3Q Earnings Review: Alaska Air Flies High On Its Operational Excellence, Capacity Expansions, And Lower Fuel Costs

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Alaska Air

Just like other major US airlines, Alaska Air (NYSE:ALK), too, posted a significant rise in its September quarter earnings last week driven by the weak jet fuel prices during the quarter. However, unlike its peers, the Seattle-based airline managed to increase its top line, despite facing a notable decline in its unit revenue due to foreign currency fluctuations and domestic competition. Furthermore, the airline’s outstanding operational performance and successful entry into new markets have continued to play a crucial role in its strong performance and enabled the airline to deliver industry leading margins even in this quarter.  Thus, we believe that Alaska Air will continue to outperform its counterparts by focusing on its operational performance and high quality customer service, while using the lower fuel costs as a cushion to expand its operations globally and returning value to the customers. In this note, we take a quick look at the key highlights of the airline’s 3Q results [1] and its outlook going forward.

ALK-Price-oct

Source: Google Finance

Operational Performance

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Despite fears of oversupply of seats in the domestic market, Alaska Air grew its system capacity by 8.2% during the third quarter, and raised its full year capacity growth target to 10.5% from the previous guidance of 10%. This is the second highest capacity additions carried out by any airline in the September quarter, after JetBlue. Moreover, the airline’s newer capacity allowed it to enter into the new markets and attract more passengers. The airline’s passenger traffic increased 7.7% during the quarter. However, much like its peers, the rising domestic competition, coupled with the foreign currency headwinds, led to a 4% fall in its unit revenue, which dampened the effect of higher traffic on Alaska Air’s revenue.

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Source: Alaska Air Form 8-K, 22nd October 2015

Financial Performance

Alaska Air met the market revenue estimate by recording third quarter revenue of $1.52 billion, 3.4% higher than the same quarter of last year. On the cost side, the slower-than-expected recovery in oil prices in the last three months due to fears of a potential downturn in the Chinese economy, continued to keep the jet fuel prices low. As a result, the Seattle-based carrier’s fuel price averaged at $1.82 per gallon as opposed to its previous guidance of $1.90 per gallon for the quarter. Consequently, the airline witnessed a significant jump in its operating income, which, in turn, enabled the airline to post industry leading margins yet again. Alaska Air generated an operating margin of 28.6% in the September quarter, which it expects to be the highest in the industry for this quarter. In addition, the airline continued to buy back its shares, which resulted in a proportionately higher growth in its earnings per share than its net income growth. The airline posted an EPS of $2.15 per share in the latest quarter, beating the consensus estimate of $2.10 per share for the quarter.

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Source: Alaska Air Form 8-K, 22nd October 2015

Going Forward

Alaska Air expects to grow its system capacity by 12.5% in the December quarter, translating into a full year growth of 10.5%. On the cost side, the airline anticipates its fourth quarter fuel costs to average $1.71 per gallon, 35% lower compared to the same quarter last year. This would result in a full year fuel price of $1.90 per gallon, resulting in a 38% cost savings during the year. The carrier also aims to proactively reduce its unit cost (excluding fuel cost and special items) to maintain its industry leading margins. Overall, Alaska Air plans to focus on its operational performance and customer service to sustain its dominance in the market.

ALK-4Q

Source: Alaska Air Form 8-K, 22nd October 2015

Thus, we figure that while the lower fuel costs will continue to drive Alaska Air’s performance over the next few quarters, its capacity expansion plans and operational excellence will play an important role in its success in the long term.

See our complete analysis for Alaska Air Group Here

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Notes:
  1. Alaska Air Announces 3Q Results, 22nd October 2015, www.alaskaair.com []