Business context and reporting period
Alaska Air Group, Inc. (Alaska Airlines and Horizon Air) reported unaudited results for the three and nine months ended September 30, 2015. Amounts below are in millions of dollars unless noted. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,515 | $1,465 | $4,221 | $4,062 |
| Operating income | $433 | $316 | $1,043 | $720 |
| Net income | $274 | $198 | $657 | $457 |
| Diluted EPS | $2.14 | $1.45 | $5.05 | $3.31 |
| Operating margin (calculated) | 28.6% | 21.6% | 24.7% | 17.7% |
- Q3 revenue rose 3%, while operating income increased 37% and net income increased 38% year over year. For the first nine months, revenue rose 4%, operating income 45%, and net income 44%.
- Q3 fuel expense fell $149 (38%) to $245; non-fuel expenses rose $82 (11%) to $837. For the nine-month period, fuel expense declined $371 (33%), while non-fuel expenses increased 9%.
- Q3 consolidated CASM excluding fuel rose 2.5% to 8.07 cents; it declined 0.5% to 8.24 cents for the first nine months. Q3 capacity grew 8.2%, while load factor slipped 0.4 percentage points and passenger revenue per ASM fell 4.0%.
Cash flow, liquidity and debt
- Operating cash flow was $1,229 for the first nine months, versus $892 in 2014. Investing used $727, including $668 of property and equipment additions; financing used $521.
- At September 30, cash and marketable securities totaled $1,258, up from $1,217 at year-end 2014. Cash and cash equivalents alone were $88.
- Total debt was $710, including $117 current and $593 long-term, down from $803 total at year-end 2014. Shareholders’ equity was $2,365. The company reported $200 of bank credit facilities with no borrowings and said it complied with their $500 minimum unrestricted liquidity covenant.
- During the first nine months, the company repaid $93 of debt, repurchased $381 of shares, and paid $78 in dividends. Capital expenditures were $668. Contractual obligations totaled $5,869, including $2,646 of aircraft purchase commitments and $1,473 of operating lease commitments.
Material changes versus the prior comparable period
- Management attributed the record Q3 pretax income of $437, versus $316 a year earlier, principally to $149 lower fuel expense and $50 higher revenue, partly offset by $82 higher non-fuel operating expenses.
- Growth drove higher passenger volumes and revenue, but competitive capacity and the company’s own expansion pressured fares and unit revenue. Q3 mainline capacity increased 7.8%, while mainline PRASM fell 4.8%.
- Labor and benefit costs rose with staffing growth, higher wage rates, and increased pension expense. Maintenance, contracted services, food and beverage, and other operating costs also increased.
- Share repurchases reduced outstanding shares; the May 2014 $650 repurchase program was completed in October 2015, and the company began a new $1 billion authorization in October.
Outlook, commentary and risks
- Management expected a record earnings year in 2015. It forecast Q4 capacity growth of approximately 12.5%, full-year capacity growth of approximately 10.5%, and CASM excluding fuel declines of approximately 1.0% in Q4 and 0.6% for the year.
- Management expected competitive capacity to increase approximately 7% in Q4 2015, 15% in Q1 2016, and 8% in Q2 2016, creating continued pressure on unit revenues. It expected at least $600 of 2015 shareholder returns through dividends and repurchases.
- Full-year cost expectations included maintenance expense 5%–10% above 2014, contracted services 10%–15% higher, food and beverage expense approximately 20% higher, and other operating expenses 15%–20% higher.
- Fuel prices remain volatile. The company held crude-oil call options covering 259 million gallons from October 2015 through March 2017; hedge outcomes and fuel prices could affect results. Other stated risks include competition, economic conditions, operational disruptions, labor matters, reliance on automated systems, and regulatory changes.
- Aircraft commitments included 71 Boeing 737s and two Q400s, with deliveries through 2022. The company also announced a $41, ten-year University of Washington sponsorship. Credit-card agreements could require reserves if specified credit-rating or liquidity triggers are breached, including cash and marketable securities falling below $500.
- Management said routine litigation was not expected to materially affect results; no material changes to previously disclosed risk factors or market risks were reported. Disclosure controls were judged effective.
Important facts for investors to verify
- Whether capacity growth and competitive supply continue to reduce yield, PRASM, and total unit revenue.
- Whether forecast fuel savings persist, and the realized cost and coverage of fuel hedges.
- Whether non-fuel cost growth, especially labor, maintenance, and contracted services, remains consistent with guidance.
- How aircraft commitments and planned capital spending affect liquidity alongside dividends and share repurchases.
- Compliance with the $500 minimum liquidity covenant and any credit-card agreement reserve triggers.