Alaska Air Group (NYSE:ALK) has scheduled to announce its second quarter earnings on Thursday, July 26 2012. The airline has continued to increase capacity by adding aircraft to its fleet and starting services on new routes. It has also been able to achieve higher load factors in the second quarter as compared to the year-ago period. Thus, we anticipate the airline to post solid top line growth in its earnings report. However, high fuel costs will continue to impact margins. We also anticipate the airline to incur higher capital expenditures on account of aircraft purchases during the second quarter, and this too will weigh on margins.
On the whole, we anticipate strong net earnings for the airline in second quarter, driven by higher passenger traffic and capacity expansion, and offset by higher capital expenditures and high fuel prices.
We currently have a stock price estimate of $42.43 for the airline, approximately 20% above its current market price.
Capacity Expansion to drive top line growth
The airline purchased two B737-800 aircraft in the first quarter of 2012 and plans to purchase four more aircraft in 2012. It also started flights on ten new routes starting from Oakland, San Jose, San Diego, Portland and Seattle.  This has resulted in 3.2%, 8.3% and 7.4% increases in Available Seat Miles (ASM) for April, May and June 2012 respectively, on a year-over-year basis.   
The airline has also managed to increase its load factor by 2.5, 2.0 and 2.3 points during the three months, compared to the year-ago periods. As a result, its Revenue Passenger Miles (RPM), an indicator of passenger traffic has increased significantly in each of the three months on yearly basis, registering double-digit growth in May and June. This makes the case for impressive top line growth for the airline, on a year-over-year basis, in the second quarter.
High fuel prices to impact margins
However, high fuel prices will continue to impact margins for the Alaska Air Group. The airline anticipates to incur 6% higher average jet fuel price per gallon in the second quarter of 2012 as compared to the year-ago quarter. Coupled with higher ASMs, the overall fuel expenses are expected to be significantly higher.
Rising capital expenditure to weigh on margins
Also, higher capacity from greater number of aircraft in fleet has resulted in higher capital expenditures for the airline. This is likely to weigh on margins during the second quarter.
On the whole, we anticipate strong earnings from Alaska Air Group in the second quarter, driven by higher passenger traffic and capacity expansion, offset by high fuel prices and capital expenditures.Notes:
- Alaska Air Group Reports First Quarter Results, April 19 2012, www.alaskaworld.com [↩]
- Alaska Air Group Reports April Operational Results, May 2 2012, www.alaskaworld.com [↩]
- Alaska Air Group Reports May Operational Results, June 5 2012, www.alaskaworld.com [↩]
- Alaska Air Group Reports June Operational Results, July 5 2012, www.alaskaworld.com [↩]