Alaska Air Group ends 2013 with another record quarter, year


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Alaska Air Group Inc. continued to set profitability records in 2013. The parent to Alaska Airlines and Horizon Air reported a net income of $383 million for 2013 in its Jan. 23 earnings report, up nearly 13 percent from a then-record $339 million for 2012.

The company’s fourth quarter alone may be more impressive. Alaska Air Group improved on a record $50 million net income in the last months of 2012 with $77 million in profit for the fourth quarter of 2013, or 54 percent growth. For the year, only the 2013 second quarter didn’t result in a record profit for Alaska Air Group. The latest period extended its run of profitable quarters to 19 in a row.

The yearly net income equates to $5.40 per share, up from $4.73 per share in 2012.

“Our operational performance continues to lead the industry,” Alaska Air Group President and CEO Brad Tilden told company investors Jan. 23.

The company held $1.3 billion in unrestricted cash and securities at the end of 2013.

After-tax return on invested capital, or ROIC, was 13.6 percent for the year, up from 13 percent in 2012.

Fourth quarter revenue of $78 million was up 7 percent on a 5 percent increase in capacity year-over-year. Full-year operating revenue was up 11 percent at $5.15 billion, according to Alaska Air Group’s financial statement.

Unit costs were down slightly in 2013, which Tilden said he expects to grow by about 1 percent in 2014.

Investments in IT infrastructure — a transition from Windows XP to Windows 7 operating systems and an outsourcing of the company’s data center — will push operating costs higher in the first quarter, Air Group Vice President Glenn Johnson said. Those costs are expected to flatten later in the year.

Increased bag and change fees — announced last summer — are expected to provide additional income in the coming year, Tilden said.

The strong returns have allowed the company to contribute to its employee pension plans to the point where they were fully funded by the end of last year, Tilden said.

“We believe this is unique in the airline industry and we’re glad our financial success has provided retirement security for our employees,” he said.

Additionally, employees earned $105 million in incentive pay in 2013, meaning each employee could expect a check equal to nearly 5 weeks of pay, Alaska Air Group Vice President and Chief Financial Officer Brandon Pedersen said in an interview with the Journal. He said the management team puts an emphasis on paying high wages and expecting quality employee performance in return.

“I think this industry has a pretty crummy track record of how we collectively work with labor, how the employees have been treated. That manifests itself in a crummy on-board experience,” for passengers, Pedersen said.

To that, Alaska Airlines led all major U.S. airlines in on-time performance in the year ending in November 2013, according to the U.S. Department of Transportation.

Alaska Air Group also inked five-year deals with Alaska Airlines pilots and Horizon flight attendants and reached a tentative agreement with Alaska Airlines flight attendants in the last year.

The company continued its stock buyback program in 2013, repurchasing nearly 2.5 million shares for $159 million, bringing the buyback total since 2007 to $478 million, the report states. Alaska Air Group stock was trading at $79.75 per share on the New York Stock Exchange as of late Jan. 28.

Pedersen said that the company’s management team looks at itself as more than just an airline.

“We want not to have the reputation of being a high quality airline with a good balance sheet; we want to be known as a high quality industrial company and have a balance sheet that looks more like a regular company, not like a regular airline,” Pedersen said.

That philosophy is born out in Alaska Air Group’s debt-to-capital ratio. In early 2009 its “debt-to-cap” ratio was 81 percent, Pedersen said. By the end of 2013 it was down to 35 percent.

The push towards lowering company debt is something unusual in an industry where borrowing money is easy.

“People are often eager to loan to airlines because the collateral is mobile. That’s something that differentiates our industry from others,” Pedersen said. “If we default on an airplane, somebody can literally come and fly it away and resell it or re-lease it to another operator.”

Lower interest payments on less debt have contributed significantly to recent higher profits, he added.

Not coincidentally, Standard and Poor’s upgraded Alaska Air Group’s credit rating to “BB+” in the past year.

Pedersen said emphasizing fuel efficiency and flying one aircraft — Boeing 737s at Alaska Airlines and Bombardier Q400s at Horizon — have helped Air Group’s bottom line.

“The industry standard measures for cost is unit cost excluding fuel, or the cost to fly one seat one mile excluding fuel,” he said. “We certainly report that, but we also like to talk about cost per available seat-mile including fuel because fuel is a third of our cost structure and to the extent that we can burn less than the other guy it is a competitive advantage.”

An International Council on Clean Transportation report released in September found Alaska Airlines to be the most fuel-efficient major airline in the country, based on Bureau of Transportation Statistics data.

Alaska Airlines is also in the midst of a delivery program with Boeing for 38 new 737-900ERs through 2017. The 900ER is the latest and most fuel-efficient adaptation of the 737 and will gradually replace the airline’s 737-400s, company officials have said.

Flying a single aircraft type is a model used by successful airlines around the world, and was started domestically by Southwest Airlines, Pedersen said. Not only does it eliminate redundancy for mechanic and pilot training, he said the model improves operational efficiency by allowing planes to be swapped on routes when issues arise and gives customers a recognizable look and feel every time they board an Alaska Air Group plane.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.