Alaska Air Posts Another Strong Quarter Driven By Lower Fuel Prices

+14.81%
Upside
42.99
Market
49.36
Trefis
ALK: Alaska Air logo
ALK
Alaska Air

The stock price of Alaska Air Group (NYSE:ALK) touched a new high of $77.80 per share during the trading day on Thursday, July 23, when the airline announced another solid quarter along with larger carriers Southwest Airlines (NYSE:LUV) and United Continental Holdings (NYSE:UAL). The Seattle-based airline posted adjusted net income of $230 million or $1.76 per share [1] for the second quarter, beating the consensus estimate of $1.73 per share, driven by fuel cost savings. Despite the pricing pressure caused by rising competition, Alaska Air managed to report quarterly revenue of $1.44 billion, matching the analyst expectations. Going forward, we expect the lower fuel costs to continue to boost the airline’s earnings. In this note, we take a quick look at Alaska Air’s second quarter results and its outlook for the next quarter.

Alaska Air

Source: Google Finance

Capacity Growth And Rising Competition Drag Down Unit Revenue

Relevant Articles
  1. Should You Pick Alaska Air Stock At $37 After Q4 Beat?
  2. Will Alaska Air Stock Rebound To Its Pre-Inflation Shock Highs of $70?
  3. What’s Next For Alaska Air Stock After A 24% Fall This Year And A Downbeat Q3?
  4. Which Is A Better Pick – Alaska Air Or UAL Stock?
  5. What’s In The Cards For Alaska Air’s Q2?
  6. Should You Buy Or Avoid Alaska Air Stock At $52?

Despite growing concerns over an excess supply of seats in the domestic market, Alaska Air grew its system capacity by 10.7%((Alaska Air Announces Second Quarter Results, 23rd July 2015, www.alaskaair.com)) during the quarter, the highest growth among the airlines that have reported their second quarter results so far. While this capacity increase resulted in a 9% rise in the airline’s passenger traffic, it pulled down the load factor (the number of passengers flown per flight) by 1.4%, to 84.9% during the second quarter. In addition, rising competition from Delta Air Lines at its home base, coupled with pricing pressure from other carriers who have been cutting prices to attract more customers, led to a decline of 5.3% in Alaska Air’s passenger revenue per available seat miles, a measure of unit revenue. Still, the airline posted consolidated revenue of $1.44 billion, 4.5% higher compared to last year.

Fuel Cost Savings Drive Margin Growth

Given the weakness in global crude oil prices, lower jet fuel prices continue to drive bottom line growth for most of the airlines. Benefiting from this global trend, Alaska Air witnessed a 33.8% drop in fuel prices, averaging $2.12 per gallon((Alaska Air Announces Second Quarter Results, 23rd July 2015, www.alaskaair.com)), slightly lower than its guidance of $2.14 per gallon. This resulted in fuel costs savings of more than $100 million during the quarter, which boosted the airline’s operating margins. Alaska Air’s operating margin for the latest quarter stood at 25.9% versus 19.1% in the same quarter last year. This huge jump in the operating profits trickled to the bottom line, resulting in a GAAP income of $234 million, or $1.79 per share, more than double its profits earned a year ago. This is the 25th consecutive profitable quarter for the airline and marks its highest quarterly profit ever.

Strong Financials

Alaska Air delivered an after-tax ROIC of 22% in the last 12 months [1] which is almost 6% higher than last year and more than twice its cost of capital. Further, the airline repurchased 2.5 million shares for $160 million during the latest quarter. At the end of the quarter, the airline had only $122 million remaining under its current authorization program which it plans to complete by the end of this year. The airline hinted at announcing its next buyback program later this year. During the quarter, Alaska Air also declared a quarterly cash dividend of $0.20 per share, a 60% increase over the dividend paid in the second quarter of 2014. This translates into one of the highest dividend yields in the industry. Besides, in order to strengthen its capital structure, Alaska Air paid down its long term debt, reducing it to $745 million at the end of the June quarter. This also makes it the only airline to have a positive net interest figure on its income statement, providing an important cost advantage over its peers.

Div yield

Source: Bank of America Merrill Lynch 2015 Transportation Conference

Outlook

After aggressively growing its system capacity in the first half, Alaska Air targets to increase its capacity by 8% during the third quarter to maintain an overall increase of 10% for the full year 2015((Alaska Air Announces Second Quarter Results, 23rd July 2015, www.alaskaair.com)). Further, given the challenging outlook of the crude oil market, the Seattle-based airline anticipates its fuel prices to average at $1.90 per gallon during the September quarter. The airline also aims to keep a check on its unit cost (excluding fuel and special items) to meet its annual target of 0.5% reduction. Moreover, the airline plans to enhance its operations by re-launching flights in some markets, investing in fuel-efficient airplanes, and introducing new revenue streams in the form of preferred seating.

ALK guidance

Given the current guidance, we expect Alaska Air’s profits to continue to surge on the back of rapid capacity expansions and lower fuel expenses, further complemented by its cost control initiatives.

See Our Complete Analysis For Alaska Air Group Here

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

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