Higher Traffic And Capacity Expansion Lift Alaska’s Outlook

by Trefis Team
-3.98%
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50.20
Market
48.20
Trefis
ALK
Alaska Air Group
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    Quick Take
  • In the first quarter, Alaska posted strong growth in revenues driven by capacity expansion. The carrier plans to continue to raise its flying capacity through 2013 in order to maintain its top-line growth.
  • Separately, Alaska will begin installing slimmer seats this fall on its 737-800s and 737-900s to increase seating capacity. This will provide the carrier with revenue growth opportunities in high demand markets.
  • Additionally, the increased on-board seats will lower the carrier’s unit costs – operating costs per seat for a mile of flight -  and provide it with more elbow room to compete against low-cost carriers.

Alaska Air Group‘s (NYSE:ALK) revenues increased by 9% year-over-year to $1.1 billion in the first quarter on gains from higher passenger traffic driven by capacity expansion. However, the carrier’s profits declined marginally to $37 million from $41 million in the first quarter of last year due to higher maintenance expenses driven by engine events at Horizon – the wholly owned subsidiary of Alaska. [1] In all, the carrier posted a good first quarter.

Looking ahead, in the second quarter, Alaska anticipates to raise its flying capacity by around 8.5% on a y-o-y basis. [1] This will drive growth in its passenger traffic and revenues. However, the carrier’s margins in the near term will face some pressure from lower demand due to the sequester and increased competitive capacity in some of its markets.

Additionally, a couple of days prior to its earnings release Alaska announced a cabin interior upgrade program in the majority of its aircraft. The highlight of this program is retrofitting the aircraft with slimmer Recaro seats which will increase their on-board seating capacity and thereby lower the carrier’s unit costs – the cost incurred per seat for a mile of flight. The lower operating costs will in turn allow the carrier to compete more effectively against low-cost carriers like Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU), both of which have been expanding to many markets served by Alaska.

We currently have a stock price estimate of $61.80 for Alaska, just ahead of its current market price.

See our complete analysis of Alaska here

Cabin Revamp Will Lower Unit Costs

Alaska will be retrofitting its 737-800s and 737-900s with the slimmer Recaro seats. This will allow the carrier to add more on-board seats to its aircraft. In case of -800s, the seating capacity will go up from 157 to 163 seats with a two-class cabin configuration. However, this is still well below Southwest’s seating capacity of 175 seats on a -800 with a one-class cabin configuration. In case of -900s, the Recaro seats will increase the number of on-board seats by nine. Overall, the retrofitting will raise the number of passenger seats in Alaska’s fleet by 2.4% through 2014 – the year in which the program is expected to complete. [2]

This increase in passenger carrying capacity will provide the carrier with revenue growth opportunities especially in high demand and high density markets, and lower its operating costs per seat as total costs will be spread over a greater number of seats.

Apart from increasing its seating capacity, Alaska will be adding 110-volt power sockets and USB outlets on the seat back in front of each passenger as part of this cabin upgrade. Passengers will find this addition particularly useful for plugging in their laptops, smartphones or tablets. The carrier will also improve its on-board entertainment options that a passenger can access through any wireless device from a server located on-board. The total one-time costs for Alaska for this cabin upgrade program will be around $100 million. [3]

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Notes:
  1. Alaska’s first quarter earnings release, Form 8-K, April8 2013, www.alaskaworld.com [] []
  2. Alaska’s first quarter earnings transcript, April 25 2013, www.alaskaworld.com []
  3. Alaska upgrading its aircraft with new seats and power outlets, April 23 2013, www.alaskaworld.com []
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