Alaska Air Beats Earnings Estimate On The Back Of Capacity Expansions And Low Fuel Costs

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Alaska Air

Alaska Air Group (NYSE:ALK) posted a net income (excluding special items) of $149 million, or $1.12 per share, exceeding the market estimate of $1.10 per share for the first quarter of 2015 [1]. As a result, the airline’s stock price surged more than 3% within a trading day on Thursday, 23rd April 2015, when the airline reported its results along with Southwest (NYSE: LUV) and United (NYSE: UAL). Alaska Air earned an adjusted pre-tax margin of 18.9%, a record growth from its margin of 11.8% a year ago ((Alaska Air Announces First Quarter 2015 Results, 23rd April, www.alaskaair.com)), driven by the sharp decline in its fuel expenses due to low crude oil prices.

We currently have a price estimate of $69 per share for Alaska Air, in line with its current market price.

See our complete analysis for Alaska Air Group here

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Rapid Capacity Additions Drive Top line Growth

During the March quarter, Alaska Air’s passenger traffic grew 9.1% on a year-on-year basis on the back of a capacity addition of close to 11% [1], the highest rate of capacity addition by any major US airline in the quarter. However, these rapid expansions created a pricing pressure for the Seattle-based airline which resulted in a 5.7% fall in the airline’s unit revenue during the latest quarter. In addition, the airline’s occupancy rate dropped 130 basis points to 83.4% during the quarter [1]. Despite this, the airline managed to meet the analysts estimate by posting quarterly revenue of $1.27 billion, up by almost 4% from the same quarter last year [1].

Lower Fuel Expenses Result In Record Earnings

Owing to the depressed crude oil prices, Alaska Air experienced an average fuel cost of $1.98 per gallon [1], a 40% reduction from its fuel costs recorded in the same period last year. As a result, the total operating expenses of the airline were down 5% on a year-on-year basis. This helped the airline to achieve net income of $149 million [1], approximately 60% higher than its net income a year ago.

Besides, the Seattle-based airline generated an after-tax return on invested capital (ROIC) of 20.1% for the trailing twelve months compared to 14.8% in the same period a year earlier [1]. Further, Alaska Air repurchased 1.6 million shares for $102 million during the quarter and paid a quarterly cash dividend of 20 cents in March [1], representing a 60% increase over the dividend declared in the first quarter of 2014.

Outlook

Alaska Air expects to increase its flying capacity by 10.5% in the second quarter. For the full year, the airline aims to continue expanding its Seattle capacity at a rate of 10% to battle the capacity expansions by Delta. The airline aims to increase its overall capacity at a high rate of 8% in 2015, which will continue to create pricing pressure for the airline but will boost its top-line growth.

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Notes:
  1. Alaska Air Announces First Quarter 2015 Results, 23rd April, www.alaskaair.com [] [] [] [] [] [] [] []