Alaska Air Q1 Earnings Beat Despite Falling Short On Revenues

by Trefis Team
Alaska Air Group
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Alaska Air Group (NYSE:ALK) reported a mixed quarter to start off the year. The company managed to beat on earnings, albeit by a meager one cent, posting $1.05 per share. That said, the figure was down almost 28% year-over-year on higher costs. Revenues came in lighter-than-expected at $1,749 million missing the analyst estimate by about $33 million. However, the reported figure was up almost 30% year-over-year. The top line was driven by an improved passenger revenues figure, which jumped 31%. Unfortunately, the results failed to ease investor sentiment, leading to a 3% share sell-off post the call.

2017 is expected to be a crucial year for the company as it works hard on the seamless integration of Virgin America into its business. If all goes to plan, we could see Alaska Air emerging victorious on all fronts.

Screen Shot 2017-04-27 at 8.57.22 AM

Key Highlights:

  • As mentioned previously, the rise in operating revenues was facilitated by increased passenger revenues. In fact, the growth in passenger revenues at Alaska outpaced that of the industry average. That said, revenues were negatively impacted by Easter shifting to the second quarter this year. This impacted the unit revenue growth by about 3 points. Additionally, the company recorded load capacity of 81.3% which was essentially flat year-over-year, despite a 4.9% increase in capacity.
  • Pre-tax profit was recorded at $202 million, which was $117 million, or 37%, lower than last year on a combined basis. Profit was hurt significantly on the back of rising costs. The quarter witnessed an almost $56 million increase in non-fuel costs and a $88 million increase in fuel prices. Additionally, non-operating costs also increased by about $12 million because of higher interest expenses.
  • Despite this, CASM (cost per available seat mile) ex-fuel came in flat in comparison to the same period last year, consistent with the initial guidance provided by the company earlier. The key metric benefited mainly from having lower-than-forecast maintenance costs. Further, certain marketing spending that was to be incurred in the quarter was shifted to the latter part of the year.
  • The merger with Virgin has enabled Alaska to add close to 37 new markets since the deal closed in mid-December, with growth focused primarily in California. Additionally, network growth synergies have helped revive growth at Dallas Love Field. The company plans on adding five new routes from the airport to the West Coast, while down-gauging the planes used on the La Guardia sector to improve profitability.
  • Going forward, the company expects Q2 to be best quarter in the year in terms of unit revenues, aided by maturing markets, stabilization of competitive capacity, and solid demand. However, CASM ex-fuel is expected to increase in the 3-6% range. The increase is driven primarily by adverse timing of maintenance events, a shift in costs from Q1, and an assumed ratification bonus regarding the deal struck with pilots at Horizon. Despite the jump in costs, the company expects the full year CASM ex-fuel to come in relatively flat.

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