Alaska Air Group (NYSE:ALK) will announce its third quarter earnings this Thursday, October 25.  The carrier reported good growth in top line but flat operating income on a y-o-y basis in the first half of this year. Revenue was $2.3 billion, up 8.5% y-o-y driven by higher passenger traffic and yield in the six months ended June 30, 2012. While operating income was $188 million in the same period, marginally lower than its year-ago levels as increase in fuel costs offset the growth in top line. 
In the third quarter, the carrier continued to add capacity thereby aiding growth in passenger traffic. And if yield levels do not fall then we will see good top line growth for the period. Also, barring the impact of fuel price hedging, fuel costs are not expected to vary much as crude oil prices in the third quarter of 2012 were comparable to their prices in the year-ago period. The carrier recently approved a $350 million share repurchase program as well.  Such a step will strengthen investor confidence in the stock.
All in all, Alaska will likely post good figures in its third quarter earnings.
We currently have a stock price estimate of $36.79 for the carrier, slightly below its current market price.
Strong y-o-y growth in passenger traffic in Q3 to drive earnings
The carrier continued to add to its capacity in the third quarter. It started daily services between its hub at Seattle and Fort Lauderdale, San Antonio, and between Portland and Reagan Washington National Airport in the third quarter.  Earlier in the year it had launched flights on ten new routes starting from Oakland, San Jose, San Diego, Portland and Seattle.  These new flights resulted in significant capacity increase, reflected by 8.0%, 7.1% and 5.1% y-o-y increase in available seat miles (ASM) in July, August and September respectively.    Aided by growth in capacity passenger traffic also increased significantly in each of the three months of the third quarter. Yield levels are also likely to hold steady as there have been no cuts in passenger fares. This makes the case for strong top line growth for the carrier in the third quarter.
Fuel costs likely to remain stable on a y-o-y basis
However, unlike in the first half of the year where operating income was flat on a y-o-y basis as increase in top line was offset by an equivalent increase in fuel costs. In the third quarter we anticipate operating income to post growth as fuel costs are not expected to vary much on a y-o-y basis. Crude oil prices in the third quarter of 2012 were comparable to their levels in the third quarter of 2011.  Thus, excluding the impact of fuel price hedging fuel costs for the airline will likely remain stable in the third quarter on a y-o-y basis. The carrier incurred an average fuel price of $3.25 per gallon in the third quarter of 2011.
Share repurchase program increases investor confidence
Also, the carrier recently announced a $250 million share buyback program. The program does not have a completion date, but the management expects it to be complete by 2014 end.  The amount of funds sanctioned equal approximately one-tenth the market capitalization of the company. This sends a positive signal to the investor community that the company is confident about its long-term prospects.
On the whole, Alaska is expected to post good numbers in its third quarter earnings on the back of higher capacity and passenger traffic. The share buyback program would provide additional support to the stock.Notes:
- Alaska Air Group to Announce Financial Results, October 2 2012, www.alaskaworld.com [↩]
- 2012 Q2 10-Q, www.alaskaworld.com [↩] [↩]
- Alaska Air Group Announces $250 Million Share Repurchase Program, September 26 2012, www.alaskaworld.com [↩] [↩]
- Alaska Air Group Archived News Releases, www.alaskaworld.com [↩]
- Alaska Air Group Reports July Operational Results, August 3 2012, www.alaskaworld.com [↩]
- Alaska Air Group Reports August Operational Results, Sept 6 2012, www.alaskaworld.com [↩]
- Alaska Air Group Reports September Operational Results, October 3 2012, www.alaskaworld.com [↩]
- Oil price performance in the last 2 years, www.moneyweek.com [↩]