Alaska Air 2Q Preview: Look Out For A Strong Quarter Despite Weak Unit Revenues

Alaska Air Group (NYSE:ALK) is scheduled to report its second quarter operational performance before the market opens on Thursday, 23rd July 2015((Alaska Air To Announce Second Quarter Results)), along with larger carriers Southwest Airlines (NYSE: LUV) and United Continental Holdings (NYSE: UAL). Based on the latest traffic numbers, ^[1] the airline continued to grow its total system capacity at a higher rate than its peers, excluding JetBlue, despite the growing concerns over an excess supply of seats in the domestic market. While these capacity additions are likely to drive Alaska Air’s 2Q results, the increasing pressure on the airline’s passenger unit revenue due to rising competition, will continue to be a drag on its top line growth. However, we expect the lower fuel costs to boost the airline’s earnings for the quarter. In this article, we briefly discuss what we expect from Alaska Air’s June quarter results.

Our price estimate for Alaska Air stands at $69 per share, 8% behind its current market price. We will be updating our valuation model for the airline after the earnings release.

See Our Complete Analysis For Alaska Air Group Here

Capacity Expansion To Drive Revenues Despite Lower Unit Revenue

Alaska Air, which remained resilient despite the recent noise over supply demand mismatch, maintained a high capacity growth rate during the June quarter. The airline’s passenger traffic grew 6.9% on a capacity increase of 7.2% during the quarter((Alaska Air Releases June Traffic Results, 2nd July 2015, www.alaskaair.com)). Though this capacity increase is lower than the airline’s guidance of 10.5% growth, it is a close second to JetBlue’s 8% capacity growth in the latest quarter. In addition, the Seattle-based airline has been facing stiff competition from Delta Air Lines at its home base, along with pricing pressure from other carriers who have been cutting prices to attract more customers. This rising competition, coupled with its own large capacity expansions, had a severe impact on Alaska Air’s passenger unit revenue (measured by passenger revenue per available seat miles), reducing the metric by approximately 5.5% in the three-month period. Further, the airline’s  load factor (number of passenger flown per flight) also declined marginally by 20 basis points to 86.7% due to the capacity additions((Alaska Air Releases June Traffic Results, 2nd July 2015, www.alaskaair.com)). Accordingly, we forecast the lower unit revenue to dampen the positive effect of the capacity increase to some extent. However, we still expect Alaska Air to report a strong top line growth on the back of capacity additions during the quarter. The market anticipates the airline to post revenue of $1.44 billion, 4.7% higher from last year.

Data Source: Google Finance

Lower Fuel Prices And Decline In Unit Costs Likely To Boost Earnings

Given the slower-than-expected oil price recovery in the last three months, Alaska Air’s expects its second quarter fuel prices to average $2.12 per gallon, slightly lower than its guidance of $2.14 per gallon((Alaska Air June Operational Performance)). Consequently, the airline will enjoy notable fuel cost savings during the quarter, boosting its bottom line growth. This will be further complemented by the 3% decline in the airline’s unit costs (excluding fuel costs and special items), higher than its previous expectation of 2% reduction. Thus, we expect Alaska Air to report strong earnings growth in this quarter as well. The consensus earnings estimate for the airline stands at $1.73 per share, more than double its earnings for the same quarter last year.

Conclusion

Despite the turbulent environment faced by the US airline industry, we expect Alaska Air to deliver impressive results yet again, driven by its rapid capacity expansions and lower fuel cost.

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1. Alaska Air Releases June Traffic Results, 2nd July 2015, www.alaskaair.com [↩]