Another record for Alaska Air despite increased competition

Photo/Elaine Thompson/AP

Alaska Air Group Inc. rode low fuel prices and debt to another record-high second quarter profit of $230 million, company leaders announced July 23.

The Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air has turned record net incomes in 12 of the last 13 quarters, along with five consecutive record-breaking profit years.

The $230 million profit is a 46 percent increase over 2014. By comparison, Air Group’s full 2014 profit was $571 million.

Alaska Air Group CEO Brad Tilden said it also marks the largest profit in the company’s history.

“As we pause to take a look at how we’re doing mid-year, and two-and-a-half years into the biggest competitive incursion we’ve seen in a while, I’m happy to share that we are thriving,” Tilden said during a call with investors, with his “incursion” comment referring to the foray of Delta Airlines into state markets. “Our operation is firing on all cylinders, our leaders are focused on execution, and we are generating returns that far exceed our cost of capital.”

Profit growth coupled with a stock repurchase program — about 3 percent of outstanding shares totaling $262 million in the first two quarters — pushed earnings per share up 56 percent to $1.76 per share in the second quarter.

Alaska Air Group stock traded for $73.04 at the end of trading July 27. The stock price has improved 53 percent since the company executed a 2-for-1 split of shares in late June 2014.

Per gallon fuel cost was down nearly 34 percent year-over-year, at $2.12 per gallon. Total fuel expense was down 28 percent despite a 10.7 percent increase in capacity companywide.

Alaska Air Group’s financials, driven primarily by Alaska Airlines, were strong before fuel prices dropped last year. The company hedges its fuel purchases through call options to mitigate drastic price swings.

Other major domestic carriers have enjoyed record profits over the past several quarters due to lower oil and subsequent lower fuel prices. Southwest Airlines and United Airlines each posted record second quarter profits despite 2 percent revenue growth for Southwest and declining revenue for United, according to a July 23 Associated Press report.

Chief Financial Officer Brandon Pedersen said the company’s fuel burn per available seat miles, essentially the fuel efficiency of its aircraft, improved 2.6 percent year-to-date. Alaska Airlines is transitioning its fleet from older Boeing 737 models to newer 737-800s and -900s. It will add 42 of Boeing’s 737-900 Extended Range aircraft over the next two years, according to Pedersen.

Also notable is Air Group’s debt-to-capitalization ratio, which was down to 29 percent.

Pedersen said he believes Alaska Air Group is the only major domestic carrier owner to have net interest income on its profit and loss, or P&L, statement.

The company expects to generate about $500 million of free cash flow for the year, he said.

Company executives often note their wish to have the balance sheet of an investment-worthy industrial company, not just a healthy airline.

Overall operating revenue was up 5 percent to more than $1.4 billion for the quarter. Operating expense was down 4 percent on $101 million of fuel savings year-over-year. That led to a net operating income of $372 million, or 41 percent growth.

Passenger revenue increased $57 million, nearly 5 percent on the 10.7 percent capacity growth.

“We’re growing significantly to strengthen and fortify our franchise in Seattle, and we crossed the 1,000-flight per day threshold on July 2,” Tilden said.

Delta Air Lines, an Alaska Airlines partner, has increased its traffic through Seattle and in Alaska significantly in recent years.

Chief Commercial Officer Andrew Harrison said overall capacity is expected to be up 10 percent in Hawaii and 17 percent in Alaska in the third quarter.

Despite that, competitive capacity growth is generally trending down, according to Harrison.

“We have confidence in the resilience of our business model, and we expect our positive momentum to continue,” he said.

Alaska Air Group airlines have added 18 markets since the first quarter of 2014. Harrison said nearly 70 percent of those markets are profitable within a year; and half would be profitable at $3 per gallon fuel. The company is also adding another 18 new markets in the second half of the 2015, some of those through agreements with partner airlines.

Notable among the new markets this fall is service to New York’s John F. Kennedy International Airport, Charleston, S.C., Raleigh, N.C., Nashville, Tenn., and Costa Rica.

Harrison said he expects 2016 growth to be “somewhere in the high single digits.”

Air Group also announced a new mileage plan partnership with Chinese Hainan Airlines July 22.

Elwood Brehmer can be reached at [email protected].

11/20/2016 - 2:52pm