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ALASKA AIRLINES: TAKING FLIGHT

Presented to Bradley Tilden, CEO of Alaska Air Group Seattle Washington // January 2017

Allison LennoxKenny LaurinAbeer HabibullahKenny Laurin

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PROBLEM

Should Alaska Airlines keep the VA brand alive or get rid of it when the merger is approved?

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“It is the thing I am losing the most sleep over with the merger.”

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EXECUTIVE SUMMARY

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Issues Recommendation Operate under one brand or two? Absorb Virgin Airlines into Alaska Airline brand – phased approach for

feasibility

Risk of alienating Virgin customers Identify common values (low price, customer service, and innovation) and incorporate Virgin best practices (Red inflight entertainment) into Alaska Airlines

Need to manage fleet integration Gradual phase out of Virgin fleet

Need to address cultural differences Careful change management program and development of Alaska Airlines Academy for training

Different in-flight entertainment Move to Virgin Airline’s Red system

Need to integrate IT Update to Virgin’s enhanced Sabre

Need to address loyalty programs Integrate into one program with options: collects based on miles or ticket price

High competition Merge brands to gain economies of scale and compete

$1.7 billion profit by 2020

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WHAT DOES THAT REALLY MEAN?

Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that

will serve both company’s customers

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Common values of low fares, customer service and innovation

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WHY DID YOU BUY?

• To gain key destinations and slots (SFO and LAX)• “It’s high time the airline strengthened its network beyond its core routes • Both airlines are known for strong growth, distinct styles and outstanding customer service

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Expanding route network and access to the west coast was the key reason for the acquisition

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CROWDED SKIES• Highly competitive space – the Big Four as well as lower cost airlines (Delta and Jet Blue)• Merger will bring together two profitable airlines to create strong competition for the big four•The only way to fight competition is by achieving significant scale, which would be difficult without consolidation

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The best way to realize advantages is to merge to gain economies of scale

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SEEMINGLY DISPARATE BRANDS

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You can make a long flight feel short with the right customer experience

VIRGINCool, hip, bicoastal

urban traveller

ALASKATech savvy, west

coast leisure traveller

This addresses who they are, not what they want:

• Innovation• Affordable prices• Customer service

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PRACTICAL, REAL WORLD, IMPLEMENTABLE

“We’re not going to rip the Band Aid off… we’re going to take a good look at what Virgin does and try to adopt

what’s best.”

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We are recommending a realistic and phased implementation

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FASTEN YOUR SEAT-BELTSKENNY WILL PROVIDE FURTHER DETAIL ON THE RECOMMENDATION

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ALASKA AIRLINES & VIRGIN AMERICAAlaska Airlines – “For the same price, you just get more”• Friendly & traditional service• High customer focus - lowest complaint rate in the US• Streamlined cost structure from efficient operations• 20 minute baggage guarantee• Custom leather seats, larger overhead bins• Innovation department – Pioneered bag tagging, accept Goggle wallet, biometric ID in board rooms

Virgin America – “Hip image, chic service, innovative”• Enjoyable customer experience• Low fare airline with efficient operations• “Red” – innovation with inflight entertainment system• Interactive safety video & inflight social network• Information technology expertise

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MERGED - ALASKA AIRLINESAlaska Airlines • Friendly & traditional service• High customer focus - lowest complaint rate in the US• Streamlined cost structure from efficient operations• 20 minute baggage guarantee• Custom leather seats, larger overhead bins• Innovation department – Pioneered bag tagging, accept Goggle wallet, biometric ID in board rooms

Virgin America – “Hip image, chic service, innovative”• Enjoyable customer experience• Low fare airline with efficient operations• “Red” – innovation with inflight entertainment system• Interactive safety video & inflight social network• Information technology expertise

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Brands have many similarities – focused around customer experience

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ALASKA AIRLINES & VIRGIN AMERICA

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Combining competencies will serve all customers

Innovation

Capability of introducing and adopting new technology Leverage Virgin’s “Red” inflight system & technology

Improved performance metrics – on-time, baggage, complaints

Leverage Alaska competency in timing Leverage Virgin competency in handling baggage

Better value proposition

High customer service focus Lower price than legacy carriers

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FLEETStandardize fleet – move to all Boeing aircraft• Remove the need to cross train crews• Eliminate need for high amount of parts inventory• Lower maintenance costs overall with streamlined operations• Sell 35 owned planes and lease back from financing firm

