Alaska/Hawaiian by numbers

The Alaska/Hawaiian deal keeps getting attention as analysts and media dig into whatever data they have. We published some thoughts on the deal based on the conference call here. As expected, both CEOs want to tout the win-win for investors. The more one searches for information, the more questions emerge. The first goal of every merger is the search for synergies. The synergies are designed to show that the combined enterprise can drive down costs and be more efficient. If the merged enterprise can deliver more for less, it's a win for shareholders. However, the pool of impacted people is far broader than shareholders. There is a big pool of stakeholders, and foremost are employees. Merger synergies typically find "rationalized workforce" numbers in the back office. After all, much of the back office work is automated and IT-focused. How many managers does the merged enterprise need? It helps that this labor group is typically non-union and easily sacrificed for the "greater good. In the Alaska/Hawaiian case, both teams need up to 18 months behind the scenes to work out these grisly details - labor buyouts among the items. What hard numbers are there from an operational basis we can look at? Well, there is DoT data that is useful for this. Both airlines file plausible data based on our audits. What does the combined fleet look like operationally, based on DoT history? Here are two screenshots from our Snapshot model for these two airlines. [caption id="attachment_79671" align="aligncenter" width="580"] T2; AirInsight[/caption] [caption id="attachment_79672" align="aligncenter" width="580"] T2; AirInsight[/caption] Neither chart has any obvious red flags. Look at the following chart that reports carbon emissions driven by fuel burn. Fuel burn is an essential cost input. Alaska has steadily reduced fuel burn per seat as it deployed MAX9s. Hawaiian also saw an improvement from deploying A321neos. [caption id="attachment_79673" align="aligncenter" width="465"] T2; AirInsight[/caption] This table provides a more granular look at the emissions numbers for a combined fleet. [caption id="attachment_79676" align="aligncenter" width="423"] T2; AirInsight[/caption] Note several models are no longer in service. The A321neo numbers are a blend of both airlines' data. It is good to see the combined fleet has two of the most fuel-efficient models at the top of the table. So that is a big plus for the combination. The 717 is an issue, though. Especially considering that Southwest now does inter-island flights with larger, more efficient aircraft. Since the Golden Fleece for airlines is seeking the lowest cost of seat production, the following chart highlights what the combined airline numbers look like through 1H23. The combined airline is well on the way to economy of scale. Another positive sign from operational data. [caption id="attachment_79677" align="aligncenter" width="580"] AirInsight[/caption] Here is the same data by aircraft type. [caption id="attachment_79680" align="aligncenter" width="580"] AirInsight[/caption] The table above highlights the 717 "problem." Fortunately, the chart below illustrates that the 717 impact is tiny overall for a combined fleet. [caption id="attachment_79681" align="aligncenter" width="580"] AirInsight[/caption] Next, let's move on to financial data. The first series of charts illustrates how the two airlines stack up in terms of costs. Here, we see an essential difference. Alaska and Hawaiian are not doing the same kind of flying. Hawaiian flights are typically long-haul, whereas the typical Alaska flight is not. This means different requirements drive their fleet decisions - and likely ensures a mixed fleet. [caption id="attachment_79685" align="aligncenter" width="580"] AirInsight[/caption] Recall we spoke about synergies from back office labor. Here, we see what the combined costs look like. Almost certainly, this is the first area that will see labor rationalization. Given that this is not a surprise, the best people at both airlines are already looking for their next opportunity rather than get shafted. This means those remaining are possibly not the best candidates. [caption id="attachment_79684" align="aligncenter" width="580"] AirInsight[/caption] There is quite a lot of data to guide an outsider on the issues to focus on. This data suggests the questions we hear most are well-placed. Fleet commonality is an issue. Network is an issue. People are an issue. The list goes on. Can one distill the data into one idea to focus on? Perhaps. If we come back to the issue of driving down costs, we can focus on this crucial metric - operational costs per minute. We divide operational costs by air hours to get this number. The following table lists this metric for the US airlines, allowing a comparison across the industry. [caption id="attachment_79691" align="aligncenter" width="480"] AirInsight[/caption] Over the period, Alaska and Hawaiian saw their costs rise 58.8% and 14.9% respectively. The industry average rose 62%. Combining Alaska and Hawaiian sees costs rise 57.4%. This shows us that Alaska, as the larger carrier, drives costs. It also shows us that as merged airlines, they should offer lower costs. and, crucially, this is before labor rationalization. On paper, the merger looks like an idea with merit. There is a myriad of details to work through still. Had these two not concluded this deal, another airline would almost have pounced on Hawaiian.

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