Alaska Air Group, Inc. History

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Company History:

Alaska Air Group, Inc. is the holding company for Alaska Air, the tenth largest U.S. airline with the country's youngest fleet of aircraft. More than 12 million passengers a year fly Alaska Air, and nearly four million its sister airline, the group's subsidiary Horizon Air. Alaska Air maintains marketing agreements with Northwest Airlines, American Eagle, KLM, Quantas, and several small commuter carriers, and is also the largest wholesaler of Disneyland vacation packages in the United States.

1930s Origins

The company that eventually became Alaska Air was founded in 1932 by Linious "Mac" McGee, a veteran of several failed business ventures who had traveled to Alaska in 1929 and set himself up as a fur buyer. In 1931, McGee and a pilot friend, Harvey W. Barnhill, purchased a used three-passenger Stinson prop plane in San Francisco and shipped it to Alaska for use on McGee's fur-buying forays. By January 1932, "Barnhill & McGee Airways" were offering charter flights in advertisements in the Anchorage daily newspaper. Barnhill and McGee dissolved their partnership shortly afterward, and McGee took over the business.

Anchorage in the early 1930s was a frontier town with an economy based largely on credit. With pilots working on commission, ferrying freight and passengers across Alaska, McGee was able to build up a fleet of seven identical Stinson planes painted with the black-and-white "McGee Airways" logo. Battered by the worldwide Depression and the seasonal nature of the Alaskan economy, however, the business was constantly on the brink of failure.

In 1934, McGee merged his struggling airline with another Anchorage airline, Star Air Service, which had a fleet of eight planes. This company had gotten its start in April 1932, when two aviators from Seattle, Steven E. Mills and Jack Waterworth, who were backed by a friend who put up the money, arrived in Anchorage with a Deluxe Fleet B-5 two-seater plane and set up shop as flight instructors. With a combined fleet of 15 planes, Star was now Alaska's dominant airline, but the business, beset by high repair costs to its fragile wood and fabric planes, continued to struggle throughout the mid-1930s.

The era of high-risk Alaska bush flying began to wind down in the late 1930s, when Star Air Service started de-emphasizing charter flights in favor of more regularly scheduled service. In 1937, in an effort to stabilize its finances, the company was incorporated as Star Air Lines. The following year, Congress passed a bill creating the Civil Aeronautics Authority to regulate the growing commercial airline industry.

Competing under CAB in the 1940s

In preparation for the advent of governmental regulation, Star began paying pilots a salary, rather than allowing them to compete for commissions, painted its 15 planes a uniform orange with a black logo, and tried to stick to semi-regular schedules for its flights. In 1940, the Civil Aeronautics Board (CAB) held hearings in Anchorage. As a result of these, Star was awarded temporary certificates in 1942 for most of the routes it desired, including many flights from Anchorage to other points. However, the airline's petition for the crucial route between Seattle and Anchorage was denied in favor of politically well-connected Pan Am.

In 1941, the financially vulnerable Star was purchased by New York businessman Raymond Willett Marshall, who had interests in other transportation companies and saw that ownership of Star could be profitable for him. The following year, vice-president and board member Homer Robinson arranged to enlarge Star by purchasing three other Alaska airlines--Lavery Air Service, Mirow Air Service, and Pollack Flying Service&mdash well as a hangar at the Anchorage air field. In light of these additions, the company's name was changed to Alaska Star Airlines in mid-1942, and then, in 1943, to Alaska Airlines, Inc.

The most significant change to the airline during this time, however, came after America's entry into World War II in December 1941; the war resulted in a severe shortage of pilots. Nevertheless, the airline purchased its first multiengine plane, a Lockheed Lodestar, in 1943. In that same year, the company's stock was first traded on the American Stock Exchange.

Because Alaska Air was owned by an outsider, meetings of the Alaska Air board were moved to New York in the 1940s, and a series of somewhat powerless company presidents was hired and fired in the ensuing years. The airline was chronically short on equipment, funds, and reliability, and pilots were frequently forced to purchase fuel for their planes out of their own pockets.

In 1945, with the war winding to a close, the airline hired its first stewardesses. With the arrival of James A. Wooten as president in 1947, Alaska Airlines began a rapid postwar expansion. Wooten's professional background was in air freight, and his strategy was to buy up surplus planes, engines, and parts from the government, which was selling off vast amounts of equipment left over from the war. The airline's fleet increased dramatically, and to keep the planes busy, Alaska Air expanded its charter business. The federal government had liberalized the airline industry, and Alaska Airlines planes began flying everywhere, hauling almost anything, including live cattle. The company flew rice to Chiang Kai-shek's troops under siege by Mao Tse-tung's Communist forces in China and brought back Chinese laborers to work in Canada. Alaska Airlines planes flew Jewish refugees to Israel and 11 loads of German war brides to America. During the Berlin airlift, the company made 87 flights into Germany. All of this helped Alaska Airlines to become the world's largest charter airline by 1948.

Closer to home, in the late 1940s the airline added popular charter flights from Anchorage to Honolulu and also began regular, though technically "nonscheduled" flights, that originated in Chicago and passed through Seattle on their way to Alaska. The frantic pace of charter flights mandated by Wooten put Alaska Air into the black, and finally the airline outgrew its facilities in Alaska, moving its base of operations to Paine Field in Everett, Washington, and making Anchorage a branch office.

However, the lax state of federal regulations that had made this flourishing activity possible was coming to an end. In 1949, the CAB shut down Alaska Airlines entirely for a short period for safety violations and levied heavy fines. Subsequently, the airline was completely prohibited from engaging in its worldwide charter business and allowed just eight trips a year between Alaska and the continental United States. Wooten left his post as president shortly thereafter, and the airline's second era of high-flying adventure came to a close.

Retrenching in the 1950s

With its sphere of activity restricted to Alaska, the company turned its attention to consolidation of its standing within the state, buying two smaller airlines, Al Jones Airways and Collins Air Service, in 1950. Throughout his tenure as owner of Alaska Air, Raymond Marshall had run the company with an eye to his own financial gain, rather than the long-term welfare of the airline itself. In 1951, with continued financial improprieties crippling the company's operations, the CAB forced Marshall out of day-to-day control over the airline by compelling him to place his stock in a five-year voting trust. In that year as well, the CAB granted Alaska Air a temporary certificate for a route outside Alaska, the long-coveted Seattle-Alaska run.

In 1952, Nelson David, a CAB-appointed president, took over, and a period of rebuilding financial and operational stability within the airline ensued. By 1957, the airline was in functional shape, and David and his cohorts departed to make way for the arrival of Charles F. Willis, Jr., a decorated World War II pilot who took over as president and chief executive officer by purchasing most of Marshall's stock in the company.

Under Willis's direction, Alaska Airlines began to make up in personality what it lacked in capital. The company became the first to show movies on planes in the late 1950s, and with the inauguration of service on its first pressurized plane, a DC-6 that allowed pilots to fly above rough weather rather than through or around it, Alaska Air introduced "Golden Nugget" service, which included an on-board honky-tonk saloon with a piano.

In 1960, the company was allowed to shuck its cumbersome bush routes to tiny towns in the interior of Alaska, and the following year the airline entered the jet age with the purchase of a Convair 880. Locked in tough competition with Pan Am, Northwest, and another regional carrier, Pacific Northern, Alaska Air turned to cheap and imaginative gimmicks to try to set itself apart from the competition throughout the 1960s. In addition to the "Golden Nugget" promotion, the company offered safety instructions read in rhyme ("A life vest is beneath each seat / They're stored so we won't lose 'em. / Now fix your eyes on the stewardies / They'll show you how to use 'em."), fashion shows in the aisles of the planes, and bingo games en route. The airline also worked to promote tourism within Alaska, organizing charters from the continental United States to the frozen north. In 1963, the company conducted a promotional tour of Japan in an effort to further expand the state's appeal.

In 1964, the company was finally given a permanent certificate from the CAB for its most important route, the nonstop flight from Seattle to Anchorage. During this time Alaska Air also added two important new planes to its fleet: the Lockheed Hercules, a massive cargo plane which it used to fly oil-drilling equipment to Alaska's North Slope and, in the early 1970s, to South America; and the Boeing 727, which would become the company's signature passenger aircraft.

Celebrating the Alaska Centennial in 1967

In 1967, as Alaska celebrated its centennial, the company adopted a "Gay Nineties" promotional theme with stewardesses dressed in Edwardian garb. In the same year, the airline expanded its coverage of Alaska to include exclusive service to the Southeast corner of the state with the opening of an airport in Sitka, Alaska. This led to the acquisition, in the following year, of two smaller airlines: Alaska Coastal Ellis and Cordova Airlines. The "Gay Nineties" theme gave way in 1970 to "Golden Samovar" service, complete with Cossack costumes and beverages served from giant Russian samovars, in recognition of the company's introduction of charter service to Siberia. After many years of diplomatic wrangling, the airline was able to win permission for more than two dozen flights in 1970, 1971, and 1972.

