2015 Earnings Review: Alaska Air’s Profits Soared Due To Its Operational Excellence And Depressed Fuel Costs

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Alaska Air

Following the trend in the US airline industry, Alaska Air Group (NYSE:ALK) posted an impressive jump in its earnings for the year ended 2015, driven by its operational performance and reduced fuel costs [1]. However, the airline experienced a decline in its unit revenue due to stiff competition from Delta, which was more than offset by its high capacity growth and increased passenger traffic. The Seattle-based airline continued to enter new and unexplored markets to expand its network and maintain industry leading margins. Going forward, the airline aims to launch new revenue enhancing and cost control initiatives, which will boost its profits, apart from the fuel cost savings. In this article, we discuss the performance of the airline and its guidance for the first quarter of 2016.

We have a price estimate of $84 per share for Alaska Air Group, which is 15% higher than its current market price. We will update the model for the airline shortly to reflect the latest numbers and guidance.

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Source: Google Finance

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Rapid Capacity Expansion And Operational Excellence Resulted In Top Line Growth

Alaska Air managed to post revenue of $1.37 billion, representing a growth of 4% on a year-on-year basis, unlike its peers who experienced pricing pressure due to their international operations. The revenue growth was driven by the improvement in its operational metrics such as on-time performance, completion rate, and customer complaints. Apart from this, the airline launched its operations into 20 new markets in 2015, expanding its system capacity by 10.6%, which is among the highest in the industry. Since Alaska Air’s passenger traffic rose by 9.3% during the year, it implies that the airline’s capacity additions have a strong demand and the airline is penetrating into the right markets. The capacity expansions have also allowed the airline to maintain its market share at 51% in its Seattle market, despite stiff competition from Delta.

 

Lower Fuel Costs Drive Profits

The sharp fall in crude oil prices led to a notable fall in the fuel costs for majority of the US airlines, including Alaska Air. The airline’s average fuel price fell almost 40% to $1.88 per gallon, translating into fuel cost savings of almost $490 million during the year. However, the airline acknowledges that the fuel expenses will not continue to remain low in the long term. Consequently, the airline has been working towards restricting its ex-fuel unit costs to sustain its long term profitability. In 2015, the airline’s unit costs (excluding fuel costs and special items) fell 0.7% compared to 2014, marking the sixth year of unit cost reduction. Lower fuel costs, along with the airline’s cost reduction initiatives, resulted in net income (adjusted) of $842 million, or $6.51 per share, 47% higher compared to a year ago.

Returning Value To Its Shareholders

Driven by the fuel cost savings, Alaska Air generated operating cash flows of $1.6 billion. Almost half of these cash flows were spent on the airline’s capital expenditure. Also, the airline remains one of only two US airlines to have an investment-grade balance sheet and reduced its long-term debt by $116 million, resulting in a year end debt of $686 million. Further, the airline bought back close to 5.5% of its outstanding shares for approximately $500 million and paid dividends in the amount of $102 million. In fact, on 21st January 2016, the airline declared a cash dividend of 27.5 cents per share, representing an increase of around 40% [2]. This reiterates that the airline is confident about its fundamentals and is willing to share its profits and growth with its shareholders.

See Our Complete Analysis For Alaska Air Group Here

Going Forward

Alaska Air aims to launch new initiatives to enhance its top line growth in 2016. These include launching new premium economy product, enhancing its alliance relationships in the international markets, improving its mileage plan and credit card program, and reconfiguring its fleet to support its regional jets. According to the airline, these new revenue initiatives will deliver incremental annual revenue of $150 million. Alaska Air expects to grow its capacity by 13.5% in the first quarter of 2016, and by 8% in the full year. On the cost front, the airline forecasts its fuel price to average around $1.25 per gallon, based on the current oil prices. It aims to reduce its unit cost (excluding fuel costs and special items) by 1.5% during the March quarter and by 1% for the full year.

Overall, we expect Alaska Air to continue to deliver industry leading margins driven by its operational excellence and low cost structure in the long term, while fuel cost savings will continue to boost its earnings over the next few quarters.

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Notes:
  1. Alaska Air Announces 2015 Results, 21st January 2016, www.alaskaair.com []
  2. Alaska Air Increases Quarterly Dividend, 21st January 2016, www.alaskaair.com []