Alaska Air cargo profits set to blossom with international expansion

December 12, 2024

Alaska Airlines’ announcement Tuesday that it will redeploy Hawaiian Airlines widebody passenger jets for nonstop routes from Seattle to Asia and Anchorage, Alaska, paves the way for the company’s first meaningful participation in the international air cargo market and faster growth of its freight business.

Cargo is poised to deliver $150 million of new annual profit for Alaska Airlines (NYSE: ALK) on the heels of September’s $1.9 billion merger with Hawaiian, harnessing the capabilities of the combined cargo organizations, management said during an Investor Day presentation outlining a new strategic plan that targets accelerated profit growth.

Alaska Air generated $252 million in cargo and other nonpassenger revenue in 2023, a quarter the cargo revenue of large U.S. international carriers like Delta Air Lines and American Airlines. The Seattle-based carrier operates three Boeing 737-700 and two Boeing 737-800 converted freighters, which are primarily used to support the Alaska market from Seattle and Los Angeles, in addition to managing shipments transported by its fleet of nearly 400 narrowbody passenger aircraft in the lower deck.

Hawaiian Airlines has about 70 passenger aircraft, including more than 30 Airbus A330 medium widebody jets and two Boeing 787 Dreamliners, but has cargo revenue well below that of Alaska Air. In late 2023, it began flying A330-300 converted freighters for Amazon’s domestic air logistics network under a long-term transportation services agreement. It currently operates six of the Amazon-supplied freighters and is scheduled to receive four more next year.

“Our mission is relatively simple,” said Jason Berry, executive vice president of Alaska Air Group and the executive with top responsibility for cargo. “We have to maximize our new combined network and fill our bellies.”

Job one toward achieving that goal is closing the gap between Hawaiian’s widebody belly performance and the rest of the industry.

Hawaiian Airlines’ widebody passenger fleet underperforms the industry average load factor by nearly 3,000 pounds per departure and on yield by more than 40% because of its remote connectivity and imbalance of capacity to and from the Hawaiian Islands, which limited its ability to flow cargo to big U.S. gateways like Los Angeles, Chicago and New York, Berry said.

The combination of the two networks and Alaska Air’s new global expansion strategy, from a traditional North American focus, is expected to open international cargo opportunities and improve profitability. A key part of the reimagined network is the establishment of a global gateway in Seattle.

Starting in May, the airline plans to introduce daily nonstop service operated on Hawaiian’s A330-200 jetliners to Tokyo Narita airport, followed in October by nonstop service to Seoul, South Korea. Alaska Air said it intends to offer 12 nonstop destinations from Seattle with long-haul widebody aircraft by 2030.

The new routes are made possible by moving capacity from the Japan market served via Hawaii, where demand has been slow to recover from the COVID crisis. Honolulu-to-Tokyo traffic will be consolidated at Haneda, Tokyo’s other airport.

Tokyo and Seoul are the third- and fourth-largest cargo export markets in Asia. Launching passenger service between Alaska’s flagship hub in Seattle and those cities is the first step toward connecting to the world’s largest – and most lucrative – cargo market, according to the company.

Alaska Air said it also will redeploy Hawaiian A330 aircraft to fly between Seattle and Anchorage during the peak summer season to take advantage of the aircraft’s higher seating and cargo capacity.

By bringing the cargo networks together, Alaska will be able to fill connectivity gaps and address the performance deficit. Berry said the combined route map translates to nearly 18,000 sellable origin-destination pairs – triple the current number of connecting markets – because of the ability to exchange freight with partner airlines that reach cities Alaska doesn’t serve.

The expanded cargo organization is led by Ian Morgan, who was hired last summer from cargo-handling agency ECS Group and reports to Berry. Morgan has decades of experience, including as a regional cargo president in the Americas for Qatar Airways, the largest cargo operator in the world by chargeable traffic, and at jumbo jet operator Cargolux.

Alaska Air estimated its upgraded cargo organization will unlock profit margins that are two to three times the system average.

Of the $150 million in new incremental profit, $35 million will come from raising the load factor to industry par and optimizing fleet deployment. Beyond capturing network synergies, Alaska Air said it expects an additional $55 million in profit from yield enhancements.

“In simple terms, we’re going to find the right product for the right lanes to help bring our selling average rates up to the industry average. From our original base, we believe we can build a franchise that, at a minimum, will be double in size and with system margins two to three times our system average,” Berry said.

Alaska Air is also inheriting Hawaiian’s new outsourced flying business for Amazon’s in-house cargo airline, Amazon Air, which is estimated to bring an additional $60 million to the bottom line.

Hawaiian Airlines never operated cargo jets prior to the Amazon deal. The only other passenger airline operating as a contractor for another airline is Sun Country Airlines, which flies a dozen smaller 737-800 converted freighters for Amazon. Regional carrier Mesa Airlines was dropped last year as an operator of some 737-400 freighters when it couldn’t meet service commitments.

“This is not a traditional space for passenger carriers, but because of our operational excellence combined with our decades of freighter experience, we believe this becomes a worthwhile diversification opportunity for Alaska Air Group,” said Berry.

Maximizing enterprise potential

Meanwhile, the airline will increase the number of hours Hawaiian’s Boeing 787-9 and Airbus A321 aircraft fly daily. The improved aircraft utilization unlocks the equivalent capacity from acquiring seven incremental aircraft, minimizing the impact of delayed Boeing 737 Max deliveries.

Management conservatively projected the merger will unlock synergies of $500 million by 2027 through top-line improvements, overhead efficiencies and scale efficiencies. New financial targets in three years call for $1 billion in incremental profit, earnings per share of at least $10 and profit margins of 11% to 13% primarily enabled by access to new revenue pools from the acquisition.

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