Alaska Air Group reports drop in annual income
A handful of factors that converged on Alaska Air Group Inc. in 2018 resulted in modest net income of $437 million, but company executives said they expect improved financial performance this year during a Jan. 24 earnings call.
The Seattle-based parent to Alaska Airlines and regional carrier Horizon Air netted $23 million in the fourth quarter, compared to $315 million in last three months of 2017. The $437 million full-year profit is off 55 percent from 2017 full-year earnings of $960 million.
Alaska Air Group CEO Brad Tilden said a year ago the company faced the challenges of increased competition, higher fuel costs, more expensive labor agreements and internal growth.
“Today, that picture looks very different. Our growth has slowed. Newer parts of our network are maturing and fuel prices are down; demand overall is solid,” Tilden remarked. “We have good momentum moving into 2019.”
Despite earnings down 73 percent year-over-year, he called the $23 million netted in the fourth quarter “solid,” noting per unit revenues rose significantly at 5.2 percent, a trend that is expected to continue.
Alaska Air Group’s per gallon fuel cost — the largest expense aside from labor for many airlines — was up 25 percent in 2018 overall and nearly 17 percent for the fourth quarter.
Overall, the company generated about $1.2 billion in operational cash flow for the year and spent about $960 million on capital expenses, which resulted in $240 million of free cash flow and more than $1.2 billion in cash on-hand at the end of the year. Chief Financial Officer Brandon Pedersen said capital expenditures should be down to about $750 million in 2019 with less fleet growth and free cash flow should improve as well.
Alaska Air Group cut its balance sheet debt by $470 million in 2018 and ended the year with a 47 percent debt-to-capitalization ratio, down from 59 percent after its purchase of former San Francisco-based competitor Virgin America for $4 billion in December 2016.
Company leaders expect to hit their debt-to-cap target in the low to mid-40 percent range this year, Pedersen said, noting the company now owns outright 95 aircraft valued at $1.7 billion.
“Our long-term owners tell us they value a conservative balance sheet and it’s been a hallmark of our past success,” Pedersen commented during the earnings call.
Alaska Airlines and Horizon Air increased their combined passenger capacity 5.3 percent in 2018 but that growth was slowed to 1.1 percent year-over-year in the fourth quarter. The company has also negotiated joint labor agreements with each of its employee groups except for aircraft technicians since buying Virgin America.
Tilden said work to integrate Virgin America systems and employees into Alaska Airlines is almost over, which he said was done remarkably quickly as well given its complexity. The refurbishment of Virgin America Airbus aircraft to Alaska livery and interiors should be done early next year, he added.
The first fully refurbished Airbus reentered service in early January.
“All of this means we’re rapidly becoming a better version of ourselves with greater reach and scale with the same competitive advantage we’ve always had and fantastic opportunities ahead,” Tilden said.
He highlighted that the company’s on-time departure rate increased to 86 percent in 2018 and Horizon Air led regional carriers with an on-time arrival rate of 83 percent.
Alaska Airlines officially opened its new $50 million, 100,00 square-foot hangar — large enough to accommodate two of the new, larger Boeing 737 Next Generation aircraft it flies — at Ted Stevens Anchorage International Airport in the fourth quarter.
The work translated into $147 million in performance bonuses awarded to Air Group employees in 2018; $120 million of which was paid Jan. 25. It was the 10th consecutive year Alaska Air Group issued performance-based incentives totaling more than 5 percent of annual wages, company executives said.
“We’re proud of this payout because it’s an example of how we’re trying to run this business in a balanced way that benefits all of our stakeholders. We’re providing good wages and good benefits to our people and sharing $147 million of incentive pay with them for hitting important goals,” Pedersen said. “Our guests are getting low fares and an improving product and our owners are getting a larger dividend.”
On Jan. 14 Air Group announced plans to add at least 3,000 jobs across various business segments. In 2018 the company added roughly 1,500 full-time equivalent positions, bringing its total full-time workforce to 21,600.
Roughly 75 percent of the new positions will be in Washington, according to a company release.
The company also announced that its quarterly shareholder dividend payment would increase 9 percent to 35 cents per share when it is paid March 7. The company paid out $158 million in shareholder dividends in 2018 and repurchased another $50 million worth of common stock.
The $23 million quarterly profit and $437 million in full-year earnings translate to earnings per share of 19 cents and $3.52 per share, respectively.
Alaska Air Group stock ended Jan. 25 trading at $63.48 per share, down slightly from a Jan. 24 pre-earnings report opening price of $65.72 per share.
Alaska Air Group is forecasting 2 percent capacity growth this year and 3-4 percent growth in 2020, according to executives.
Tilden said company leaders have also set a multi-year goal to produce profit margins in the 13 percent to 15 percent range by focusing on improving performance in areas the company can control.
“We’re on the road to deliver higher margins in 2019 and 2020 as we work with our people to leverage Alaska’s substantial competitive advantage over a route network that now has greater reach and scale,” he commented.
Continued per-unit cost containment will be a major part of the improved returns expected in the coming years, according to Pedersen. He said 2018 unit costs were up 3 percent on about 5 percent capacity growth, which was better than early year guidance of 3.5 percent unit cost growth on a 6.5 percent increase in capacity.
Unit costs would have been close to flat in 2018 if not for the added expenses of new labor agreements, Pedersen added.
This year nonfuel costs are expected to increase 2-2.5 percent on about 2 percent capacity growth, according to Pedersen, who called it “an exceptionally strong cost plan considering the low (capacity) growth and the roughly 120 basis points of headwind we expect from a higher mix of regional flying.”
Finding savings through new agreements with contractors is a major element of Air Group’s plan for the coming year as well.
“We’re looking for long-term partners who can help us reduce costs today in exchange for future opportunities to grow their business with us,” Pedersen said.
Elwood Brehmer can be reached at [email protected].