Alaska Airlines turning purchase into profits
Alaska Airlines’ parent company is starting to see the benefits of the $4 billion deal it made three years ago to purchase West Coast rival Virgin America.
Executives for Seattle-based Alaska Air Group Inc. reported a $322 million third quarter profit on Oct. 24, a 48 percent improvement over the $217 million the company netted a year prior.
The third quarter net income came on the back of nearly $2.4 billion in operating revenue, which was up 8 percent year-over-year.
Alaska Air Group also operates regional carrier Horizon Air.
CEO Brad Tilden highlighted numerous positives for the company so far in 2019 but he started an Oct. 24 earnings call by offering condolences to the passengers and their families impacted by the Oct. 17 crash of a Peninsula Airways plane that overran the runway in Unalaska while attempting to land in high winds.
The crash killed one passenger and injured several others. PenAir is a code share partner with Alaska Airlines, which marketed the flight.
“This is a somber reminder to me and the rest of our leadership team of the grave responsibility we should and of the continued need for us to underscore the importance of safety with our people and our partners at every opportunity and to back up this understanding with our actions every day,” Tilden said.
To the quarterly results, Tilden emphasized the company’s focus on customer service is a foundational element of its strong recent financial performance.
“We can’t thank our employees enough for their skill and dedication in serving our guests,” he said.
The $322 million profit translated to earnings per share of $2.60. Alaska Air Group stock ended trading Oct. 25 at $71.57 per share, up nearly 4.1 percent from its Oct. 24 close following the post-trading release of the earnings report.
The 8 percent revenue growth was on a system-wide passenger capacity increase of just 3.4 percent. Tilden noted that Horizon increased its capacity 24 percent year-over-year during the quarter through new aircraft but still managed to drop its per unit non-fuel expenses.
The quarterly profit was aided in part by a 5 percent reduction in fuel costs, which make up approximately one-quarter of the company’s operating expenses. However, the fuel savings was overcome by an 11 percent increase in wage and benefits costs, which account for nearly one-third of operating costs.
The wage cost increases included $24 million in signing bonuses related to contracts ratified during the quarter for ramp, passenger service and clerical employees represented by the International Association of Machinists and mechanics in the Aircraft Mechanics Fraternal Association, Chief Financial Operator Brandon Pedersen said.
For the full year, per unit costs excluding fuel are expected to increase 2.2 percent on 2.1 percent capacity growth.
“Normally we would celebrate unit cost declines, not increases, but given the step change increase in labor costs we’ve had this year and the very low growth relative to our recent history we’re pleased with the result,” Pedersen said. “It demonstrates what we can achieve with a back-to-basics approach to cost execution with a sharp focus on productivity and operating our business with a low overhead mindset.”
He noted that 2020 costs will likely rise based on more major aircraft maintenance scheduled for next year as well as costs associated with starting to return leased Airbus aircraft formerly flown by Virgin America. Alaska Airlines had long flown the reliable and efficient Boeing 737 exclusively before taking on Virgin America’s fleet.
Alaska does not currently have any of the grounded 737-MAX aircraft, but it is scheduled to take delivery of three in the coming months.
Looking ahead, Tilden said full-year margins are expected to be in the 11-12 percent range, up from less than 9 percent in 2018.
“We’re encouraged by our progress but we’re not at our destination,” he said, adding the long-term goal is to generate returns in the 13-15 percent range.
The quarterly numbers were also buoyed by a load factor, or number of available seat miles sold, of 85.8 percent, a 0.9 percent year-over-year increase. According to Tilden, it marked the highest companywide quarterly load factor in five years for Air Group airlines.
Chief Commercial Officer Andrew Harrison said the third quarter revenue per available seat mile of 13.6 cents was the best in three years. The company is enjoying growth in the number of Alaska Airlines mileage plan members and credit card holders, according to Harrison. That nearly one-third of new credit card memberships are from California — Virgin America’s primary market — is particularly encouraging, he said.
Alaska announced Oct. 2 that its mileage partnership with American Airlines would be drastically reduced early next year, a move some analysts said is aimed at getting more passengers on its own planes as the airlines’ network grows.
Nearly half of all Alaska passengers are loyalty members, Harrison said further.
“Our value proposition hinges on offering low fares while providing award-winning service, generous rewards, and a premium product and our people are delivering on this,” he said.
The fuller flights have helped the company mitigate per unit costs and drive up overall profits.
As of Sept. 30, Alaska Air Group had a 12-month adjusted net income of $709 million — a 30 percent improvement over the prior 12-month period, according to Tilden — that it translated into $695 million of free cash flow.
Alaska Air Group held $1.6 billion in cash at the end of the quarter and had generated nearly $1.5 billion in cash from operations so far in 2019, Pedersen said. Of that, approximately $525 million went to capital expenses, leaving about $950 million in free cash flow year-to-date, which is a $460 million improvement over 2018, according to Pedersen.
Much of that cash is being used to pay down the debt incurred to buy Virgin America in 2016. The Air Group executives said deleveraging their balance sheet has been their primary objective with available funds and they expect the company will have repaid about 75 percent of the $2 billion it borrowed to acquire the San Francisco-based carrier.
Alaska Air Group’s debt-to-capitalization ratio stood at 42 percent at the end of the quarter. Company leaders have a long-term goal of a 40 percent dept-to-cap ratio.
“Strengthening our fortress balance sheet positions us to be flexible and opportunistic and make the best strategic and capital allocations in the future,” Tilden said.
Pedersen often further detail, saying the company has refinanced more than 75 percent of its debt to be “fixed at historically low interest rates.” Air Group debt carried a weighted average interest rate of 3.2 percent at the end of the quarter, according to Pedersen.
Additionally, Alaska Air Group made a $65 million voluntary payment towards its defined benefit pension plans, which are now 80 percent funded and increased its 2019 share repurchase allocation from $50 million to $75 million based on its strong cash balances, Pedersen added.
With its quarterly dividend the company expects to return $248 million, or about a quarter of its free cash flow, to shareholders this year, he said.
Elwood Brehmer can be reached at [email protected].