Alaska Air Group (NYSE:ALK) will announce its second quarter earnings on July 25. The carrier will likely post strong growth in revenues on higher passenger traffic driven by capacity expansion. Profits of the carrier will also benefit from lower jet fuel prices and lower year-over-year unit costs – operating expenses excluding fuel and special items per seat for a mile of flight. In all, Alaska will likely post a strong quarter.
For full year 2013, consensus estimates guide the carrier’s revenues at over $5 billion, up from $4.7 billion in 2012.  In the first quarter, the carrier’s revenues had increased by 9% annually to $1.1 billion. 
We currently have a stock price estimate of $61.80 for Alaska, marginally above its current market price.
Top Line Will Rise On Growth In Passenger Traffic
In the second quarter, Alaska continued to increase its flying capacity by expanding to new transcontinental and mid-continental markets, and increasing its frequency on certain existing routes. Overall, in the second quarter, the carrier raised its flying capacity by 7.6% annually. This drove growth in its passenger traffic which increased by 7.5% annually. 
However, gains from higher passenger traffic were partially offset by a decline in the carrier’s unit revenues – the amount generated from passengers for a seat per mile of flight. This decline in Alaska’s second quarter unit revenues was primarily due to expansion of low-cost carriers like JetBlue (NASDAQ:JBLU) in its core markets of Pacific Northwest and the state of Alaska.
In May, JetBlue started non-stop flights on the crucial Seattle-Anchorage route at fares as low as $119.  This route in 2012 was the leading non-stop route for Alaska in terms of revenue generation.  JetBlue’s low priced fare on this crucial Alaska route limited the latter’s pricing power for this route and contributed to its its overall unit revenues falling by 4% annually in the second quarter. 
Profits Will Benefit From Lower Unit Costs And Fuel Prices
On the bright side, the impact on Alaska’s margins from lower unit revenues was offset in part by its lower unit costs. In the second quarter, Alaska’s unit costs declined by 0.5% annually on gains from multiple cost-saving initiatives, which included increased subcontracting of services like heavy aircraft maintenance, fleet service, facilities maintenance to outside vendors and operation of single aircraft type through mainline (Boeing 737s) and regional (Bombardier Q400s) network. 
Second quarter profits of Alaska will also benefit from lower jet fuel prices, which declined by 3.5% annually to around $3.28 per gallon for the carrier. Notes:
- Alaska Air Group Investor Presentation, July 18 2013, www.alaskaworld.com [↩]
- Alaska’s first quarter 2013 earnings release, Form 8-K, April 8 2013, www.alaskaworld.com [↩]
- Alaska’s June operational results Form 8-K, July 9 2013, www.alaskaworld.com [↩] [↩] [↩] [↩]
- JetBlue’s Anchorage to Seattle Route is Now On Sale for as Low as $119, December 17 2012, www.jetblue.com [↩]
- Alaska’s 2012 10-K, February 14 2013, www.alaskaworld.com [↩]