Alaska Air Group returns to profitability without pandemic aid
Alaska Airlines stood up on its own in the third quarter for the first time since the pandemic began, company executives said in a Thursday earnings call with investors.
Alaska Air Group Inc., which also owns regional carrier Horizon Air, reported $194 million in third quarter net income without COVID-19 financial assistance from the federal government. The profit stands in stark contrast to the $431 million loss the airline company endured a year ago.
CEO Ben Minicucci said the turnaround exemplifies the success of Alaska Air Group's approach to maintaining discipline in its balance sheet and operations. He noted the final pre-tax earnings margin beat internal projections of 10%for the quarter.
“Our 12% pretax margin solidly led the industry and was just six points shy of our third quarter 2019 margin,” Minicucci said. “I'm proud of how our company is recovering strong from the pandemic.”
Alaska Air Group netted $397 million in the second quarter — it's first after five consecutive losses totaling more than $1.5 billion — but that was the direct result of more than $660 million in federal pandemic relief loans and grants the company accepted during the period. Without the federal aid and other special items, Air Group would've reported a $38 million second quarter loss, according to company executives.
Minicucci attributed the rebound to pent-up leisure travel demand and thanked the company's employees for their strong performance in a fluid environment. Activity around theFourth of July and Labor Day approached 2019 levels.
Customer service metrics have exceeded internal targets each month of the quarter, according to Minicucci.
“Sustaining operating performance with high guest satisfaction is a remarkable achievement given how complex re-ramping our operations has proven to be,” he said.
Minicucci is planning for Alaska Air Group to return to its pre-pandemic size “no later than next summer and then grow from there,” he said.
Air Group added back nearly 4,300 employees last quarter, which correlates to 27% growth in the company's workforce.
The $194 million third quarter profit was generated on the back of more than $1.9 billion in total revenue, nearly triple what the company generated a year ago. The income translates to net earnings of $1.53 cents per share. Alaska Air Group stock traded $54.49 per share near the end of trading Friday, which was down from a pre-earnings open price of $57.23 per share despite the reported profit.
Chief Financial Officer Shane Tackett said Alaska Air Group's healthy liquidity and balance sheet should give company leaders the flexibility to reinstate shareholder distributions later in 2022, while also funding a large order of new Boeing 737-900 aircraft.
Alaska Air Group ended the quarter with $3.6 billion in total available cash, including unused credit, which was down from $4.4 billion after paying down nearly $550 million in debt and making a $100 million voluntary contribution to employee pensions, which are now 94% funded, according to Tackett. The pension payment allowed Alaska Air Group to capture a one-time, $14 million tax benefit, he said.
Cash from operations was “essentially breakeven” in the quarter, Tackett said, adding operational cash flow will likely be slightly in the negative, up to $100 million. But company leaders ultimately expect to net up to $100 million if Alaska Air Group's 2020 tax refund comes as expected.
Chief Commercial Officer Andrew Harrison said load factors, or the percentage of seats filled by revenue customers, dropped from 88% in July to 72%, largely due to the emergence of the delta variant across the country. Fourth quarter bookings are being impacted, as well, he said.
“The consequences from the delta variant have not yet dissipated and we're still working to build back Q4 bookings that were lost from the fourth COVID wave, given it occurred during an important period for building fourth quarter traffic,” he said.
Despite the broader, immediate challenges, demand for first-class and premium seating has exceeded 2019 levels and should be sustained as business travel returns, according to Harrison.
Alaska Air Group additionally netted its largest cash payment ever from its credit card loyalty program, up 7% from the same period in 2019, he noted.
“Our loyalty program is one of the most durable, competitive advantages and we are squarely focused on maintaining and improving this momentum over the coming quarters,” Harrison said.
Relatively high oil prices are likely to add marginal costs over the coming quarters if they hold, according to Tackett, despite the fact that 50% of the company's expected fuel consumption is hedged over the next six months. Fuel hedging has saved the company about 11 cents per gallon this year as oil prices have climbed, he said.
Despite a contracted workforce, overall per-unit costs have been higher than pre-pandemic levels and were 9.3% over 2019 levels, but still beat internal projections in the third quarter, according to Tackett. He expects unit costs to drop as Alaska Air Group's airlines continue to bring back capacity, even with higher fuel prices and upward pressure on entry-level wages.
“Notwithstanding the headwinds, we will emerge as an airline with a cost structure equal or better than 2019 in short order,” Tackett said.
Operating costs will also be aided by the addition of many new, more efficient Boeing 737-900 aircraft in the coming years, he said.
Alaska Airlines currently has seven Boeing 737 “dash nines,” as they are known in the industry, and should have 93 by 2024 with options for 52 more, according to Minicucci.
The new Boeing fleet will replace the Airbus aircraft acquired in Alaska's 2016 purchase of West Coast rival Virgin America, and also positions the airline for significant growth when demand fully recovers, Minicucci said.
Elwood Brehmer can be reached at [email protected].