Alaska Air Group, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012, for Alaska Air Group and subsidiaries Alaska Airlines and Horizon Air. Results are seasonal and the company cautions that the quarter is not necessarily indicative of full-year results.
Financial performance
- Revenue: $1,039.3 million, up 7.7% year over year. Passenger revenue rose 8.1%; traffic increased 6.5%, capacity 3.3%, and passenger revenue per available seat mile (PRASM) 4.7%.
- Profit: Operating income was $72.4 million versus $133.8 million; operating margin was approximately 7.0% versus 13.9%. Net income was $40.8 million versus $74.2 million; diluted EPS was $0.56 versus $1.01. Pretax income declined to $66.6 million from $120.7 million.
- Adjusted results: Excluding net mark-to-market fuel-hedge adjustments and 2011 fleet-transition costs, adjusted net income was $28.3 million, or $0.39 per diluted share, versus $29.5 million, or $0.40 per share. These are non-GAAP measures.
- Expenses and margins: Operating expenses rose 16.3% to $966.9 million, led by fuel expense, up $124.3 million to $318.8 million. Non-fuel expenses rose 1.8%. CASM excluding fuel and fleet-transition costs was 8.82 cents, approximately flat year over year.
- Cash flow: Operating cash flow was $183.3 million versus $118.8 million. Investing activities used $173.4 million and financing activities used $63.9 million. Cash and cash equivalents declined $54.0 million to $48.2 million.
- Liquidity and debt: Cash and marketable securities totaled $1,141.2 million at March 31, essentially unchanged from year-end. Total debt was $1,247.0 million, including $210.1 million current; long-term debt net of current portion was $1,036.9 million. The company had no borrowings under its two $100 million credit facilities and reported compliance with the $500 million minimum-liquidity covenant.
- Other metrics: Consolidated load factor increased 2.6 points to 84.9%. Economic fuel cost was $3.41 per gallon versus $2.87. Shareholders’ equity was $1,218.0 million.
Material changes versus Q1 2011
- Revenue improved by $74.1 million, principally on higher traffic and yield, but higher fuel expense and other operating costs more than offset the gain; pretax income fell $54.1 million.
- Raw fuel cost per gallon rose 13.0%, consumption rose 3.2%, and the company recognized substantially less benefit from unrealized fuel-hedge mark-to-market gains: $19.9 million in Q1 2012 versus $82.0 million in Q1 2011.
- Reported Q1 2011 results included $10.1 million of Horizon fleet-transition expense as it exited CRJ-700 operations; no such expense was reported in Q1 2012.
- Operating cash flow increased, while cash and marketable securities remained broadly stable. Debt declined following scheduled payments and a $22.1 million aircraft-debt prepayment.
- The company completed a two-for-one stock split in March 2012; historical share and per-share figures were recast. Q1 share repurchases totaled $8.8 million.
Outlook, commentary, and risks
- Management reported solid demand and advance bookings; April load factor was up 2.5 points year over year. For Q2, it forecast capacity growth of about 6% and expected load factors up 1.5 points in May and 2.5 points in June.
- Full-year 2012 capacity guidance was 31,100–31,600 million ASMs, approximately 6% growth. Full-year CASM excluding fuel and special items was forecast at 8.40–8.45 cents, down about 1.5%; Q2 guidance was 8.35–8.45 cents, approximately flat year over year.
- Management expected Q2 economic fuel cost per gallon to be about 6% above Q2 2011, but said full-year fuel cost could not be forecast with certainty because oil prices and refining margins are volatile.
- Expected 2012 capital expenditures were $505 million, with $450 million forecast for 2013. The company had firm commitments for 28 aircraft and additional purchase options. It expected to contribute $20–$30 million to pension plans during the remainder of 2012, although no minimum contribution was required.
- Management said existing liquidity, operating cash flows, aircraft financing capacity, and credit facilities should be sufficient for the foreseeable future. It identified fuel-price volatility, economic conditions, competition, operational disruptions, labor matters, indebtedness, revenue concentration, system reliance, and regulatory changes among key risks.
- Labor negotiations were ongoing with flight-attendant unions at Alaska and Horizon and Alaska’s IAM ramp-services and stock-clerk union. The company disclosed routine litigation that management did not expect to materially affect results. No material changes to previously disclosed risk factors were reported.
- Terminal 6 at LAX was placed into service in March. The company accounts for most project assets as its own during construction and expects the assets and related reimbursements to remain reflected on its balance sheet due to continuing involvement.
Important facts for investors to verify
- How much of the earnings decline reflects underlying operating performance versus the timing and accounting treatment of fuel hedges; compare GAAP results with the company’s non-GAAP adjusted figures.
- Whether fuel prices, refining margins, and hedge settlements track management’s Q2 assumptions, and how hedge coverage changes across forecast periods.
- Whether planned capacity growth, demand, load factors, and PRASM support the full-year outlook while non-fuel unit costs remain within guidance.
- Funding needs for aircraft deliveries, LAX Terminal 6, debt maturities, and pension contributions, including continued compliance with credit-facility liquidity covenants.
- Outcomes of labor negotiations and any changes in operational, legal, or other disclosed risks.