Capacity Expansion & Revenue Initiatives Will Likely Lift Alaska’s Results

Alaska Air Group (NYSE:ALK) will announce its first quarter 2014 results Friday, April 25. The carrier is coming off a good 2013 in which its revenues and profits grew strongly on gains from capacity expansion. Last year, the carrier also became the third major U.S. airline after Southwest (NYSE:LUV) and Delta (NYSE:DAL), to start paying quarterly dividends to its shareholders highlighting its strong balance sheet and cash flow from operations.

In the first quarter, we anticipate Alaska to maintain its strong performance as it continues to expand its flying capacity in a growing demand environment. The carrier’s first quarter results will also benefit from its revenue initiatives such as  hikes in baggage fees and cabin upgrades with slimmer Recaro seats. In all, we anticipate Alaska to post a good first quarter.

See our complete analysis of Alaska Air Group here

Capacity Expansion Will Drive Alaska’s Top Line

In the first quarter, Alaska expanded its flying capacity by nearly 5% on a year-over-year basis. Given the growing demand for air travel in the U.S. and on Latin international routes where Alaska operates, this higher flying capacity from the carrier was absorbed by the growing demand. As a result, Alaska’s first quarter passenger traffic also rose by around 4% annually. ^[1] Coupled with marginally higher unit revenue (amount collected from  passengers for a seat per mile of flight) the carrier’s passenger revenues are set to rise in the first quarter on a year-over-year basis.

In our opinion, the carrier’s smaller size compared to other legacy carriers such as American, United (NYSE:UAL) and Delta, enables it to add flying capacity at rates that are higher than industry average. At this rate, we figure that Alaska’s market share of the industry’s total flying capacity will continue to rise in the first quarter and the remaining months of 2014.

Installation Of Slimmer Recaro Seats Will Aid First Quarter Growth

Alaska is also installing slimmer Recaro seats on all its Next Generation 737 airplanes. These seats allow for installation of six more seats on the carrier’s 737-800s and nine more seats on its -900s without compromising on passenger seating space. These additional seats in turn are aiding growth in Alaska’s top line by raising the passenger carrying capacity of its airplanes. Assuming a conservative occupancy rate of 50% for these additional seats, the carrier estimates that this initiative could add around $47 million to its top line in 2014. ^[2] This cabin upgrade is likely to add to growth in Alaska’s first quarter results.

Additionally, as this increase in passenger carrying capacity is being achieved without any major increase in operating costs. We figure this initiative will help Alaska lower its unit operating costs (operating costs per unit of flying capacity). This bottom line improvement will enable Alaska to compete more effectively with low cost carriers such as Southwest and JetBlue (NASDAQ:JBLU).

Increases In Extra Baggage & Ticket Change Fee Will Also Aid First Quarter Growth

Separately, 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 it charged earlier for a change made online and $100 for a change made through a call center. Through these two hikes in baggage and ticket change fees, Alaska anticipates to generate incremental revenue of $50 million annually, which will add to growth from its capacity expansion and cabin upgrade. ^[2] Though this incremental revenue is a fraction of the carrier’s total annual revenue of over $5 billion, we figure it will aid the carrier’s profit growth as it has negligible costs associated with it. In addition, given that margins of Alaska are thin, the profit gain from this hike in extra baggage and ticket change fee will be significant. These fee increases will also aid growth Alaska’s first quarter results.

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1. Alaska’s march traffic results, April 9 2014, www.alaskaworld.com [↩]
2. Alaska Air Group, Inc. 2013 Investor Day Presentation, November 14 2013, www.alaskaworld.com [↩] [↩]