Alaska Airlines and the Hedgehog Concept

I had prepared another article below, but when I saw this on, I knew I needed to write about it. In the WSJ, the article An Airline That Makes Money. Really. showed a great example of the hedgehog concept. In an interview, Bill Ayer, CEO of Alaska Airlines, described the typical model for the airline industry. If you are losing money, increase capacity to take advantage of economies of scale and ignore the other problems reducing profitability. With this strategy, the airline industry was down 25% last year in the markets.

Alaska Airlines decided to set a different focus: run an airline like any other business. In any other business expanding before you are able, you will run into financial trouble. Instead of expanding, they focused on improving operations to increase profitability, specifically, they focused on the metric cost per available seat mile.

So how was Alaska Airlines able to become the best at running a profitable business while facing the same obstacles as other airlines? First they helped their employees become passionate about the goal. They did this by helping show their employees the importance of a long term profitable business. Even in unions, employees jobs wouldn't be secure if Alaska Airlines wasn't around to employ them. This helped them to eliminate defined benefit pensions for new employees and negotiate reduced union salaries in return for profit sharing bonuses.

In order to learn what they needed to know to become the best at running an airline like a business, Ayer brought in successful businessmen such as Jim Collins, Jim Senegal, and Oren Smith. He also borrowed best practices from other industries and implemented them in Alaska Airlines.

Focusing on this single principle has benefited Alaska Airlines economically. They have a goal to reduce expenses by $300 million from 2003 by reducing their cost per available seat mile metric from 8.73 cents to 7.25 cents. So far, despite fuel costs rising 35% in 2011, they have reach 7.6 cents. Also, Alaska Airlines is the only pre-1978 carrier that has not filed for bankruptcy.