Alaska Air Group (NYSE:ALK) posted strong growth in its revenue and earning in the third quarter on higher passenger traffic. Backed by a stable demand environment the airline raised its capacity and held its passenger fares steady to generate higher overall passenger revenue. Total revenue increased 6.2% y-o-y to $1.3 billion in the third quarter.  In addition, unlike in the first half of 2012 when net income was flat y-o-y as revenue increases were offset by equivalent increases in fuel costs, in the third quarter rose 111% y-o-y to $163 million as fuel costs declined. 
Higher passenger traffic drives growth in top line
In Alaska’s markets, the U.S., Canada and Mexico, demand for flights is increasing. To take advantage of this, Alaska raised its capacity by 6.8% y-o-y in the third quarter. This enabled a 7.2% y-o-y growth in its passenger traffic.  The carrier also held its passenger fares steady indicated by nearly flat levels of passenger revenue per available seat mile (PRASM). As a result, the total passenger revenue increased 6.9% y-o-y to $1.1 billion for the carrier. 
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Net income rises as fuel prices hold steady on a y-o-y basis
Jet fuel costs accounts for nearly 30% of total operating costs and is the largest single expense and so its decline in the third quarter on hedging gains helped profits. The carrier benefited from $21 million in mark-to-market adjustments arising out of fuel price hedging. As a result, total jet fuel costs declined nearly 20% y-o-y to $337 million in the third quarter.  This decline in fuel costs led to a sharp y-o-y rise in net income to $163 million compared to $78 million in the third quarter of 2011.
Replacement of older airplanes with new ones to drive up profitability over the coming years
Alaska also placed an order for 50 Boeing 737s including 37 of Boeing’s new fuel efficient 737MAX in the third quarter. The deliveries for this order will start from 2015 through 2024.  This will position Alaska well to raise its capacity as well as to replace its aging airplanes to improve on its fuel and maintenance costs over the next decade.
Share repurchase program increases investor confidence
The carrier also announced a $250 million share buyback program.  The amount of funds sanctioned equates to around one-tenth the market capitalization of the company. The program which the management expects to be complete by 2014 will send a positive signal to the investor community that the company is confident about its long-term prospects.
All in all, Alaska posted strong growth in its third quarter earnings driven by higher passenger traffic and aided by fuel price hedging. We currently have a stock price estimate of $36.79 for the carrier, marginally below its current market price. We are in the process of incorporating the third quarter earnings and will update our analysis shortly.Notes: