Alaska Air Group posts $99M profit in first quarter
Alaska Air Group Inc.’s impressive run of record earnings came to an end to start 2017, but the company still turned a $99 million profit in its first full quarter after acquiring Virgin America.
The Seattle-based parent to Alaska Airlines, regional carrier Horizon Air and now Virgin America reported quarterly net income of $130 million excluding merger and fuel hedging costs, according to an earnings report released April 26.
By comparison, Alaska Air Group earned $184 million in profits in the first quarter of 2016, just before announcing the deal to purchase San Francisco-based competitor Virgin America in a deal that totaled approximately $4 billion in cash and assumed debt.
The deal closed this past Dec. 14 after a lengthy Justice Department review.
“We are pleased to report a solid profit for the first quarter,” Alaska Air Group CEO Brad Tilden said in a formal statement. “With the biggest integration decisions behind us, the hard work of executing the plan now lies ahead. We’ve laid a foundation for growth with our recent announcements of 37 new routes, and the leadership team is fully focused on running a great airline and doing the things we do well — taking care of our guests, building loyalty and operating on time.”
In January, the company reported a $911 million profit for 2016, its seventh consecutive record earnings year.
The $99 million first quarter profit equated to net earnings of 79 cents per diluted stock share. Alaska Air Group stock sold for $84.93 per share on the New York Stock Exchange at the close of trading April 27.
That was down from an early March high of more than $99 per share and down from an April 25 close of $91.42 per share just before the first quarter results were made public.
The company paid a dividend of 30 cents per share in the quarter.
Alaska Air Group generated about $470 million in operating cash flow for the quarter and spent about $215 million of it on capital projects for a free cash flow of $255 million.
Alaska Airlines is spending about $100 million in Alaska to expand and remodel its rural terminals in the state and build a new $40 million hangar at Ted Stevens Anchorage International Airport to accommodate its new larger Boeing 737s.
Overall operating revenues were up 30 percent for the quarter to about $1.75 billion and total operating expenses were up a full 50 percent to $1.58 billion year-over-year. That led to a 43 percent decline in year-over-year operating income, which was at $166 million for the quarter.
Alaska Air Group ended the quarter with a debt-to-capitalization ratio of 58 percent, largely due to financing the Virgin America deal and taking on Virgin’s $1.4 billion of debt.
It ended 2015 with a 27 percent debt-to-cap ratio and Air Group Chief Financial Officer Brandon Pedersen said the company will focus on getting its debt-to-cap back near 40 percent with a less aggressive share repurchase program.
“Overall, our first full post-acquisition quarter was solid,” Pedersen said during an April 26 conference call with investors. “There’s a ton going on right now, and I want to credit our frontline folks for taking great care of our guests. But I also want to give a shout out to all the back-office folks who are working so hard to put these two companies together. This is really hard work. But having said that, I hope everyone listening to the call today or reading the transcript can sense the optimism that we have here.”
In the first quarter Alaska Air Group added new 20 nonstop market flights from San Francisco, San Jose and San Diego. Through most of 2016 company executives highlighted the desire to capture more of the California market to go with Alaska Airlines dominance in the Pacific Northwest as the primary driver behind the Virgin America purchase.
In March, Alaska Airlines announced it would retire the Virgin brand, likely in 2019.
It remains to be seen what Alaska Air Group will do with Virgin’s fleet of Airbus jets in the long-term. Alaska Airlines flies Boeing 737s exclusively, a decision that has led to operational efficiencies and Tilden has said the company wants to maintain its strong relationship with aircraft manufacturing giant Boeing, a fellow Seattle resident.
Horizon Airlines also announced a tentative amendment to the contract it has with its pilots union, the International Brotherhood of Teamsters, April 14. The specific terms of the new deal were not disclosed, but it would be amendable again in December 2024, according to a Horizon release.
On Jan. 27 the union filed for a federal court injunction, claiming the airline was using sign-on bonuses of up to $10,000 without signing a contract to attract new pilots and that violated its existing contract with the Teamsters.
“I commend the negotiations team for their efforts to reach a deal that allows us to increase our pilot recruitment efforts and offer generous entry level wages for new first officers,” Horizon Vice President of Flight Operations Brad Lambert said in the April 14 release. “This deal will allow us to successfully compete for talent and grow our airline.”
Hiring and retaining pilots has become a challenge for airlines nationwide, particularly for smaller carriers. In Alaska, the state’s Air Carriers Association is working with the state and federal Labor departments to establish an apprenticeship program for pilots and other airline trade careers.
Elwood Brehmer can be reached at [email protected].