Alaska Air nets $266M while muddling through merger

  • Alaska Air Group reported record operating revenue in the third quarter, but is still grappling with the challenges of integrating Virgin America into its fleet as well as dealing with pilot shortages at its regional carrier Horizon Air. (Photo/Mark Thiessen/AP)

Alaska Air Group Inc. leaders reported a third quarter net income of $266 million and record revenues in the third quarter during an Oct. 25 investor call despite continued operational challenges at their airlines.

Seattle-based Alaska Air Group’s airlines, Alaska, Virgin America and regional carrier Horizon Air, generated a record $2.12 billion in operating revenue during the quarter and netted pretax profits of $446 million for a pretax margin of 21 percent.

CEO Brad Tilden called the results, which were down year-over-year if Virgin America’s pre-merger results are factored in, “solid” considering the company is still working to combine Alaska and Virgin and fuel prices were up 14 percent over 2016 as well.

Alaska Air Group stock closed Oct. 25 down 9.6 percent for the day after the morning earnings call when company executives disclosed some frustrations regarding integrating the two airlines. Its stock started Nov. 1 trading at $65.65 per share.

“From an ops standpoint, we’ve come a long way from the beginning of the year, but we still have work to do. We ranked second out of the six largest carriers on on-time performance for the quarter, up from nearly the bottom of the pack during the first quarter,” Tilden said. “While we’re pleased to have closed the gap with our competitors, we remain committed to getting back to the number one position on this metric.”

Alaska Airlines has long been the top on-time domestic carrier, but since bringing Virgin America into the fold in the fourth quarter of last year those numbers have fallen. Through September, 82 percent of Alaska Airlines flights arrived on time, which is down 6.5 percent year-over-year.

For Virgin America-flagged flights the numbers are worse. Just more than 67 percent of Virgin flights have been on-schedule this year, a decrease of 9.3 percent.

Additionally, Horizon Air continues to face the same problems retaining pilots as many regional carriers across the country, an issue that forced the airline to curb its schedule in August and September, Tilden acknowledged.

“Pilots have been leaving regional airlines for mainline opportunities at higher rates in the past and at higher rates than we anticipated,” he said.

Horizon’s flight schedules have since been adjusted to match pilot availability and cancellations have subsided, according to Tilden.

Horizon Air agreed to an amended contract with its pilots earlier this year after the pilots’ union, the Airline Professionals Association Teamsters Local 1224, sued the airline in federal District Court alleging Horizon had offered new pilots hiring bonuses outside of its contract terms to attract new hires.

And after a roughly four-year experiment Horizon will stop its service in Alaska on March 10, according to Alaska Airlines Regional Vice President Marilyn Romano.

Horizon, with its smaller Q400 Bombardier turboprop aircraft, took over flights between Anchorage, Fairbanks and Kodiak for its larger sister airline in early 2014. Horizon's routes in the state will be picked back up by Alaska Airlines Boeing 737s.

While 2017 has not been the smooth sailing of recent years for the company, Alaska Air Group’s record revenue allowed it to generate $1.4 billion in operating cash flow so far this year, $840 million of which has been invested in capital expenses, according to the earnings report.

The remaining $520 million in free cash flow is part of $1.7 billion in cash on hand for the company.

The company also lowered its debt-to-capitalization ratio to 53 percent at the end of the quarter, down from 59 percent to start the year.

Looking ahead, Tilden said the next eight months will be important for Alaska Airlines as Virgin America is further blended into its operations.

In January, the airlines should move to single payroll, human resources and accounting systems, according to Tilden. Air Group will also join the airlines’ loyalty programs and expects to have a single operating certificate from the Federal Aviation Administration early next year, he said.

Shortly thereafter, the first Virgin America Airbus will be repainted to officially become an Alaska Airlines aircraft, Tilden added.

“By the middle of next year, our most critical integration milestones will be behind us, and we’re thrilled about this,” he said. “The fact that we remain on track to complete all of our goals on schedule is a testament to the quality and dedication of our fantastic people.”

Tilden continued to note the transition has not been easy, saying the challenges are not different than others the company has overcome.

“We’ve also been steadily and consistently building a great company, and that’s what we’re going to keep doing for all of the people who are counting on us to do so. Our customers, our communities, our employees and our shareholders,” Tilden said.

Elwood Brehmer can be reached at [email protected].

11/02/2017 - 10:11am