Alaska Air Group (NYSE:ALK) will announce its fourth quarter earnings Thursday, January 23. The carrier will likely post strong growth in revenues and profits on higher passenger traffic driven by capacity expansion. Additionally, we figure Alaska’s baggage and ticket change fee hikes implemented from October 31, 2013, will bring incremental revenues in the fourth quarter to add to its top line growth.
In the first three quarters of 2013, driven by gains from capacity expansion, Alaska’s revenues rose by 12% annually to $3.9 billion and profits rose by 58% annually to $430 million.  This performance is one of the strongest profit growths among US airlines and, in our opinion, Alaska’s smaller size compared to American, United (NYSE:UAL), Delta (NYSE:DAL) and Southwest (NYSE:LUV) allowed it to add capacity at rates higher than the industry average. In turn, this grew the carrier’s passenger traffic at higher rates. Coupled with Alaska’s focus on cost control, higher passenger traffic lifted the profits significantly.
We currently have a stock price estimate of $74.66 for Alaska Air Group, around 5% below its current market price.
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Capacity Expansion Will Drive Growth In Alaska’s Fourth Quarter Top Line
In the fourth quarter, Alaska expanded its flying capacity by around 5% annually, starting service to many trans-continental and mid-continental destinations from its hubs on the west coast. In turn, this higher capacity raised the carrier’s passenger traffic by around 4% annually in the fourth quarter.  A stable demand environment for flights during the quarter also enabled Alaska to maintain unit revenues – the amount collected from passengers per seat for a mile of flight. In all, higher passenger traffic and stable unit revenues effectively mean that Alaska will post higher passenger revenues in the fourth quarter.
Higher Baggage Fee Will Add To Top Line Growth
Additionally, beginning October 31, 2013, Alaska hiked its baggage fee to $25 for each of the first two checked bags and $75 for each bag beyond two bags, compared to a fee of $20 per bag it charged earlier for the first three checked bags and $50 for each additional bag. The carrier also hiked its ticket change fee to $125 for travel due within 59 days, compared to a flat fee of $75 for a change made online and $100 for a change made through a call center that it charged earlier. Through these two hikes in baggage and ticket change fees, Alaska anticipates to generate incremental revenues of $50 million annually.  We figure in the fourth quarter these hikes will add to gains from capacity expansion to grow the carrier’s top line.
Growth In Unit Costs Will Likely Remain Low
Separately, Alaska, in the first three quarters of 2013 posted good cost performance with its unit operating costs, excluding fuel, declining. We figure the carrier’s gains from various cost initiatives enabled it to post lower unit costs – operating costs per seat for a mile of flight. For instance, the installation of slimmer Recaro seats on all of Alaska’s Next-Generation 737s provided it with revenue opportunities without growing costs. This installation allowed for addition of six more seats on the carrier’s 737-800s and nine more seats on its -900s without compromising on passenger seating space. Revenue from these additional seats helped expand Alaska’s margins as it came with no corresponding operating costs. In the fourth quarter, we anticipate gains from this seat retrofit and other measures to continue to maintain Alaska’s good cost performance.
In all, Alaska’s profits in the fourth quarter will likely rise on low growth in costs and strong growth in revenues driven by capacity expansion and baggage fee hike.Notes: