Alaska Air Reports A Solid September Quarter On The Back Of Continued Capacity Expansion

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Alaska Air

Alaska Air Group (NYSE:ALK) has reported impressive numbers through the year, even as other airlines witnessed a slowdown. The September quarter was no different, with revenues up 3% y-o-y. Compared to the legacy carriers, United, Delta, and American, it is the only airline so far to report growth in its top line. Despite growing its capacity at thrice the size of the industry, Alaska was able to use it efficiently, as is reflected in its high 85.6% load factor. In terms of bottom line, growth failed to impress, as operating income fell by 8% y-o-y. This was primarily a result of higher wage expense and third party regional carrier expenses. Consequently, the operating margin shrank by 3 percentage points.
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The rise in operating revenues was mainly facilitated by higher traffic attracted through lower fares. In fact, in a study conducted by the carrier, it was seen that Alaska’s one way fares are 23% cheaper than other airlines flying on the same routes. Having said that, Alaska’s unit revenues remained in the red. The fall was much worse than American Airlines, as its passenger yields continued to be under pressure. The fall in PRASM can be understood by Alaska’s decision to continue capacity expansion, unlike other players in the industry. It expects the industry-wide trend of declining PRASM numbers to correct itself, as macroeconomic conditions all over the world improve, and it completes its merger with Virgin America.

On the cost side, as discussed above, the lower fuel expenses were more than offset by higher operating expenses in the quarter. However, Alaska expects its non fuel cost to increase only by 0.5% in the year 2016, as it practices strict fiscal discipline hence forth.

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Going Forward

In line with Alaska’s strategy to expand capacity, Alaska expects a 10% increase in its system-wide capacity in the fourth quarter, and hopes to continue the trend in 2017 at 9%. While the capacity expansion may help support the top line, we forecast its unit revenues to be impacted adversely by the move unless it sees an improvement in its occupancy rate. Further, the carrier expects its fuel price in the quarter to go up, due to the recovery being seen in oil prices. This will, further, push Alaska to focus on improving it efficiency by way of an improved fleet.

As an update on its merger with Virgin America, Alaska Air highlighted that it had raised approximately $1.5 billion in funding for the merger and remains confident that it will get the nod of approval from the Department Of Justice soon. The acquisition will make the carrier a premier airline for travelers on the West Coast, giving it the biggest chunk of California’s air market.

See Our Complete Analysis For Alaska Air Here

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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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