Alaska Air Group turns a record quarterly profit — again
The cliché that “records are made to be broken” is taken to heart at Alaska Air Group Inc., where yet another record quarterly profit of $200 million was announced Oct. 23.
The third quarter adjusted net earnings result is the ninth record in the last 10 quarters for the company that owns both Alaska Airlines and Horizon Air. It is also the 22nd consecutive profitable quarter for the company.
The record profit was a 27 percent increase versus the third quarter of 2013, also a record at the time, and equated to $1.47 per diluted share.
Alaska Airlines split its stock in June. A share was worth $51.82 at the end of trading Oct. 27.
Air Group CEO Brad Tilden said during a conference call with investors that the positive returns were driven primarily by four factors: “Strong revenues, very strong non-fuel cost performance, lower fuel prices and increasingly by the benefit of much more fuel-efficient aircraft, which are coming online. This is shaping up to be a year of record profitability despite increased competition.”
The increased competition is largely from Delta Air Lines out of Seattle, Alaska Airlines’ home hub. Delta began flights between Juneau and Ketchikan and Seattle this year; those routes were flown exclusively by Alaska Airlines for years.
Air Group’s net pretax income was $320 million for a 21.8 percent margin and a 27.5 percent improvement over third quarter 2013 pretax figures.
Year-to-date adjusted pretax income was $716 million, a 45.5 percent increase over the first nine months of 2013. Total operating revenue was $1.46 billion for the quarter, up 7.3 percent year-over-year.
As Tilden noted, average fuel costs, one of the largest expenses for airlines, fell for the quarter and year. Alaska Air Group spent an average of $3.15 per gallon for fuel in the third quarter, a 2.8 percent decline. For the year per gallon fuel costs were down 3.3 percent. When combined with a 2.8 percent increase in fuel efficiency — based on average seat miles per gallon — fuel expenses improved significantly, he said.
Much of the fuel savings can be attributed to newer mainline aircraft. Alaska Airlines has 23 Boeing 737-900ER aircraft, which have 37 more seats than the 737-400s they are replacing in Alaska’s configuration, and use about the same amount of fuel as the older, smaller 737, Air Group Chief Financial Officer Brandon Pedersen said.
Alaska Airlines has firm orders for 37 more 737-900ERs over the next three years.
“With fuel representing about a third of total airline operating costs, fuel efficiency gains add to our competitive cost structure advantage,” Pedersen said.
Several industry watch groups consistently rate Alaska Airlines as the most fuel-efficient domestic mainline carrier.
Other major domestic carriers including American Air Lines, Southwest Airlines and United Airlines reported strong third quarter financials based largely on fuel savings, according to the Associated Press.
Air Group productivity, calculated as the number of revenue passengers per full-time equivalent employee, also increased 2.2 percent in the quarter.
Reducing debt and associated expenses has been a priorityAir Group leaders have said and has played a large role in the company’s recent financial success. Its debt-to-capital ratio at the end of the third quarter was 31 percent, down from 47 percent a year prior.
Pedersen said during the call that Alaska Air Group would like to keep its debt-to-capital ratio less than 40 percent, based on research of other large industrial companies within the S&P 500.
Air Group’s 12-month return on invested capital, or ROIC, improved to 17.2 percent. It was 13 percent for the year ending Sept. 30, 2013.
Nonfuel unit costs decreased 3.6 percent year-over-year on an 8.1 percent increase in capacity. Pedersen said nonfuel expenses are expected to fall 2.5 percent in the fourth quarter as well, on what should be a 10 percent capacity increase.
With its numbers driven by Alaska Airlines, the Alaska Air Group capacity as a whole has increased 6 percent for the year. Its load factor, the percentage of available seat miles sold, is down 0.3 percent to 85.7 percent year-to-date.
Tilden reported that Alaska Airlines agreed in principle to a contract with its flight attendants Oct. 9. The flight attendants are the only large employee group currently without an updated contract, he said.
“I want to thank our flight attendants for continuing to provide great service throughout the negotiations,” Tilden said. “We believe that it’s a fair agreement that recognizes the great work that our 3,300 flight attendants do every day.”
The union rejected a tentative agreement in February and has worked without a new contract since May 2012.
Elwood Brehmer can be reached at [email protected].