Business Context and Reporting Period
Alaska Air Group, Inc. (Alaska Airlines and Horizon Air) filed this unaudited Form 10-Q for the three months ended March 31, 2011, with comparable results for the first quarter of 2010. Effective January 1, 2011, Horizon shifted to a capacity-purchase model in which Alaska bought all of Horizon’s capacity; the resulting segment revenue and expense reclassifications did not affect consolidated results.
Financial Performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $965.2 million | $829.6 million | +16.3% |
| Operating income | $133.8 million | $25.7 million | +$108.1 million |
| Net income | $74.2 million | $5.3 million | +$68.9 million |
| Diluted EPS | $2.01 | $0.15 | +$1.86 |
| Operating expenses | $831.4 million | $803.9 million | +3.4% |
| Operating cash flow | $118.8 million | $54.5 million | +$64.3 million |
Passenger revenue rose 16.8%, supported by stronger ticket yield and load factors. Consolidated load factor increased 2.8 percentage points to 82.3%; revenue passenger miles grew 15.9% on 12.0% capacity growth. Reported fuel expense was $194.5 million versus $207.3 million, but included a $94.5 million hedge gain in Q1 2011. Economic fuel expense, a company-defined cash-oriented measure, increased 41.9% to $276.5 million, or $2.87 per gallon, from $194.8 million, or $2.26 per gallon.
Cash and marketable securities were $1,042.5 million at quarter-end, down from $1,208.2 million at December 31, 2010. Total debt was $1,445.0 million, including $169.8 million current and $1,275.2 million long-term, versus $1,534.2 million at year-end. Shareholders’ equity was $1,170.1 million. Investing activities used $33.8 million and financing activities used $114.3 million; capital expenditures were $149.1 million.
Material Changes and Unusual Items
- Management attributed the pretax income increase, to $120.7 million from $10.2 million, primarily to $135.6 million of additional operating revenue, partly offset by higher economic fuel and other operating costs.
- Q1 2011 net income included an $82.0 million pretax fuel-hedge mark-to-market gain and a $10.1 million pretax Horizon CRJ-700 fleet transition charge. Q1 2010 included a $12.5 million pretax hedge mark-to-market loss. Excluding these items, the company reported adjusted net income of $29.5 million, or $0.80 diluted EPS, versus $13.1 million, or $0.36, in 2010; these are non-GAAP measures.
- The company repaid $89.2 million of long-term debt, including $51.8 million to prepay two aircraft loans, and repurchased $26.3 million of stock. The $50 million repurchase authorization was completed in early April.
- The first-quarter CRJ-700 transition charge covered four aircraft. Management expected another $18–$20 million charge in Q2 for removal of the remaining nine aircraft. Potential future charges related to 16 subleased Q200 aircraft could not be reasonably estimated.
Guidance, Outlook, and Risks
- Management expected Q2 2011 economic fuel cost of approximately $3.30 per gallon, versus $2.87 in Q1. It cited fuel prices as its largest concern, while stating that fuel-efficient aircraft and hedges helped manage exposure.
- Q2 advance booked load factors were 2–3 points above the prior year on expected capacity growth of 7%. Management forecast consolidated non-fuel, ex-special-item cost per ASM down approximately 3–4% in Q2 and 4% for full-year 2011; the corresponding mainline forecasts were down 3–4% and 3%.
- Expected 2011 capital expenditures were $385 million, including $330 million aircraft-related; 2012 estimates were $370 million. The company had firm orders for 29 aircraft requiring approximately $995.8 million in future payments, with additional purchase options.
- Management believed liquidity, operating cash generation, and other sources would be sufficient for the foreseeable future. The two $100 million credit facilities had no outstanding borrowings; the company reported compliance with their $500 million minimum unrestricted cash and securities covenant.
- Risks highlighted include volatile fuel costs, competition, economic conditions, significant indebtedness, labor and operational disruptions, market concentration, safety incidents, and regulatory changes. Routine litigation was not expected to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- How much of reported earnings came from fuel-hedge mark-to-market gains, and how actual settled hedge benefits compare with the company’s economic fuel cost measure.
- Whether fuel costs, load factors, and capacity trends matched the Q2 and full-year outlook, including the expected $3.30 per-gallon Q2 fuel cost.
- The timing and final cost of the CRJ-700 transition, and any developments affecting Q200 subleases.
- Aircraft purchase funding, capital spending, and liquidity after debt repayment and share repurchases; also review aircraft lease and other contractual commitments.
- Execution and reimbursement of the LAX Terminal 6 project. The filing estimated the company’s non-reimbursable share at approximately $25 million and stated that a funding agreement was signed April 19, 2011.