What Can We Expect From Alaska Air’s Q2 Earnings?

Alaska Air Group (NYSE:ALK) is all set to report earnings for the second quarter of FY 2017 on 26 July, before the market opens. The company has reported impressive numbers in the last few quarters, even as other airlines witnessed a slowdown. In the previous quarter, earnings and revenues came in flat. Despite falling short of the consensus estimate by $33 million, overall revenue was up almost 30% year-over-year, more than surpassing the industry average. The top line was mainly driven by a significantly improved passenger revenue figure, which jumped a mammoth 31%. We can expect the momentum garnered over the last few quarters to continue into Q2 as well.

Probable Factors:

• As mentioned above, passenger revenues were up significantly in the previous quarter. For the coming quarter, RASM is expected to come in around 3.5% higher than the same period last year. The company expects Q2 to be the best quarter in the year in terms of unit revenues, aided by maturing markets, stabilization of competitive capacity, and solid demand.
• The acquisition of Virgin America will continue to augment the company’s top line in its second quarter, owing to increased passenger revenues. Additionally, the shift of the Easter weekend to April is also expected to float the top line this time around.
• In May 2017, Alaska approved of an amendment to the existing eight-year pay-related contract with the pilots of Horizon Air, a subsidiary. This amendment is expected to increase labor costs significantly, consequently hurting the bottom line in Q2. Further, the adverse timing of maintenance events and a shift in costs from Q1 are bound to weigh on the bottom line. In this respect, CASM ex-fuel is expected to increase in the 3-6% range. Despite this, the company’s current guidance pegs non-fuel unit costs to drop year-over-year beginning early next quarter.
• Alaska’s expansion plans continue to remain encouraging. In May, the airline started direct flights connecting Philadelphia and Portland, in an effort to meet the growing demand during the summer. The flights have been operating on a daily basis from May 22 and will continue until Aug 26. Additionally, 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. Further, 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.

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