Despite the promotional fanfare service to the Soviet Union brought, the airline as a whole was in difficult straits. Throughout the first two years of the 1970s, company cargo planes sat idle, sapping revenues as work on the Alaska pipeline was held up. A further blow came on September 4, 1971, when an Alaska Air jet crashed on landing in Juneau with a loss of 111 lives. It was the worst single-plane domestic air disaster to date. Financially, despite the CAB's award of exclusive rights to serve Southeast Alaska, the airline was struggling badly. Finally, president and chief executive officer Willis was deposed in 1972 by the airline's board and replaced by Ronald F. Cosgrave, a board member who had gotten his start in business providing Alaskans with mobile homes.

When Cosgrave took over, Alaska Air was $22 million in debt to its creditors. In an effort to salvage the company, the airline cut flights and employees and dropped its freight business entirely. The new management also set out to improve the airline's punctuality in hopes of banishing its unflattering image as "Elastic Airlines." By 1973, the airline's performance had improved and it was turning a small profit. In this new, less-flamboyant phase, symbolized by the more sober logo of a native Alaskan that was painted on the tail of the company's planes, the airline remained profitable throughout the mid-1970s.

With the passage of the Airline Deregulation Act of 1978, the American airline industry underwent a radical transformation. Alaska Airlines also underwent a transformation of sorts at the start of the new era. The real estate arm of the company was broken off into a separate company. Cosgrave became chairman of the new firm, relinquishing the reins of the airline to his close associate, Bruce R. Kennedy. In alliance with Alaska Air, Cosgrave then launched a failed campaign to take over one of the airline's competitors, Wien Air Alaska, that later resulted in federal fines for Alaska Airlines and its leaders for improprieties during the attempt.

Kennedy's role as leader of Alaska Air was to shepherd the airline through the marked expansion of the brave new unregulated world of the 1980s. Immediately, the company placed two more continental American cities on its route map: Portland, Oregon, and San Francisco, California. The Arctic cities of Nome and Kotzebue, and then Palm Springs, California, were added shortly; and Burbank and Ontario, California, came on line in 1981.

By 1985, Alaska Air was serving cities in Southern California, Idaho, and Arizona as well, and profits were up. The company was able to settle a three-month-long strike by its machinists in June, part of an overall strategy to pare labor costs to the bone and maintain peace with its unions. In November, the company introduced a popular daily air freight service from Alaska called "Gold Streak."

Anticipating further expansion, the airline formed Alaska Air Group as a holding company in 1985. Horizon Air, a Seattle-based regional commuter airline serving the Pacific Northwest, was purchased in 1986. A year later, the company bought California-based Jet America Airlines, which was merged into Alaska Airlines after getting slammed by larger airlines on its East-West routes from Southern California to the Midwest. Despite this setback, Alaska Air pressed ahead with its expansion into the hotly contested California market.

In an effort to compensate for the seasonal imbalance in travel to Alaska, much of which takes place during the summer, the airline in 1988 inaugurated service to the Mexican resort cities of Mazatlan and Puerto Vallarta, whose high season is the winter. By 1989, the company served 30 cities in six western states outside Alaska, and 70 percent of its passengers flew south of Seattle. The airline had successfully used its base in Alaska as a springboard to profitable performance in larger markets. Alaska Air continued its emphasis on customer service as its calling card, stressing higher-quality food and more leg room on its flights than on other airlines.

New Vision for the 1990s

In 1990, the company unveiled a strategic plan that included lease orders for 24 new Boeing 737-400 aircraft. One provision of the transaction was the company's sale of a $60 million preferred stock position to International Lease Finance Corporation (ILFC), lessor of the airplanes. A creative feature of the stock transaction was that the conversion rights were purchased by a large group of Alaska's management employees, who were to redeem the stock from ILFC and convert it to common stock no later than 1997. The conversion feature was structured to create an incentive for management to achieve strong stock performance through operating results. At the same time, Alaska announced a large repurchase of shares, using proceeds of the preferred stock sale, and began an employee stock purchase plan.

The airline further expanded its route map in 1991, adding the international destinations of Magadan and Khabarovsk in the Russian far east, and Toronto, its first city served north of the American border and east of the Rockies. (Toronto was eventually dropped in July 1992.) As the company notched awards for customer service and marked its 19th consecutive year of profits in a turbulent industry, Kennedy retired in May 1991 and was succeeded by Raymond J. Vecci.

