Alaska Air Higher After Impressive Performance In Q4’16

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Alaska Air Group
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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.
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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.

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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.

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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.

 

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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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