Capacity Expansion & Ancillary Revenue Initiatives Will Likely Lift Alaska’s Earnings

by Trefis Team
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Alaska Air Group (NYSE:ALK) will announce its second quarter earnings Thursday, July 24. The carrier is coming off a good first quarter in which its profits rose to $94 million, from $37 million in the prior year period, on gains from capacity expansion and ancillary revenue initiatives. [1]

In the second quarter, we anticipate the trend to continue. Alaska increased its flying capacity by about 5% annually in the second quarter in response to the growing demand for flights, especially in the domestic air travel market. This hike in the carrier’s capacity increased its second quarter passenger traffic. Additionally, Alaska’s unit revenue (amount taken from each passenger for a seat per mile of flight) increased by nearly 3% annually in the second quarter, indicating possible fare hikes on some routes. [2] In all, higher passenger traffic and higher unit revenue indicate that Alaska will likely post higher passenger revenues in the second quarter.

Also, hikes in ticket change fee and extra baggage fee that Alaska implemented late last year will likely add significant growth to its ancillary revenues in the second quarter. Gains from these fee revisions had increased the carrier’s ancillary revenues by 22% annually in the last quarter. [1] Thus, Alaska looks set to post strong growth in its second quarter top line on growth in its passenger revenues as well as ancillary revenues.

We currently have a stock price estimate of $47.64 for Alaska, marginally below its current market price.

See our complete analysis of Alaska Air Group here

Second Quarter Profits Will Likely Also Rise

In an investor update filed earlier in July, Alaska forecast its non-fuel unit costs (operating costs excluding fuel expense that a carrier incurs to fly an airplane seat for a mile) to increase by a modest 1% annually in the second quarter. [2] At the same time, the carrier has estimated its unit revenue to increase at a higher rate of nearly 3%. So, we figure as Alaska’s unit revenue will rise at a higher rate than its non-fuel unit costs, its second quarter profits will likely rise on a year-over-year basis.

Updates Related To Delta’s Expansion At Seattle

Separately, we will be noting the impact on Alaska from Delta’s expansion at Seattle. For many years, Alaska has dominated the Seattle market, but beginning this year, Delta began establishing Seattle as its international gateway to Asia. Accordingly, Delta launched many flights from Seattle to Asian destinations such as Hong Kong, Shanghai and Tokyo. Additionally, to fill its flights on these international routes, Delta launched flights on a host of domestic routes connecting Seattle. To gauge the extent of Delta’s build up at Seattle, we look at the increase in the carrier’s daily departures from this city. Delta started 2014 with around 38 daily departures from Seattle, and it currently has about 95 daily departures from this city. [3] This rapid increase in the number of Delta flights from Seattle has posed a significant challenge to Alaska, which generates a large portion of its overall passenger traffic from this city.

At its last earnings presentation, Alaska said that Delta’s expansion at Seattle had created excess capacity. Now, this excess capacity was expected to weigh heavily on Alaska’s pricing ability and its average fares. But, with growth of about 3% in its second quarter unit revenues, we figure Alaska’s pricing ability has not been impacted as heavily as was previously expected.

On its part, Alaska took many steps to temper the impact from Delta’s expansion at Seattle. Alaska reallocated some of its capacity to new destinations out of Seattle such as Tampa, Detroit, New Orleans, Albuquerque, Baltimore and Cancun. Alaska also reallocated some of its capacity to new markets outside of Seattle to reduce its dependence on the city. For instance, in June, Alaska started flying from Salt Lake City to many other cities in the west. In our view, these measures enabled Alaska to temper the impact on itself from Delta’s expansion at Seattle. Nonetheless, as Seattle still forms the largest market for Alaska, we will watch the carrier’s second quarter results for any updates on the impact which Alaska sees on itself from Delta’s expansion at this city.

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Notes:
  1. Alaska’s 2014 Q1 earnings form 8-K, April 25 2014, www.alaskaworld.com [] []
  2. Alaska’s June traffic report and its second quarter investor update, July 2014, www.alaskaworld.com [] []
  3. Alaska analysts on Delta intrusion, July 21 2014, www.thestreet.com []
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