Alaska Air Group doubles bottom line in 4Q; up 76% for year
Alaska Air Group finished 2019 by netting $181 million in the fourth quarter, which capped a full-year profit of $769 million and put the airline company on track to hit its long-term financial targets, executives said during a Jan. 28 earnings call.
The $181 million quarterly profit nearly doubled its fourth quarter income of $93 million in 2018 and the $769 million annual total was 76 percent better than $437 million for last year.
Alaska Air Group CEO Brad Tilden called 2019 a “turning point” for the Seattle-based parent to Alaska Airlines and Horizon Air as the company largely completed integrating Virgin America into its operations more than three years after buying its former West Coast competitor and is starting to see the benefits of the deal.
Alaska Air Group was in the midst of a long run of record profits before the Virgin America acquisition, which caused the company to focus less on costs and more on quickly blending the airline into Alaska Airlines’ operations in recent years.
“We’ve made progress on many fronts but we’re especially pleased with our momentum on commercial initiatives designed to improve the guest experience and drive revenue gain,” Tilden said, adding that Air Group leaders expect their year-end results to show the best unit growth in the industry.
The profits came on the back of more than $2.2 billion of operating revenue for the quarter and nearly $8.8 billion for the year, which were 8 percent and 6 percent improvements over 2018, respectively. They translated into earnings per share of $1.46 for the quarter and $6.42 for the year. Alaska Air Group also announced a 7 percent increase to its quarterly dividend Jan. 29 to 37.5 cents per share. It’s the seventh time since the dividend was instituted in 2013 that it has been raised.
Alaska Air Group stock closed Jan. 28 trading at $65.54 per share. The stock price jumped to $66.83 the next morning following the Jan. 28 post-trading earnings release.
The revenue generated a record $1.8 billion in operating cash flow for the quarter, which, after approximately $700 million of capital investments, left Air Group with $1.1 billion in free cash flow, a $760 million year-over-year improvement, according to Chief Financial Officer Brandon Pedersen. The company ended the year holding roughly $1.5 billion in cash, Pedersen said.
On the cost side, the company held its full-year unit cost growth to 2.3 percent on 2 percent capacity growth, which matched its initial cost guidance while also absorbing an unexpected $42 million cost from new agreements with its mechanics unions during the fourth quarter, according to Pedersen.
The company’s top financial priority in 2019 was de-leveraging its balance sheet, Pedersen said, and it paid off more than $600 million in debt over 2019, which brought its debt to capitalization ratio down to 41 percent.
By the end of the year Air Group had repaid approximately 75 percent of the $2 billion it borrowed to purchase Virgin America in 2016, executives said.
Pedersen also commended the company’s treasury team for getting 79 percent of the company’s debt on fixed terms that average 3 percent interest. He said Air Group ended 2019 holding 113 of its aircraft unencumbered and roughly $400 million in available credit.
It all helped Air Group generate a 12 percent full-year pretax margin, which was a 3.1-point improvement over 2018 and puts the company on track to reach its goal of sustained 13 percent to 15 percent pre-tax margins, Pedersen said.
Tilden added achieving those margins is the company’s top financial priority for 2020.
He said Air Group would pay out $130 million in annual performance bonuses Jan. 29, a figure that roughly equates to an extra month of pay for most employees.
Tilden thanked employees for offering “genuine and caring service” and said he found the company’s workforce energized about the future following two weeks of meetings at Air Group hubs across the country.
“This industry can be challenging but our people know what it takes to win: a relentless focus on safety and on-time operation; truly remarkable service and a low-fare, low-cost, high-efficiency profile,” Tilden said. “We continue to do these things and we’ll continue to grow.”
Alaska Air Group Chief Commercial Officer Andrew Harrison said one of the main initiatives the company has implemented in recent years that has spurred revenue growth is its focus on expanding its premium products.
First class and premium seating comprised just 7 percent Air Group’s revenue when it first started offering premium cabin seating in 2017; today, that figure is up to 22 percent, according to Harrison, who said the premium revenue will continue to grow as Alaska Airlines’ fleet of formerly Virgin America Airbus aircraft are reconfigured to offer premium seating.
The per unit revenue from premium and first class seats is 54 percent better than main cabin seats, he said.
“We’re intentional with how we manage our premium product business,” Harrison said. “Our goal is to keep our premium cabins affordable and provide generous benefits to our loyalty members while competing effectively against our peers.”
Overall, Air Group’s per-unit revenue was up 4.2 percent for 2019, which was 200 points above the industry average and helped mark the company’s best per-unit revenue since 2011, according to Harrison.
“It’s imperative that we carry the momentum we built in 2019 forward,” he said.
Current Executive Vice President of Planning and Strategy Shane Tackett, who will take over as CFO in March following Pedersen’s retirement, said Air Group expects to grow its capacity 3 to 4 percent on 2 percent cost growth in 2020 presuming Boeing’s 737 MAX aircraft are cleared to return to service mid-year.
Alaska Airlines has not flown the MAX-series yet but is scheduled to receive 10 of the aircraft at some point this year, according to Tackett.
He said Alaska Airlines also has the opportunity to replace 61 Airbus A319 and A320 aircraft with newer, larger and more efficient planes this year. Deciding whether Alaska will continue flying Airbus planes or make a return to a fleet comprised strictly of Boeing 737s is a primary operational objective for the year, according to Tackett.
Alaska Airlines’ longstanding practice of only flying Boeing 737 aircraft prior to its purchase of Virgin America helped the airline generate efficiencies on multiple fronts.
Elwood Brehmer can be reached at [email protected].