Alaska & United’s Profits Rise On Capacity Expansion Gains & Lower Fuel Costs

Alaska Air Group‘s (NYSE:ALK) revenues rose by 7% annually to $1.2 billion in the fourth quarter on higher passenger traffic driven by capacity expansion. The carrier’s fourth quarter profits also jumped to $78 million, from $44 million in the year ago period on additional gains from lower fuel costs. ^[1] In all, Alaska capped off 2013 with strong fourth quarter results. Looking ahead, the carrier plans to continue to add flying capacity to its network to grow its passenger traffic and revenues.

We currently have a stock price estimate of $74.66 for Alaska Air Group, around 5% below its current market price. We are in the process of incorporating the fourth quarter results and shall update our analysis shortly.

See our complete analysis of Alaska Air Group here

Capacity Expansion & Lower Fuel Costs Drive Profits Higher

In the fourth quarter, Alaska raised its flying capacity by 5% annually, starting service to many new mid-continental and trans-continental destinations from its hubs on the west coast. In turn, this capacity expansion raised the carrier’s passenger traffic by 4% annually. ^[1] Coupled with marginally higher passenger yields driven by higher passengers fares, Alaska’s top line rose in the fourth quarter.

The carrier’s fourth quarter profits in addition to benefiting from this top line growth rose sharply on lower fuel costs. The carrier’s fuel costs fell by $20 million annually in the fourth quarter on gains from fuel hedges. These fuel cost savings in turn played a large part in growing Alaska’s fourth quarter profits by $34 million annually to $78 million.

United’s Fourth Quarter Earnings

Separately, United‘s (NYSE:UAL) fourth quarter profits also rose sharply on lower fuel costs and top line growth driven by capacity expansion. The second largest U.S. carrier by passenger traffic after American Airlines, posted profits of $140 million in the fourth quarter, up from a loss of $620 million in the fourth quarter of 2012. Like Alaska, United too benefited from fuel hedges to incur $130 million less in its fuel costs on a year-over-year basis in the fourth quarter. The carrier’s fourth quarter top line also rose by 7% annually to $9.3 billion as it expanded its flying capacity to grow its passenger traffic. ^[2] Additionally, supported by stable demand for air travel, United generated higher passenger yield in the fourth quarter driven by fare hikes on some routes.

Overall, United through its fourth quarter results showed steady improvement in its operating performance. The carrier began 2013 with a huge loss in the first quarter, but steadily improved its profits through the year by focusing on flying fuller flights that arrived on time. A stable demand environment for air travel also helped United grow its flying capacity later in the year that further propped up its passenger traffic and revenues. In all, United’s profits grew to $571 million in 2013, from a loss of $723 million in 2012. ^[2] Though the carrier’s 2013 profits still lag behind Delta’s 2013 profits of $2.7 billion, we figure with steady improvement in its operating performance, the carrier  will close this gap with Delta in 2014. ^[3] (See United’s Profits Could Soar Higher In 2014 On Cost Cuts & Capacity Expansion)

See our complete analysis of United here. We are in the process of incorporating United’s fourth quarter results in our analysis and shall update the same shortly.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Alaska’s 2013 Q4 earnings form 8-K, January 23 2014, www.alaskaworld.com [↩] [↩]
2. United’s 2013 Q4 earnings form 8-K, January 23 2014, www.unitedcontinentalholdings.com [↩] [↩]
3. Delta’s 2013 Q4 earnings release, January 21 2014, www.delta.com [↩]