Business context and reporting period
Alaska Air Group, Inc. (Alaska Airlines and Horizon Air) reported unaudited results for the quarter and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,494 | $1,437 | $2,841 | $2,706 |
| Operating income | $418 | $372 | $708 | $610 |
| Net income | $260 | $234 | $444 | $383 |
| Diluted EPS | $2.10 | $1.79 | $3.56 | $2.91 |
| Operating margin | 28.0% | 25.9% | 24.9% | 22.5% |
- Q2 revenue rose 4% and operating income rose 12%; six-month revenue rose 5% and operating income rose 16%. Q2 net margin was 17.4% versus 16.3%; six-month net margin was 15.6% versus 14.2%.
- Q2 fuel expense declined $60 million year over year, while non-fuel expenses rose $71 million and merger costs were $14 million. For the first half, fuel expense fell $128 million and non-fuel expenses increased $151 million.
- Passenger revenue increased, but unit revenue weakened: Q2 PRASM declined 7.7% and six-month PRASM declined 7.7%. Mainline load factor was flat at 84.9% in Q2; regional load factor fell 2.5 percentage points to 79.3%.
- Cash from operations was $899 million for the first half, versus $889 million. Capital additions were $340 million, implying operating cash flow less capital additions of $559 million, versus $330 million in the prior-year period.
- At June 30, cash and marketable securities totaled $1.607 billion, up from $1.328 billion at year-end. Total debt was $626 million, including $117 million current; long-term debt excluding current maturities was $509 million. Shareholders’ equity was $2.627 billion.
- First-half financing uses included $193 million of share repurchases, $68 million of dividends and $57 million of debt payments. The quarterly dividend was $0.275 per share.
Material changes, outlook and risks
- Alaska agreed to acquire Virgin America for $57 per share, approximately $2.6 billion in cash, and expects to assume certain debt and lease obligations. The deal remained subject to regulatory approval; management expected a fourth-quarter 2016 close. The companies agreed not to close before September 30 unless the DOJ completed its review sooner. Alaska planned to fund the transaction with cash and secured debt, and said it had financing terms in principle.
- Management forecast 2016 system-wide capacity growth of approximately 8.5%. Consolidated Q3 capacity guidance was 11.15–11.20 billion ASMs, up about 8%; full-year guidance was 43.25–43.35 billion ASMs. Forecast consolidated CASM excluding fuel and special items was 8.28–8.33 cents for Q3 and 8.25–8.30 cents for the full year.
- Management expected higher wages and benefits, maintenance and contracted services for the year, while expecting lower economic fuel cost per gallon than in 2015. It expected maintenance expense to be 3–4% higher than 2015. Competitive capacity was expected to rise about 13% in Q3 and 12% in Q4 in its markets.
- Firm aircraft purchase commitments totaled $3.346 billion, excluding options; projected 2016 property and equipment additions were $695 million. These obligations, and other commitments, do not include the pending Virgin America merger.
- Fuel-price volatility, competitive capacity and fare actions, execution and financing of the Virgin America transaction, operational disruption, labor and personnel matters, and regulatory changes are among the disclosed risks. Existing credit-card agreements could require reserves if specified credit-rating or liquidity triggers are met; no reserve was then required. The company reported compliance with the $500 million minimum liquidity covenant on its credit facilities.
- The company paused share repurchases in Q2 ahead of the acquisition. It reported $14 million of merger costs for the first half. The filing states routine litigation was not expected to materially affect financial position or results; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether regulators approve the Virgin America acquisition, its final closing date, financing mix, assumed obligations and total integration costs.
- Whether Alaska can sustain earnings as capacity grows amid falling PRASM and increased competition, particularly in Seattle and regional markets.
- Actual fuel prices and hedge outcomes versus management’s expectations, and the effect on margins and cash generation.
- Execution of aircraft investment and purchase commitments, the effect on liquidity and debt, and any changes to planned capital spending.
- Trends in wages, medical costs, maintenance and other non-fuel expenses relative to the company’s CASM guidance.