Alaska Air Higher After Impressive Performance In Q4’16

Alaska Air Group (NYSE:ALK) has reported impressive numbers through the year, even as other airlines witnessed a slowdown. The December quarter was no different, with revenues up significantly at 11% y-o-y to $1.5 billion. Alaska Air beat the consensus for both revenue and earnings in the quarter, resulting in the stock price rising upwards. Compared to the legacy carriers and small cost carriers, it is the only airline to report such significant 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 the two percentage point increase in the company’s load factor. However, in terms of bottom line, the growth failed to impress, as operating income fell by 5% y-o-y. This was primarily a result of higher wage expense, aircraft rent, and additional costs relating to mergers and acquisitions. Consequently, the operating margin shrank by almost 3 percentage points, while net income was down 40% y-o-y.

The rise in operating revenues was mainly facilitated by higher traffic attracted through lower fares. Furthermore, the company outperformed its previous performance in terms of unit revenues. Despite being the only airline to not reduce capacity, the company was able to arrest the fall in passenger revenues per average seat miles, a widely watched industry metric. As expected by the company, the industry-wide trend of declining PRASM corrected itself, as macroeconomic conditions all over the world improved, especially owing to Latin America.

On the cost side, the company impressed, as its unit costs excluding fuel declined -0.4%. Given the industry dynamics, this comes as a surprise. Having said that, Alaska’s fuel price came in higher at almost a 12% y-o-y increase in the quarter, while wages and rents also rose. Consequently, the company’s operating expenses were up 14% y-o-y, resulting in a decline in margins.

As an update on its merger with Virgin America, Alaska Air completed its acquisition of the company in mid-December. The acquisition has made the carrier a premier airline for travelers on the West Coast, giving it the biggest chunk of California’s air market. On a standalone basis, Virgin America recorded a pre-tax profit of $61 million, a 14% improvement over the fourth quarter of the prior year. Below we have listed the consolidated unit’s (Alaska+Virgin) performance on a retrospective basis for the fourth quarter.

Going Forward

The company earlier forecast its capacity growth in Q1’17 to be 9% y-o-y. However, Alaska Air has now revised its capacity guidance to 6% y-o-y for the first quarter of 2017, while for the full year to 7% y-o-y. Furthermore, the company’s unit revenues are also expected to turn to positive as we head into the first quarter. However, the fuel costs in the quarter are expected to go up, even as the carrier practices fiscal discipline, resulting in costs excluding fuel staying constant. The higher fuel prices are likely to impact Alaska’s margins adversely.

Have more questions about Alaska Air (NYSE:ALK)? See the following links:

• Why Have We Revised Alaska Air’s Price Estimate To $69 Per Share?
• Alaska Air Reports Another Strong Quarter Backed By Rapid Capacity Growth And Lower Fuel Costs
• Alaska Air Q2’16 Earnings Preview: Capacity Growth, Fiscal Discipline To Support Earnings
• How Will The Virgin America Deal Impact Alaska Air’s Share Repurchase Program?
• Will Alaska Air-Virgin America Face Antitrust Issues?
• How Will The Virgin America Merger Impact Alaska Air’s Cost Of Capital?
• How Will Alaska Air’s Market Share Change Post The Virgin America Deal?
• Why Is Alaska Air Acquiring Virgin America?
• How Will Alaska Air Benefit From The Virgin America Deal Operationally?
• How Will The Expected Return On The Alaska Air-Virgin America Merger Compare With The Previous Deals In The Sector?
• How Will The Virgin America Deal Alter Alaska Air’s Capital Structure?
• Has Alaska Air Paid A Fair Price For Acquiring Virgin America?
• Alaska Air’s Earnings Rise On The Back Of Rapid Capacity Growth And Lower Fuel Costs

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

View Interactive Institutional Research (Powered by Trefis):

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

More Trefis Research