Alaska Air Reports Another Strong Quarter Backed By Rapid Capacity Growth And Lower Fuel Costs

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Alaska Air

Continuing the growth streak from the past quarters, Alaska Air Group (NYSE:ALK) reported impressive June quarter 2016 results on the back of strong capacity growth and lower fuel costs. [1] While the airline’s top line growth was hampered by the sharp decline in its passenger unit revenue (PRASM), its aggressive capacity expansion led to a notable rise in its passenger traffic, which more than offset the impact of weak unit revenue. As a result, the airline’s 2Q’16 revenue grew about 4% to $1.49 billion, meeting the consensus expectations.

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On the cost side, the sudden recovery in crude oil prices in the last three months caused Alaska Air’s fuel price for the quarter to average at $1.53 per gallon, well above its guidance of $1.44 per gallon. However, due to its efforts to control its operating costs, the airline’s unit cost (excluding fuel costs and special items) declined 3.7% on a year-on-year basis. This enabled the Seattle-based airline to post a 210 basis points expansion in its operating margins compared to the same quarter last year.

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As an update on its merger with Virgin America, Alaska Air highlighted that it had reached an agreement with the Department of Justice (DoJ) concerning the timing of the review of the deal. Post the closure of the deal, which is expected to be in the fourth quarter of 2016, Virgin America will operate as a subsidiary of Alaska Air, until it obtains a single-operating certificate. The airline expects to receive the certificate by the first quarter of 2018. The carrier also reiterated that Peter Hunt, who is currently the Senior Vice President and Chief Financial Officer with Virgin America, will be designated as the subsidiary’s President. Benito Minicucci will become the Chief Executive Officer of Virgin America, in addition to his current role of Chief Operating Officer of Alaska Air.

Alaska Air-Virgin America Deal Milestones

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Going forward, Alaska Air aims to moderate its capacity growth in the second half of the year. The airline plans to grow its capacity by 8% in the third quarter and by 3% in the fourth quarter, translating into an overall capacity growth of about 8.5% in 2016 compared to 2015. This growth will include Alaska Air’s newly approved flights to Newark, and Cuba. However, the airline anticipates its fuel price to rise to $1.62 per gallon in the September quarter because of the recovery in crude oil prices. Further, its unit costs (excluding fuel costs and special items) are also expected to increase 3% and 0.5% in the third and the fourth quarter, bringing the full year 2016 unit costs up by only 0.5%.

Besides this, the airline aims to slow down its share buyback program over the next couple of years to fund its merger with Virgin America. However, the airline will maintain a strong capital budget to improve its fleet of aircraft. Alaska Air expects to receive delivery of 14 new 737-900s in the next year, for which the airline expects to spend over $1 billion in 2017.

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Source: Alaska Air-Virgin America Merger Presentation, April 2016

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alaska Air Group

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Notes:
  1. Alaska Air Announces Second Quarter 2016 Results, 21st July 2016, www.alaskaair.com []