Alaska Air Group rebounds to solid second quarter profit
Alaska Air Group Inc. executives said the company is returning to its core business principles following a strong second quarter that netted the company a $262 million profit.
Seattle-based Alaska Air Group Inc. operates Alaska Airlines and regional carrier Horizon Air.
Air Group leaders have long stressed fundamental business principles to achieve an investment-grade balance sheet with modest debt levels; ideals that led the company to seven consecutive years of record profits earlier this decade.
The streak of profitability provided Alaska Airlines the financial wherewithal to purchase Virgin America, one of its primary West Coast competitors, in an April 2016 deal that cost the company roughly $4 billion.
The complexities of merging two large airlines have since eaten into company profits, but the airline is poised to return to its strong moneymaking ways, CEO Brad Tilden said in a July 25 conference call with investors.
“We are well set up to move towards our targeted annual growth and our targeted pretax margin of 13 to 15 percent over the business cycle,” Tilden said. “Our results for the first half of the year make us optimistic for the rest of 2019 and beyond.”
Company officials generally said their focus in 2019 is on managing costs — which was done better than expected in the first half of the year — and the coming years will be about beginning to realize the benefits of the larger network the Virgin America acquisition can provide.
Alaska Air Group produced a profit of just $4 million in the first quarter, but executives blamed the relatively small profit on unusually bad winter weather in the Pacific Northwest. The $262 million in second quarter earnings was a 26 percent improvement over its $193 million profit for the same period in 2018.
The $262 million profit also translated into a net of $2.11 per share. Alaska Air Group stock closed trading July 25 at $63.83 per share.
The company paid a dividend of 35 cents per share in the second quarter and repurchased approximately $25 million worth of shares in the first half of 2019, according to the quarterly report.
“We set a plan to return $220 million to shareholders this year and we’ll hit it,” Chief Financial Officer Brandon Pedersen said during the earnings call.
The $262 million profit was on the back of nearly $2.3 billion in operating revenue, which correlates to 6 percent year-over-year growth. Chief Commercial Officer Andrew Harrison said that the second quarter revenue growth of was the best year-over-year per unit improvement the company has seen in seven years.
Pedersen noted the company also enjoyed its second consecutive year-over-year improvement in quarterly margins.
“It’s evidence that our plan to improve revenues is working,” Pedersen said.
Air Group ended the quarter holding more than $1.6 billion in cash and short-term investments. The company, which holds nearly $13 billion in assets, generated cash flow from operations totaling roughly $1.1 billion during the first half of the year.
After $330 million in capital expenditures, Air Group was left with $735 million in free cash flow, which Pedersen said was nearly $400 million more than 2018 year-to-date. The extra available cash is the result of a calculated decision last year to reduce capital investments in order to have more money on-hand, he said.
In Alaska, the company completed a new $50 million hangar at Ted Stevens Anchorage International Airport last November. The Anchorage maintenance facility was the largest of numerous new construction and renovation projects Alaska Airlines began across the state in 2016.
It also spent $30 million to remodel and expand several of the terminals it owns at rural Alaska airports it serves. The airline also participated in several terminal upgrade projects at some of its West Coast hubs, such as Los Angeles International Airport, in recent years.
The airline also finished launching three new cargo aircraft dedicated to serving the state of Alaska last year.
Additionally, Pedersen said Air Group has repaid about $280 million in debt this year and is trying to refinance some of its outstanding obligations to fixed-rate debt to take advantage of currently low borrowing costs. He noted the company has repaid $1.2 billion of the roughly $2 billion it borrowed to purchase Virgin America and is on pace to reduce its debt balance by about $350 million this year.
Including aircraft leases, Alaska Air Group’s debt-to-capitalization ratio currently sits at about 45 percent and is on track to be 42 percent by the end of the year.
The company should return to its 40 percent debt-to-cap target next year, according to Pedersen.
“A fortress balance sheet has been the hallmark of this company for many years and we’re moving quickly back to that position,” he said.
On the operations side, Pedersen said Horizon Air’s productivity — measured as passengers per full-time equivalent employees — improved 3.3 percent in the second quarter and the regional carrier’s passenger traffic increases 17.4 percent on a 15.3 percent increase in capacity, according to the quarterly report.
Chief Operating Officer Ben Minicucci added that Horizon, which for years had dealt with on-time performance issues related to an industry-wide pilot shortage, according to company leaders, is now among the top-performing regional carrier in the country.
“I want to give a shout out to the people of Horizon for a complete turnaround in their performance over the past couple of years,” he said.
During the quarter Alaska Airlines also reached a two-year contract extension with its mechanics represented by the Aircraft Mechanics Fraternal Association, which allows Alaska mechanics to work on all of the airline’s mainline aircraft, according to Tilden.
Alaska Airlines historically flew Boeing 737 aircraft exclusively, while Virgin America operated Airbus planes.
Alaska also reached a tentative five-year agreement with its roughly 5,200 office, passenger service and ramp employees represented by the International Association of Machinists, which Tilden said he hopes will be ratified by the union in the coming weeks.
Alaska does not have any of the currently grounded Boeing 737 MAX series aircraft. The airline was scheduled to take three 737 MAX planes later this year, but those deliveries will likely be cut to one MAX this year, according to Pedersen, with two more coming early in 2020.
The new labor deals will add about $50 million in wage and benefit costs annually, and about $40 million in the second half of this year due to $24 million in signing bonuses that will be paid in the third quarter, according to executives.
Pedersen said even with the new labor costs the company expects to keep its cost growth at about 2 percent per unit for the year, excluding fuel, which is in line with earlier projections.
“We’re delivering industry-leading performance and our customer service is award winning,” Pedersen said. “On the financial side we have revenue and cost momentum and our balance sheet is strong. If we continue to execute our plan we’ll be in the top quartile of the industry for profit margins, balance sheet and free cash flow generation.”
Elwood Brehmer can be reached at [email protected].