Alaska Air Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are in millions of dollars except per-share, operating-statistic and percentage data. Comparisons are with the corresponding 2013 periods unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,375 | $1,256 | $2,597 | $2,390 |
| Operating income | $263 | $174 | $405 | $239 |
| Net income | $165 | $104 | $259 | $141 |
| Diluted EPS | $1.19 | $0.74 | $1.86 | $0.99 |
| Operating margin | 19.1% | 13.9% | 15.6% | 10.0% |
| Net margin | 12.0% | 8.3% | 10.0% | 5.9% |
Margins are calculated from reported revenue and income. Q2 passenger revenue rose 8%; other revenue increased 22%, including Mileage Plan revenue and higher bag and ticket-change fees. For the first half, revenue rose 9%, while operating expenses increased 2%. Fuel expense fell 3% in Q2 and 5% for the half, but non-fuel expenses rose 6% and 5%, respectively. Adjusted net income excluding fuel-hedge mark-to-market effects was $157 million ($1.13 diluted EPS) in Q2 and $246 million ($1.77) for the half; these are non-GAAP measures.
Q2 consolidated CASM excluding fuel was 8.36¢, up 0.6%; first-half CASM excluding fuel was 8.50¢, up 0.5%. Q2 load factor was 86.3%, versus 86.4%; passenger revenue per ASM increased 2.6%. First-half load factor was 85.5%, versus 85.8%, and passenger revenue per ASM rose 2.2%.
Cash, liquidity and debt
- Operating cash flow was $635 million for the first half, versus $592 million. Capital expenditures were $350 million; cash flow less capital expenditures was $285 million, compared with $334 million in 2013.
- Cash and marketable securities totaled $1.510 billion at June 30, up from $1.330 billion at December 31, 2013. Cash and cash equivalents alone were $22 million. The company also had $200 million of undrawn credit facilities.
- Total debt was $859 million, including $114 million current and $745 million long-term, compared with $871 million at year-end. Shareholders’ equity was $2.200 billion. Debt-to-capital, including the present value of aircraft operating leases, was 32:68, versus 35:65 at year-end.
- Financing activities included $64 million of debt payments, $83 million of share repurchases and $34 million of dividends; the company also financed $51 million for three Q400 aircraft.
Material changes and management commentary
- Q2 pretax income increased to $265 million from $169 million. Management attributed the $96 million increase mainly to $119 million higher revenue, $12 million lower aircraft fuel expense and improved nonoperating results, partly offset by $42 million higher non-fuel operating costs.
- Mainline passenger revenue growth reflected capacity additions and higher PRASM. Regional revenue grew more slowly than capacity, with lower regional PRASM and yield; management said industry pricing changes affected revenue allocation between Mainline and Regional.
- Wages and benefits, incentive pay, contracted services and other expenses increased. Lower maintenance costs and airport-related costs partly offset those increases. Management cited higher labor rates, staffing for growth, IT investment and higher activity as cost drivers.
- Fuel-hedge accounting affected comparisons: Q2 included $13 million of pretax mark-to-market gains, versus $1 million of losses in Q2 2013; first-half results included $21 million of gains versus $13 million of losses. Management discontinued refining-margin hedging beginning in Q3; crude-oil call options remained in place.
Outlook, commitments and risks
- Management forecast Q3 capacity growth of about 8% and full-year growth of about 7%. Consolidated CASM excluding fuel was forecast to rise about 1% in Q3 and decline about 0.5% for full-year 2014. Mainline full-year CASM excluding fuel was expected to be roughly flat.
- Management expected competitive capacity in its markets to rise about 9% in Q3 and 12% in Q4, potentially pressuring yields and load factors. It expected Q3 unit costs to exceed 2013 levels and economic fuel cost per gallon to be lower year over year for the full year.
- The company expected to return at least $350 million to shareholders in 2014 through dividends and repurchases. A new $650 million repurchase authorization began after the prior $250 million program was completed in July; July repurchases totaled $87 million.
- Firm aircraft purchase commitments were reported at $2.780 billion, with operating lease commitments of $894 million. Planned 2014 property and equipment additions totaled $550 million, before potential option-aircraft spending.
- Credit facilities require at least $500 million of unrestricted cash and marketable securities; the company reported compliance. Certain credit-card agreements may require reserves if liquidity falls below $500 million or specified credit-rating conditions are met.
- Risks highlighted include fuel-price volatility, competition, economic conditions, operational disruptions, labor matters, market concentration, technology and regulatory changes. Flight-attendant negotiations remained in mediation. Management said routine litigation was not expected to materially affect results; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth and improved margins persist as capacity and competitor capacity increase, particularly given weaker regional unit revenue and management’s yield/load-factor caution.
- How full-year CASM-ex-fuel guidance, wage and incentive costs, and the expected fuel-cost trend compare with subsequent reported results.
- Cash generation after aircraft investment and shareholder returns, and compliance with the $500 million liquidity covenant and credit-card agreement thresholds.
- The size and timing of aircraft commitments, lease obligations and repurchases, including the effect of exercising aircraft options.
- The earnings impact and remaining exposure from fuel hedges, including the shift away from refining-margin swaps and the distinction between cash fuel costs and mark-to-market accounting.