Alaska Air Group ready for results from Virgin acquisition

  • A Horizon Air Q400 turboprop airplane, part of Alaska Air Group, bottom, lines-up to prepare for take off from Seattle-Tacoma International Airport as another Alaska jet begins take-off behind Aug. 13 in SeaTac, Wash. (Photo/Elaine Thompson/AP)

Alaska Air Group Inc. had a solid third quarter netting $217 million, but company executives said during an Oct. 25 earnings call that they are not satisfied with the results.

CEO Brad Tilden said the company has completed about 90 percent of its work to integrate Virgin America into Alaska Airlines since it closed on the purchase of the West Coast competitor nearly two years ago and has done so as fast as any other merger in the industry.

Air Group leaders are now ready for that work to start paying off in the form of higher revenue and profit margins.

“The performance of our core business remains strong and our brand and products are gaining increasing traction in California,” Tilden said.

Seattle-based Alaska Air Group is the parent company to Alaska Airlines and regional carrier Horizon Air.

The $217 million profit was down from $259 million for the same period in 2017. It translated into earnings of $1.75 per share.

Air Group paid a dividend of 32 cents per share during the quarter and has repurchased about 582,000 shares of common stock for $37 million so far in 2018.

Air Group stock opened trading Oct. 31 at $63.16 per share.

The $217 million came on the back of $2.2 billion in operating revenue, which was up 5 percent year-over-year on 4.8 percent capacity growth.

That equated to flat per-unit revenue for the quarter, the best result in five quarters for the metric that had been trending in the wrong direction, according to Chief Commercial Officer Andrew Harrison.

“This is only the beginning, and we expect our unit revenue momentum to continue as we execute on a number of substantive initiatives to ensure our recent trajectory continues into the fourth quarter and beyond,” Harrison commented during the Oct. 25 call.

The company expects to capture $130 million in synergies next year as Virgin America aircraft and employees are fully blended into Alaska operations, Tilden said.

Flight attendants are being trained to work on both Alaska’s fleet of Boeing 737s and the fleet of former Virgin America Airbus A320 series aircraft that Alaska now operates; he said they would start working in both types of aircraft next February.

Harrison added that Alaska is working through IT issues for paid upgrades on Airbus flights and will be reconfiguring the Airbus cabins to increase first class capacity by 50 percent.

“We expect to see significant revenue increases from the front cabin in 2019,” Harrison said.

And while Alaska Airlines’ popular Club 49 loyalty program mostly insulates Alaskans from baggage fees, the airline recently announced its fees for non-mileage plan members would go up $5 to $30 for the first checked bag and $15 to $40 for the second bag, bringing them in line with fees charged by other major carriers, according to Tilden.

Additionally, Tilden said the company would begin what he called “the difficult but we believe necessary step” of cutting some management positions next year, but he did not elaborate as to which positions or how many employees would be let go.

“This will save overhead but more importantly it will improve the speed of decision-making and the flow of information through our organization,” he said.

Higher fuel costs have been a major contributor to the decreased margins, according to Tilden, who said the industry as a whole has not yet adjusted to them.

Fuel can be upwards of one-third of an airlines’ overall operating expenses and despite significant hedging efforts, Air Group’s fuel costs were up 39 percent year-over-year to $513 million in the third quarter.

In response, Air Group plans to slow its growth in 2019 and executives are comfortable with the company’s position in that regard, Tilden said.

By the end of 2018 the company will have paid down $800 million, or roughly 40 percent of the debt it took on to acquire Virgin America, he added. Alaska Air Group had a debt-to-capitalization ratio of 49 percent at the end of the third quarter, compared to 59 percent when it bought the airline in December 2016.

The company also held $1.4 billion in cash on Sept. 30.

“We feel confident we’re on the road to producing better returns in the quarters ahead as we work together as a single team to demonstrate the true power of our combined company,” Tilden said.

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Elwood Brehmer can be reached at [email protected].

Updated: 
11/02/2018 - 11:59am

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