Alaska Air Group earnings rebound in second quarter
Alaska Air Group rebounded from a relatively tough start to the year by turning a $193 million profit in the second quarter amid escalating operating costs.
Leaders of the parent company to Alaska Airlines and regional carrier Horizon Air are finishing up work to rebalance the company’s operations and finances after purchasing former West Coast competitor Virgin America for roughly $4 billion in a deal that closed in December 2016.
While Alaska Air Group was still in the black in the first quarter, the $4 million profit was its smallest quarterly return in more than six years. The $193 million netted in the second quarter — adjusted upward to $206 million when ongoing merger-related costs, fuel hedging and other special items are included — compares to a $293 million net in the second quarter of 2017.
The net income translates to $1.56 per share. Alaska Air Group Inc. stock closed trading July 25 at $58.76 per share before the earnings report and rose 10.2 percent to close July 26 at $64.76 per share.
The company paid a 32 cents per share dividend in the second quarter and has repurchased $25 million worth of shares this year.
CEO Brad Tilden said during a July 26 call with investors that about 85 percent of the work to integrate Virgin America into Alaska Airlines is behind the company, which is starting to return its focus to improved margins.
“Our team has been resilient and has secured a number of important accomplishments that have laid the foundation for our long-term growth and success. As we sit here today, we believe we’ve now passed through the inflection point of the merger,” Tilden said. “And while we have a lot of work ahead of us to lean out our cost structure and river revenues higher, we feel very good about the plan we’re putting in place, and I’m optimistic about our future.”
He highlighted the company’s smooth April 24 transition to a single passenger service system for Alaska and Virgin, which handles bookings and other customer services, as well as a June agreement to bring the airlines’ dispatchers under a single collective bargaining agreement.
Tilden said Air Group now has 93 percent of its unionized payroll under single union contracts.
“This is extremely important for any airline, but especially at Alaska, where we have such a unique culture that drives our success,” he added.
Getting back to the numbers, the second quarter profit was on the back of $2.1 billion of operating revenue, or 3 percent year-over-year growth on 7.8 percent capacity growth. Year-to-date revenue was up 4 percent to just shy of $4 billion, while operating expenses up 17 percent for the quarter and 15 percent for the year cut the company’s operating roughly in half versus the first half of 2017.
The company’s labor costs are up 17 percent year-to-date and the company has paid out $77 million in incentive and performance pay, compared to $58 million in the first six months of last year.
The company’s workforce is also up nearly 12 percent for the year to more than 21,400 full-time equivalent employees, according to the earnings report.
Fuel costs — a fundamental cost for any airline — have increased $201 million, or 29 percent so far in 2018, despite the company’s continual fuel hedging.
Tilden said the group’s airlines are currently paying about $1 more per gallon over what they were paying in February 2016 when oil prices bottomed out at less than $30 per barrel.
“It may be that the early 2016 prices were unusually low, but it’s clear that we have higher costs and we need to be focused on actions that help us recover these higher costs,” Tilden said July 26.
According to Chief Financial Officer Brandon Pedersen, Alaska Air Group has hedges on half of its planned fuel consumption for the rest of 2018, at an average “strike price” of $67 per barrel of oil.
Overall, the company has generated $375 million in free cash flow while spending $425 million on capital investments so far this year, Pedersen said.
Alaska Air Group held $1.6 billion in cash on June 30.
Looking ahead, Pedersen said company executives expect third quarter nonfuel costs to grow another 5 percent on 6 percent capacity growth.
However, the company is scaling back its growth plans for 2019 from 4 percent to 2 percent added capacity because of fuel costs and current industry capacity levels in Alaska’s markets, he said further.
“We’re solidly in returns improve mode, and 2 percent growth helps us get there because it will improve our ability to manage fares in a way that will help cover the cost increases we’ve seen,” Pedersen said during the investor call. “Like our 4 percent plan before it, the 2 percent plan lets us leverage the considerable growth that we’ve had over the last five years but demonstrates, once again, that Alaska is willing to right-size capacity when needed.”
Alaska Airlines and Horizon have also largely overcome on-time performance challenges experienced during the merger — and in Horizon’s case due to a pilot shortage — with 83.4 percent of the airlines’ flights arriving on time so far this year. That is a 7.4 percent year-over-year improvement, according to its June operational report.
“At Horizon, our on-time performance is the best in the regional industry and our pilot staffing pipeline is full,” Tilden said.
He also noted that J.D. Power ranked Alaska Airlines as the “Highest in Customer Satisfaction Among Traditional Carriers” for the 11th straight year during the quarter.
Elwood Brehmer can be reached at [email protected].