Alaska Air reports another record quarter
At Alaska Air Group Inc. records are indeed made to be broken. Leaders of the parent to Alaska Airlines reported a record second quarter net income of $157 million.
The results reported July 24 are a 50 percent increase in profits versus the $105 million second quarter of 2013 and mark the company’s eighth record net income in the last nine quarters. It was also Alaska Air Group’s 21st consecutive profitable quarter.
Operationally, President and CEO Brad Tilden said Alaska Airlines had the highest on-time performance among the eight major domestic carriers at 88 percent.
“With the continued commitment of our people across the system, we expect to deliver another year of exceptional financial and operational performance in 2014,” Tilden said during an earnings call with investors.
The adjusted earnings broke down to $1.13 per share, up 53 percent from the second quarter of 2013. Air Group stock was trading at $46.47 near the end of trading July 29. The company executed a two-for-one stock split July 9.
Operating revenue was up 8.7 percent year-over-year at $974 million. Pre-tax margin grew 18.3 percent and adjusted pre-tax earnings were $252 million.
Air Group Chief Financial Officer Brandon Pedersen said the phasing out of older aircraft helped improve Alaska Airlines’ fuel efficiency by 2.5 percent in the second quarter. That, combined with hedging lower fuel hedging costs that saw the economic fuel price drop 2.4 percent year-over-year, contributed to the positive results, according to Pedersen.
He said there is a target of returning $350 million to the company’s shareholders by the end of the year. It is currently issuing a quarterly dividend of 25 cents per share.
“When viewed as a percentage of either free cash flow or net income, Air Group’s distributions will likely lead the industry, underscoring our long-term commitment to ensuring that our owners get an appropriate return,” Pedersen said.
The dividends totaled $34 million in payouts over the first half of the year.
Through June, the company had repurchased 1.8 million shares totaling $83 million, he said. In May, a new, multi-year $650 million stock repurchase plan was announced on the back of a just-completed $250 million repurchase program.
Its 12-month running return on invested capital, or ROIC, was 16.1 percent, up from 13 percent during the previous 12 months.
Alaska Air Group finished the quarter with an adjusted debt-to-capital ratio of 32 percent. Pedersen said it was 81 percent at the end of 2008.
With its credit rating of BBB- by Fitch Ratings, Alaska Air Group is one of only two major domestic carriers to have an investment-grade credit rating. The other is Southwest Airlines.
“This important recognition validates the work we’ve been doing to position Air Group as a high-quality industrial company,” Pederson said.
Aside from the financials, Alaska Air Group became a Fortune 500 company for the first time in its history during the quarter.
“Our pensions are fully-funded and we own 73 of our airplanes free and clear,” he said. “Our balance sheet puts us in an excellent position to defend the franchise we’ve created here in the Pacific Northwest.”
Air Group Senior Vice President Andrew Harrison said passenger revenue was up 8 percent on a 5.2 percent increase in capacity for the quarter.
In recent months Delta Air Lines has increased its schedule out of Seattle, Alaska Airlines’ main hub, a trend Harrison said Alaska Air Group expects will continue. He said Delta’s Seattle flights will likely overlap with half of Alaska Airlines’ available seat miles by next summer.
The increased competition has hurt unit revenues for several quarters and will continue to, Harrison said.
Delta and Alaska Airlines have been partners in many ventures including mileage plans for many years, a relationship that has been strained by Delta’s increased presence in the Pacific Northwest. Tilden said the revenue gained from feeding Delta’s flights as well as the “natural end-to-end connection opportunities” with the industry giant could make working through the relationship challenges worthwhile.
By next spring, Alaska Airlines’ Seattle departures are expected to grow by 11 percent, he said.
For the remainder of the year Alaska Airlines will look to wrap up a $100 million investment in new seats for its 94 Boeing 737-800 and 737-900 aircraft. The seats each have a power outlet and USB input for electronics and will grow capacity by 2.4 percent without sacrificing legroom, company officials have said.
Along with the seat upgrade, Alaska Airlines will be the first airline to install Boeing’s new larger overhead compartments, allowing passengers to have larger carry-on items, Tilden said.
Elwood Brehmer can be reached at email@example.com.