said last week that it will introduce the 76-seat Embraer E175 jet on several routes within Alaska in October. This move could open up meaningful opportunities over time for Alaska Airlines to grow and improve its profitability in Alaska, where it faces limited competition.

An Embraer E175 in the Alaska Airlines livery on the tarmac

Image source: Alaska Airlines.

Air service in Alaska suffers a big blow

Alaska is a unique operating environment for airlines in the U.S. There are hundreds of airports in the state, mostly serving small, remote communities. Moreover, due to the sheer size of the state and the harsh climate, 82% of Alaska communities are only accessible by plane or boat, according to the state.

In recent years, RavnAir Group has been the dominant airline serving these small communities scattered around Alaska. Despite a troubling history of frequent accidents, RavnAir has served as a vital lifeline to many villages and towns around the state, bringing food, medicine, mail, and just about everything else needed from the outside world. At the beginning of 2020, it served over 100 destinations in Alaska with more than 400 daily flights.

However, RavnAir was one of the first casualties of the COVID-19 crisis within the U.S. airline industry. In early April, it shut down all operations without warning and filed for bankruptcy protection. While RavnAir hopes to sell itself through a bankruptcy auction to a bidder that could revive the carrier, there's no guarantee that will happen.

Other small airlines in Alaska have moved quickly to pick up the slack after the RavnAir shutdown, but there could still be a meaningful opportunity for Alaska Airlines to expand its footprint within the state.

Bringing the E175 to Alaska

Launching E175 flights in Alaska will be critical for capturing this opportunity. Initially, the E175 will mainly operate between Anchorage and Fairbanks: a trunk route that is usually served by mainline jets. In the current environment of depressed demand, adding the 76-seat E175 to the mix will allow Alaska Airlines to operate more frequent service than it could support with its smallest mainline jet: the 124-seat Boeing 737-700.

A Horizon Air E175 in flight

Image source: Alaska Airlines.

However, Alaska will also use the E175 to support year-round flights to two additional communities -- King Salmon and Dillingham -- rather than the seasonal service it has offered previously. The airline says that it hopes to open up service to additional markets in the future. That could include year-round service to some destinations that Alaska began serving with mainline jets after RavnAir's demise.

Importantly, the E175 has the same ability to operate in bad weather as the 737. And unlike the Q400, it has enough range to fly between Anchorage and Alaska Airlines' main base in Seattle, making it easy to rotate E175s in and out of the state. This should lead to fewer operational problems than Alaska and Horizon experienced in their attempt to use the Q400 turboprop in Alaska.

Of course, even the E175 is too big for many communities in Alaska, due to airport facilities limitations as well as demand levels. Nevertheless, having a smaller aircraft available will enable Alaska Airlines to expand beyond the 21 airports it currently serves in Alaska and offer year-round service in more of those existing markets.

Why the opportunity matters

Many airline executives expect brutal fare wars in the U.S. over the next year or two, as supply is expected to outstrip air travel demand in the near term. That will complicate airlines' attempts to return to profitability.

In this context, having a captive market of sorts is a huge competitive advantage. Alaska Airlines doesn't have to worry about any other major airlines entering the intra-Alaska market. Its only competitors will be small regional carriers that tend to have high unit costs and can't offer nationwide connections.

By bringing the E175 to the state of Alaska, Alaska Airlines will be better able to match supply to demand, especially in smaller markets. This could enable it to return to solid profitability in the state of Alaska relatively quickly, providing an important source of stability as the company works to reach breakeven in other markets where it faces more robust competition.

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