Alaska Air Group has 5th straight record year, profit up 49%
Quarterly or yearly, record-breaking profits are officially old hat at Alaska Air Group Inc.
During a Jan. 22 call with investors, executives of the parent to Alaska Airlines and Horizon Air reported a record full-year profit of $571 million in 2014 and a fourth quarter record profit of $125 million.
The net income figures exclude special items.
It is the fifth consecutive record-breaking year for Alaska Air Group and the 10th record quarter in the last 11. It is also the 23rd consecutive profitable quarter for the company.
Per share, the profits break down to 94 cents for the quarter and $4.18 for the full-year.
The yearly net income is a 49 percent increase over a record $383 million in 2013 and a 62 percent year-over-year improvement on a previous fourth quarter record.
The pretax margins are even better. Pretax profit for the quarter was $206 million, a 67 percent improvement over 2013; and full-year pretax profit was up 50 percent at $922 million.
“We had a record year on almost every front, even as we approach the end of the second year with much more competition in Seattle,” Alaska Air Group President and CEO Brad Tilden said on the call.
Tumbling fuel prices during the second half of 2014 helped many major carriers have strong years, but Tilden said Air Group’s full-year margins grew 3 percent even when lower-cost fuel is excluded.
Jet fuel averaged $1.57 per gallon for domestic carriers on Jan. 9, down nearly 50 percent from a year ago, according to the International Air Transport Association.
Air Group Chief Financial Officer Brandon Pederson said the company saved $42 million on fuel in the fourth quarter because of lower prices. Alaska Air Group purchases fuel call options that act as an “insurance policy” and hedge against sudden price spikes but allow it to take advantage of price declines, he said.
“Our monthly profit when compared to the same month in 2013 was higher in every single month,” Tilden said. “These results affirm that we’ve built a business that performs when challenged and that works well throughout the cycle.”
Alaska Airlines’ competition at its home hub of Seattle has come primarily from Delta Air Lines, a mileage plan partner, which has pushed more into the Pacific Northwest market over the last couple years.
Alaska Air Group’s total operating revenue was up 4 percent for the year at $5.3 billion; for the quarter it was up 8 percent at $1.3 billion.
Overall 2014 passenger revenue grew 7.3 percent on a 7.1 percent growth in capacity.
A drastic improvement was also seen in the company’s return on invested capital, or ROIC. Air Group had an ROIC of 18.6 percent in 2014, up a full 5 percent.
Alaska Air Group leadership has expressed a desire to hold a debt-to-capital ratio of less than 40 percent, based on research done of other companies within the S&P 500. It ended 2014 with a debt-to-capital ration of 31 percent, down 4 percent for the year. Some investors asked if it would be prudent to borrow against its capital given the low interest rates afforded it based on the company’s position. Pederson said using debt to leverage returns to shareholders could be of interest, but the company has worked hard to put itself in the position it is today.
At the end of 2011 Air Group held debt equal to 62 percent of its capital.
“We do a lot of things to emulate high-quality industrials, including where we set our capitalization level in the mix between debt and equity,” Pederson said.
Alaska Air Group stock traded for $68.65 per share on the New York Stock Exchange at the end of trading Jan. 23. The stock price has risen about 45 percent since a June two-for-one stock split. Just before the split it traded in the $95 range.
During the call, Tilden announced Alaska Air Group would increase its quarterly dividend payment to shareholders by 60 percent per share. The dividend began in the third quarter of 2013 at 20 cents per share. It is back to 20 cents per share after the stock split.
Alaska Airlines’ new Boeing 737s — the only aircraft the company flies — and their increased fuel efficiency has helped the company invest in long-term cost savings. Pederson said fuel burned per mile has improved 22 percent over the past 10 years.
Alaska Airlines took delivery of 10 Boeing 737-900ER, or extended range, aircraft in 2014 and will get another 11 this year. It had a fleet of 137 aircraft at the end of the year and expects to have 147 by 2017.
Alaska Air Group owns 77 percent of its fleet.
“For Alaska, these great results come amidst unprecedented competition in our markets, and the folks throughout our company are rising to the occasion to make us a great airline every day for our customers,” Tilden said.
The roughly 13,000 Air Group employees earned $116 million in incentive pay last year, according to Pederson.
With a new five-year agreement with Alaska flight attendants approved in December, Air Group has average agreements in place with all its employees nearly four years out, Tilden said.
Continuing into 2015 Alaska Airlines capacity will likely grow 11 percent in the first quarter and about 8 percent for the year, Air Group Vice President of Revenue Management Andrew Harrison said.
Comparably, other airline capacity is expected to be up 15 percent early in 2015.
Harrison said lower fuel prices would not lead to lower ticket prices on Alaska Airlines.
“When pricing tickets, we look at the supply and demand in each of our markets and adjust prices to balance the two,” he said. “Approximately 90 percent of our flying is in the United States domestic market, and the U.S. economy continues to be strong.”
Elwood Brehmer can be reached at [email protected].