How is Alaska Airlines Shaping UP?

by Trefis Team
Alaska Air Group
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Alaska Airlines (NYSE:ALK): Alaska Airlines reported its third quarter results recently. Revenues came in a little higher at $2.21 billion. With costs increasing due to rising fuel prices, and employee pay rising, profits decreased by 16% year-on-year. Net profit came in at $217 million, and earnings per share came in at $1.75, again down 16% y-o-y.

We currently have a price estimate of $70 per share, which is 12% higher than the market price. You can use our interactive dashboard Q3 Outlook For Alaska Airlines to modify key drivers and visualize the impact on ALK’s price estimate.

With rising fuel prices weighing down earnings, management has decided to take key steps to reduce costs, and increase revenues, by increasing baggage fees, during the quarter. With improved routes, the airline should see an increase in revenue during the fourth quarter, as improved routes increase seat efficiency. In addition, the carrier plans to overhaul its seating plans to increase premium category seats in its Airbus fleet.

RASM (Revenue per average seat mile) for the quarter rose by 4% as capacity rose by 4.8%. The airline continues to run less efficiently than it should, this meant that higher operating costs weighed down earnings. Something the airline can ill-afford considering the rising fuel costs.  A number of key routes have been especially tepid in the quarter, e.g. Hawaii, this has meant that ticket prices did not reflect price levels that they should have.  Wages rising by 15%  has been a key factor in the current quarter for earnings coming in lower, and the trend is expected to continue throughout next year as labor markets continue to be tight.

Alaska continues to work on integrating Virgin Airlines which it acquired in 2016,  due to the differences in fleets, and therefore the need to re-train staff has meant that the integration has been a costly affair. The airline for the quarter continues to make key changes to off-set fuel costs, but the off-sets will have only partial effect going forward. Management has re-iterated that it plans to tighten up operations and get back to an historical profitability trend during the coming quarters.



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