Alaska Air Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparatives are for the three months ended March 31, 2018 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and financial performance
Air Group operates Alaska (including Virgin America) and Horizon, with regional flying also provided by third-party carriers. First-quarter results reflect seasonal air-travel demand, merger integration activity, and significant winter weather disruptions.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $1,876 | $1,832 | Up 2% |
| Operating expenses | $1,851 | $1,803 | Up 3% |
| Operating income | $25 | $29 | Down $4 |
| Operating margin | 1.3% | 1.6% | Down 0.3 percentage points |
| Pretax income | $6 | $6 | Flat |
| GAAP net income / diluted EPS | $4 / $0.03 | $4 / $0.03 | Flat |
| Adjusted net income / diluted EPS | $21 / $0.17 | $18 / $0.14 | Up |
| Operating cash flow | $468 | $306 | Up $162 |
Adjusted results exclude merger-related costs, fuel-hedge mark-to-market adjustments and, in 2018, other special items. Adjusted net income is a non-GAAP measure. Consolidated CASM excluding fuel and special items rose 2.8% to 9.06 cents; RASM rose 2.2% to 12.10 cents.
Financial position, liquidity and cash flow
- At March 31, 2019, cash and marketable securities were $1.436 billion, versus $1.236 billion at year-end 2018. Cash, cash equivalents and restricted cash totaled $225 million.
- Total debt was $1.964 billion, including $300 million current and $1.664 billion long-term. The company repaid $393 million of debt, including a $320 million prepayment, and raised $254 million in secured aircraft financing during the quarter.
- Operating lease assets and liabilities recognized under the new lease standard were $1.715 billion and $1.718 billion, respectively. The company reported adjusted debt-to-capitalization, including certain lease obligations, of 47%.
- Investing cash outflow was $186 million, including $115 million of property and equipment additions. Financing cash outflow was $171 million, including debt payments, $43 million of dividends and $13 million of repurchases.
- Credit facilities had stated aggregate availability of $516 million in the debt note; the MD&A describes $400 million of combined lines with no outstanding borrowings. Facilities require at least $500 million of unrestricted cash and marketable securities; the company reported covenant compliance.
Material changes and management commentary
- Revenue increased $44 million, while operating expenses rose $48 million. Fuel expense increased $11 million and non-fuel expenses excluding special items increased $42 million; merger-related costs were $26 million versus $6 million a year earlier.
- Winter storms in the Pacific Northwest caused about 1,100 flight cancellations over ten days. Management estimated a $15 million revenue impact and $5 million of added operating costs. On-time performance was 76.9% for Mainline and 77.0% for Regional.
- Mainline pretax profit fell to $49 million from $69 million; Regional’s pretax loss narrowed to $35 million from $49 million; Horizon pretax profit increased to $12 million from $3 million.
- Passenger revenue increased 2%, with yield up 1.5%. Cargo and other revenue rose 22%, primarily from new freight contracts. CASM excluding fuel and special items increased 2.8%, reflecting higher labor, maintenance, aircraft rent and depreciation costs.
- Cash from operations improved largely because of greater increases in air traffic liability and deferred revenue and the timing of expense payments. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Outlook, commitments and risks
- Management expected combined network capacity growth of approximately 2% in 2019 and 3%–4% in 2020. Expected capital expenditures were $750 million in each of 2019 and 2020.
- Management projected $200 million of annual incremental revenue from initiatives: Saver Fare (over $100 million in 2019), other initiatives (about $50 million in 2019), and higher checked-bag fees (about $50 million). These are management expectations, not reported results.
- Integration of Boeing and Airbus operations and realization of merger synergies remained priorities. The company also described investments in Wi-Fi, onboard products, lounges, airport facilities and Airbus cabin retrofits.
- Fuel prices, competition, labor, operational disruptions, economic conditions, revenue concentration, integration and regulatory changes were identified as risks. Fuel hedges covered approximately 47% of expected 2019 fuel requirements.
- A court entered approximately $78 million in judgment against Alaska and Virgin America in a flight-attendant wage-and-hour class action. The company is appealing and accrued no loss, citing its belief that the claims lack merit. The outcome could create a material exposure.
- The company had $1.934 billion of aircraft purchase commitments and $1.833 billion of capacity-purchase-agreement commitments in the disclosed schedule. It also had firm aircraft orders, cancelable Airbus commitments and additional purchase options.
- The Boeing 737 MAX delivery schedule was not expected by management to be affected by then-recent events and investigations. This was a forward-looking statement, subject to change.
Most important facts for investors to verify
- Whether the company’s revenue initiatives, capacity plans and merger-synergy expectations were achieved, and how they affected unit revenue and costs.
- The status and potential cash or earnings impact of the approximately $78 million class-action judgment and appeal; no loss was accrued at quarter-end.
- Whether aircraft delivery plans, including MAX aircraft, and planned capital spending changed after the filing.
- The basis for the different disclosed credit-line figures ($516 million aggregate facility availability versus $400 million described in MD&A), and continued compliance with liquidity covenants.
- How recurring operating performance compares with adjusted results, given GAAP net income of $4 million and $26 million of merger-related costs in the quarter.