Business context and reporting period
Alaska Air Group, Inc. (Alaska Airlines and Horizon Air) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Unless noted otherwise, financial amounts are in millions of dollars. The filing cautions that seasonal travel demand, fuel-price volatility, economic conditions and other factors mean interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,437 | $1,375 | $2,706 | $2,597 |
| Operating income | $372 | $263 | $610 | $405 |
| Net income | $234 | $165 | $383 | $259 |
| Diluted EPS | $1.79 | $1.19 | $2.91 | $1.86 |
| Operating margin | 25.9% | 19.1% | 22.5% | 15.6% |
| Net margin | 16.3% | 12.0% | 14.2% | 10.0% |
For Q2, revenue rose 5%, operating income 41% and net income 42% year over year. For the first half, revenue rose 4% and net income 48%. Lower fuel expense was the largest earnings driver: Q2 fuel expense fell $99 (28%) and first-half expense fell $222 (31%). Non-fuel costs increased 7% in Q2 and 9% in the first half.
Q2 capacity (ASMs) grew 10.7%, while passenger revenue grew 5%. Consolidated load factor declined 1.4 percentage points to 84.9%, yield fell 3.8%, and PRASM fell 5.3%. Consolidated CASM excluding fuel was 8.08 cents, down 3.5%. Economic fuel cost per gallon declined 33.8% to $2.12. Reported earnings included fuel-hedge mark-to-market gains; excluding those adjustments, adjusted Q2 net income was $230 and diluted EPS $1.76, versus $157 and $1.13 a year earlier. These are company-defined non-GAAP measures.
Six-month operating cash flow was $889, versus $635. Investing cash outflow was $594, including $559 of property and equipment additions; financing cash outflow was $357, including $262 of share repurchases, $52 of dividends and $58 of debt payments. Cash and marketable securities totaled $1,192 at June 30, compared with $1,217 at December 31, 2014; cash alone was $45. Total debt was $745, down from $803, and shareholders’ equity was $2,219. The company reported $200 of undrawn credit facilities and stated it had no immediate borrowing plans. Its facilities require at least $500 of unrestricted cash and marketable securities; the company reported compliance.
Q2 dividend was $0.20 per share; first-half dividends were $0.40 per share. The company repurchased 2.48 million shares for $160 in Q2 and 4.06 million shares for $262 in the first half.
Material changes and management commentary
- Management attributed the $111 increase in Q2 pretax income to $99 lower fuel expense and $62 higher revenue, partly offset by $52 higher non-fuel operating expenses. Revenue growth reflected capacity expansion, while increased competition and newer, less-mature routes pressured yields and load factors.
- Wages and benefits increased 9% in Q2 and 10% year to date, reflecting workforce growth, labor agreements and higher pension costs. Maintenance expense benefited in Q2 from $10 of vendor credits for prior B737 work; management cited higher underlying engine and airframe maintenance activity.
- The company announced 18 new routes for the second half of 2015. It amended its SkyWest agreement to replace eight CRJ-700 aircraft with eight E-175 aircraft during 2016.
- At June 30, firm aircraft purchase commitments totaled $2,735; the company had orders for 76 B737s and two Q400s, plus options for additional aircraft. Total disclosed contractual obligations were $5,774, including debt, leases, aircraft purchases, interest and other obligations.
Outlook, risks and contingencies
For Q3 2015, management forecast consolidated capacity growth of approximately 8% and CASM excluding fuel of 8.28–8.33 cents, about 5.5% above Q3 2014. For full-year 2015, it forecast capacity growth of approximately 10% and CASM excluding fuel of 8.29–8.34 cents, about 0.5% lower year over year. Management expected competitive capacity to pressure yields and load factors. It also expected full-year maintenance expense to rise 5%–10%, contracted services 10%–15%, and food and beverage expense about 20%; wages and benefits were expected to increase.
Fuel remains a significant exposure. At June 30, fuel call options covered 259 million gallons through December 2016; management forecast economic fuel cost per gallon to be lower in Q3 and for the full year than in the comparable 2014 periods. Other disclosed risks include competition, operational disruptions, labor matters, concentration in key markets, economic conditions, reliance on automated systems and regulatory changes. Credit-card agreements could require reserves if specified credit-rating or liquidity thresholds are breached; no reserve was then required. Deferred tax liabilities may reverse into higher future cash taxes. Routine litigation was not expected by management to materially affect results. The company reported no material change to its previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and earnings remain resilient as competitive capacity pressures yields, load factors and PRASM.
- How fuel prices, refining margins, fuel-option coverage and hedge settlements affect cash fuel costs and reported results.
- Whether forecast capacity growth and unit-cost targets are achieved, particularly given labor, maintenance and service-cost increases.
- Funding and returns associated with the $2,735 aircraft commitments and other contractual obligations, alongside the planned shareholder distributions.
- Liquidity headroom against the $500 minimum covenant and the credit-card agreement thresholds; cash and marketable securities were $1,192 at quarter-end.