Furious competition descended on Alaska Air's home turf after the carrier declined to buy its rival MarkAir Inc. in the fall of 1991. Since it began carrying passengers in 1984, MarkAir had worked out feeder arrangements with Alaska Air that kept competition to a minimum. However, after the buyout offer was refused, it unleashed low-cost service on the Anchorage-to-Seattle market and others within Alaska, where Alaska Air earned nearly one-third of its revenues.

In 1992, Alaska Air posted its first loss--$121 million--in 20 years. Under Vecci, the carrier canceled two planned maintenance facilities and deferred a massive $2 billion aircraft purchase; it was able to increase utilization of its existing planes, however. The company cut back on unprofitable routes and even tampered with its award-winning customer service formula, economizing on in-flight meals and other amenities. Attempting to reduce costs on labor resulted in predictably tense relations with the unions. The strict fiscal regimen produced prompt results; Alaska's losses fell to $45 million in 1993 and produced a $40 million profit in 1994. Record-setting cargo operations accounted for about eight percent of these revenues.

In 1993, competition heated up, as the legendary low-cost airline Southwest Airlines entered the Pacific Northwest market by acquiring regional carrier Morris Air. United Airlines simultaneously transferred many competing routes to its less expensive shuttles. Alaska Air was able to reduce its costs, while maintaining a level of customer service that helped make it the leading carrier out of Seattle, Portland, and Anchorage. Alaska Air billed itself as "the last great airline." Still, analysts argued that Alaska Air was in need of deeper cuts, and the company was also plagued by union strikes by flight attendants.

In early 1995, Vecci was dismissed and replaced by John Kelly, formerly CEO of Horizon Air. Alaska and Horizon expanded West Coast routes to capitalize upon a new "open skies" agreement between the United States and Canada. Alaska Air also added a new Russian destination. Its competitor MarkAir had by then centered its jet service on Denver.

In 1996, Alaska Air conducted the first commercial passenger flight using Global Position System (GPS) navigation technology. It announced plans to become the first airline in the world to integrate GPS and Enhanced Ground Proximity Warning System (EGPWS) technology, adding a real-time, three-dimensional display of terrain. The system was scheduled to be operational in all the carrier's Boeing 737-400s by April 1999.

Innovation was important to the company. In 1989, Alaska Air had become the first airline to use head-up guidance systems to operate in foggy conditions. In 1995, it became the first U.S. carrier to sell tickets over the Internet. The airline installed self-service "Instant Travel Machines" that printed boarding passes and allowed customers to bypass the traditional ticket counter. The addition of an X-ray device to the unit was being tested in Anchorage in the spring of 1999, which would allow passengers to check their own baggage. For in-flight emergencies, the carrier also planned to provided automatic external defibrillators in all planes by the year 2000.

Alaska Air's operating revenues were $1.59 billion in 1996, and increased to $1.74 billion the next year. The impressive revenue growth of 1998&mdash′ofits were up 49 percent to $190.5 million--continued into 1999. Alaska Air had evolved into a lean, low-cost carrier. As it approached a new century, the airline again looked to expand, buying Bombardier regional jets and Boeing 737s and adding new training and maintenance facilities.

Principal Subsidiaries: Alaska Airlines, Inc.; Horizon Air Industries, Inc.

Further Reading:

• Alaska Airlines: General Information and History, Seattle: Alaska Airlines, 1992.
• Beauchamp, Marc, "... We're Vulnerable," Forbes, March 6, 1989.
• Benton, Hal, and Andrea Rothman, "Is Alaska Big Enough for These Two?," Business Week, April 13, 1992, pp. 74--76.
• Kernstock, Nicholas C., "Alaska Air Prospers by Focusing on Niche Markets, Profitability," Aviation Week and Space Technology, September 25, 1989, pp. 110--11.
• Levine, Jonathan B., "Alaska Air: Is It California Dreamin'?," Business Week, November 30, 1987, p. 150.
• Miller, Bettye Wells, "High Flyer," Managing Service Quality, March 1992, pp. 153--56.
• Nelms, Douglas W., "Alaska Turnaround," Air Transport World, May 1996, pp. 49--55.
• O'Lone, Richard G., "Alaska Buoyed by Initial Response to Its Soviet Far East Service," Aviation Week and Space Technology, July 29, 1991, pp. 34--35.
• Proctor, Paul, "Alaska Expansion Yields Gains, Growing Pains," Aviation Week and Space Technology, November 27, 1995, pp. 36--37.
• Satterfield, Archie, The Alaska Airlines Story, Anchorage: Northwest Publishing Company, 1981.

Source: International Directory of Company Histories, Vol. 29. St. James Press, 1999.

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