What Can We Expect From Alaska Air’s Q1 Earnings?

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Alaska Air

Alaska Air Group (NYSE:ALK) is all set to report earnings for the first quarter of FY 2017 on April 26. The company has reported impressive numbers in the last few quarters, even as other airlines witnessed a slowdown. In keeping with this trend, in the last quarter the airline reported revenues of $1.5 billion, up significantly at 11% year-over-year. 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. That said, the bottom line was hurt primarily as a result of higher wage expense, aircraft rent, and additional costs relating to mergers and acquisitions.

The company earlier forecast its capacity growth in Q1’17 to be 9% year-over-year. However, Alaska Air has now revised its capacity guidance to 6% year-over-year for the first quarter of 2017, while for the full year to 7% year-over-year. 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.

Probable Highlights:

  • Alaska’s passenger revenue per available seat mile (PRASM) declined approximately -6.6% in the previous quarter. The fall in unit revenues at Alaska Air has been higher than most other players in the industry, mainly due to the carrier’s decision to continue capacity expansion, unlike other players in the industry. However, the headwinds related to yields are expected to begin dissipating beginning this year.  As a result, we expect the fall in unit revenues in the first quarter to be relatively less than that seen in previous quarters.
  • On its merger with Virgin America, Alaska Air completed its acquisition of the company in December last year. 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. As the synergies of this deal begin to be realized, we can anticipate to see a heavy boost in the top and bottom lines. The upcoming earnings call should give us more clarity on the post-merger situation.
  • Oil prices in the quarter proved to be highly volatile. Earlier in the year, members of the Organization of Petroleum Exporting Countries (OPEC) imposed severe production cuts. This led to a sudden surge in oil prices. In the first two months of the year, oil prices traded between $50-$55 per barrel. However, in March, the price fell to below $50 per barrel again, as the U.S. inventory and production compensated for the decline in OPEC oil supply. The volatility in the oil prices is likely to impact the airline’s fuel expenditure significantly.
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