Plane transition• Do not renew Airbus aircraft leases - lease new Boeing aircraft to operate on Virgin routes• Transition over time – 6 per year for 7 years, training completed at same rate• Retrofit existing Boeing aircraft with in-flight entertainment systems• Younger planes, under 12 years old

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Standardizing the fleet over time will best position for Alaska Airlines for the future

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ROUTES

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Alaska Airlines will take over existing Virgin routes

Transition Alaska to take over Virgin routes

Align with fleet transition and crew training

Steal market share from Big 4 with value proposition

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SUBSIDIARY CONSIDERATIONS

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Creating the optimal experience for the customer will realize value of acquisition

Issue Recommendation

Loyalty plan Merge both loyalty plan and offer customers the option to earn cash rewards & mile rewards

Pricing Maintain Alaskan Airlines dynamic pricing model, below legacy carriers

Information technology

Migrate to using Virgin America IT system given enhanced functionsNot a large challenge to migrate given the same Sabre system

Non ticket revenue Charge for meals, seat selection, baggage, fuel surcharge

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PREPARE FOR TAKE-OFFABEER WILL EXPLAIN THE FINANCIALS

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Alaska has one of the highest margins in the U.S.; you need to capitalize on your business model’s efficiencies

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As your gate and route access increases your focus should be grabbing market share from the Big Four and other airlines.

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Need a strategy to control reduce debt and interest expense

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ASSUMPTIONS

•2016 onwards financials are consolidated with Virgin Airlines (based on seat miles)

•Available seat miles increase at CAGR (5 year average) of 7.7%

•Average load factor of 85%

•Operating revenues per ASM of ¢14.6 (5 year average)

•Net income margin of will improve to 15% by 2020

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2015 2016 2017 2018 2019 2020Available seat miles (000,000) 39914 57597 62052 66852 72024 77595Load factor 84% 85% 85% 85% 85% 85%Revenue passengers miles 33568 48980 52744 56824 61220 65956Operating revenues per ASM (RASM) in ¢ 14.0 14.6 14.6 14.6 14.6 14.6Operating revenues 5600 8414 9065 9766 10521 11335Net Income 672 1052 1178 1318 1473 1700

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Net income will increase to $1.7 billion by 2020

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SELL-AND-LEASEBACK STRATEGY

Assumptions:• $5 billion out of $6.5 billion total assets are aircrafts

• Average value per aircraft of $28.5 million (based on 175 fleet)

We recommend you sell-and-leaseback 35 aircrafts over 3 years, helping you raise $1 billion to reduce debt level

This strategy offers a tax advantage as well

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COST OF IMPLEMENTATION

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Initiative Type Cost (US$)

Creation of AAAcademy program- Facility retrofits

One-timeOn-going (3 years)

1M10-15M

Marketing- Merger of loyalty and booking technology- Consumer facing – internal- External facing

One-time1M1M4M

Hiring AAAcademy staff - 1 Sr. Manager- 3 Regional Managers

Yearly$150k$115K

Outfitting new planes 8 per year for 3 years6 per year for 4

afterwards

$1-1.5M per plane

Installing Red in existing AA planes 1 per month for 3 years

$250k per plane

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ALTERNATIVES

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Don’t merge Virgin America operations

Expand Internationally

Merge the two companies immediately

STOP!

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DON’T MERGE VIRGIN AMERICA OPERATIONS

•VA market is small, you should target the bigger pie

•Forgo cost efficiencies you may actualize from merging

•Passengers are increasingly price and efficiency sensitive

•Paying 0.7% revenues in perpetuity to Virgin Group

•Airline industry has consolidated over the past decade because the business model lends itself to it

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Do not keep Virgin and Alaska seperate!

STOP!

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EXPAND INTERNATIONALLY

•Different operational mode and more complexity (turnaround time, cabotage, customs)

•Slot acquisition is difficult in international airports

•Fleet is not optimal for long-haul international flights

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Do not expand internationally!

STOP!

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MERGE THE TWO COMPANIES IMMEDIATELY

•Capital intensive

•Risk of alienating current customer base

•Impact of cultural differences on employees

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Do not rush combining the two companies!

STOP!

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RECOMMENDATION

Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that

will serve both company’s customers

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Common values of low fares, customer service and innovation

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CRUISING AT ALTITUDEJEFF WILL RUN THROUGH THE IMPLEMENTATION

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CUSTOMER JOURNEY

Booking & Collecting

Boarding & Flying

Landing & Unloadiing

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BOOKING & COLLECTING•Booking•Merge booking software immediately •Update to most recent version of Sabre•Make code-sharing agreements immediately

•Collecting•Multi-tier rewards model•Offer choice & flexibility to members

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Combination of software makes a strong new offering

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BOARDING & FLYING

•Boarding:•Both employee groups are happy & productive – maintain in short term

•Look for quick wins in operation efficiency•Key indicators: On-time arrivals, load factor, fewest complaints

•Flying:•Gradual turnover of fleet – starting with “Red” in AA planes•No clear class divisions – offer economy premium seats

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LANDING & UNLOADING

•Adopt best practices from flight & ground crews in both cultures•Must improve baggage consistency – currently worst in US•Must maintain fewest complaints – improve VA operations•Reduce VA delays – #1 across new company

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On-ground & in-flight best practices taught to key crew leads

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PRE-FLIGHT ANNOUNCEMENTS (MARKETING)

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•Customers need to be made aware of advantages•“For the same price, you just get more”•Highlight advantages of combined loyalty program•Demonstrate world class in-flight experience•Assuage concerns about pricing changes

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ROLLOUT ITINERARY

Phase 1: 18 months

• Culture & Quick Wins

Phase 2: 2-5 years

• Transition Phase

Phase 3: 5-10 years

• Integration Phase

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CULTURE & QUICK WINSTask Responsibility KPI/Criteria Time

Code-sharing efficiencies Existing marketing & operations teams

- High load factor- Growing revenue seat miles

0-3 months

Develop culture program Small cross-functionalteams

- Consistent feedback- Buy in at top, with key players

0-6 months

Merge & launch rewards program

Marketing from AA & VA - Clear communication to existing members

- Additional buy in from new members

0-12 months

Hire AA Academy employees

HR from VA & AA - Experience in change management- Understanding of industry

0-6 months

Retrofit existing training facilities

AAA teams & operations - Consistent branding- Development of a strong new feel

6-12 months

Begin training key staff AAA teams & crew leads - Feeling of ownership- Consistent feedback loops

8-18 months

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CULTURE IS CRITICAL

•Buy in from top management

•Input from the start

•Identify champions & resistors

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ALASKA AIR ACADEMY

•New training program•Jointly developed•Input from all levels•Own it from the start

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Retrofit existing facilities to create consistency & urgency

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AVOIDING TURBULENCERisk Mitigation Likelihood Impact

Big Four competitors respond Better value proposition, more costefficient operations

H H

Shareholders unhappy with merger

Reach synergies quickly & carefully M M

Loss of Virgin Atlantic customers Integrate the best parts of Virgin into AA

M L

Flight crews unionize Explore employee ownership model such as Southwest, WestJet

M H

Fuel prices fluctuate Small fuel surcharges for customers H L

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FLYING INTO THE FUTURE

•These are ideas we are not recommending right now, but should be considered in the future.•AA Vacations

• Partnerships with hotels, taxi companies, tour companies to provide packages

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PREPARE FOR LANDINGALLISON WILL WRAP-UP

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RECOMMENDATION

Alaska Airlines should absorb the Virgin Airlines brand, taking the best of each brand to create an experience that

will serve both company’s customers

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Common values of low fares, customer service and innovation

HaskayneConsulting

EXECUTIVE SUMMARY

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Issues Recommendation Operate under one brand or two? Absorb Virgin Airlines into Alaska Airline brand – phased approach for

feasibility

Risk of alienating Virgin customers Identify common values (low price, customer service, and innovation) and incorporate Virgin best practices (Red inflight entertainment) into Alaska Airlines

Need to manage fleet integration Gradual phase out of Virgin fleet

Need to address cultural differences Careful change management program and development of Alaska Airlines Academy for training

Different in-flight entertainment Move to Virgin Airline’s Red system

Need to integrate IT Update to Virgin’s enhanced Sabre

Need to address loyalty programs Integrate into one program with options: collects based on miles or ticket price

High competition Merge brands to gain economies of scale and compete

$1.7 billion profit by 2020