Alaska Air Group, Inc. — 2010 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. The unaudited consolidated results include Alaska Airlines and Horizon Air. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,067.5 | $967.4 | $2,873.8 | $2,553.7 |
| Operating income | $216.4 | $159.8 | $352.3 | $214.6 |
| Operating margin | 20.3% | 16.5% | 12.3% | 8.4% |
| Net income | $122.4 | $87.6 | $186.3 | $97.5 |
| Diluted EPS | $3.32 | $2.46 | $5.08 | $2.69 |
Q3 revenue rose 10.3% and net income rose 39.7% year over year. Nine-month revenue increased 12.5% and net income increased 91.1%. Q3 pretax income was $198.2 million versus $142.8 million; nine-month pretax income was $302.4 million versus $160.9 million.
For the first nine months, operating cash flow was $506.4 million, up from $305.4 million. Investing activities used $299.0 million, including $153.9 million of property and equipment additions; financing activities used $242.4 million. Cash and cash equivalents ended at $129.2 million, compared with $164.2 million at year-end 2009.
At September 30, cash and marketable securities totaled $1,317.7 million, or 35% of trailing-twelve-month revenue. Total debt was $1,623.9 million, including $233.8 million current and $1,390.1 million long-term, versus $1,855.2 million at December 31, 2009. Shareholders’ equity was $1,073.5 million. Current assets of $1,768.3 million exceeded current liabilities of $1,472.0 million by $296.3 million. The company reported compliance with the $500 million minimum unrestricted liquidity covenant on its credit facilities.
Material changes and operating trends
- Q3 consolidated unit revenue increased 4%, with higher load factors at both airlines. Alaska mainline passenger revenue rose 11.0%, supported by 7.3% capacity growth and 3.5% higher PRASM; its load factor improved 3.0 points to 85.3%.
- Fuel remained a major cost pressure. Q3 economic fuel cost averaged $2.37 per gallon, up from $2.15; reported consolidated aircraft fuel expense increased to $220.9 million from $199.5 million. Nine-month consolidated fuel expense rose to $683.2 million from $485.6 million.
- Alaska’s Q3 operating income increased to $201.5 million from $136.7 million, while Horizon’s declined to $15.8 million from $23.7 million. Horizon’s pretax income fell to $11.7 million from $19.1 million, principally reflecting restructuring and CRJ-700 transition charges.
- Alaska’s Q3 mainline CASM excluding fuel and specified special items fell 4.7%. Horizon’s comparable CASM, excluding fuel and specified transition costs, increased 3.2% in Q3.
- The company recorded $9.8 million of Q3 Horizon restructuring and CRJ-700 fleet transition costs; nine-month charges were $13.2 million. Alaska’s 2009 comparison included $35.8 million of pilot contract transition costs. Fuel hedge mark-to-market movements also affected comparability: Q3 included net gains of $16.7 million, while the first nine months included net losses of $33.4 million.
Liquidity, outlook, risks, and contingencies
- Management said existing liquidity, expected operating cash flow, aircraft financing capacity, credit lines, and other sources should fund operations for the foreseeable future. Its plan was to reduce cash and marketable securities from 35% to 25%–30% of revenue over two years through debt repayment, share repurchases, pension funding, or a combination.
- The company prepaid $115.5 million of aircraft debt in the first nine months and another $53.7 million after quarter-end; it anticipated completing a $200 million debt-prepayment plan in early 2011. It repurchased $31.2 million of stock during the first nine months. A new $50 million repurchase authorization had $45.0 million remaining at September 30.
- Management forecast Q4 2010 capacity growth of about 7%. Advance-booked load factors were up on average for November and slightly down for December versus the prior year. Alaska forecast Q4 mainline CASM excluding fuel and special items down approximately 4%–6%, and about 4% lower for full-year 2010. Horizon forecast comparable Q4 costs flat to up 2%, and full-year costs relatively flat.
- Management expected economic fuel expense to be higher for the remainder of 2010 than in 2009, reflecting higher fuel prices and consumption. Fuel prices are volatile; the company hedged through crude-oil call options and refining-margin swaps. A 10% crude-price increase or decrease was estimated to change the fair value of the crude-oil hedge portfolio by approximately $39.4 million or $31.8 million, respectively.
- Horizon planned to transition to an all-Q400 fleet. It had 13 CRJ-700 aircraft remaining in its operating fleet at quarter-end and a letter of intent to place eight with a third party in the first half of 2011; further transition charges were possible. Horizon also outsourced remaining heavy maintenance, eliminating about 100 positions. A tentative Horizon pilot agreement, if ratified, was expected to result in a Q4 charge.
- The company had firm orders for 21 aircraft requiring approximately $537 million in future payments, and total listed contractual obligations of $4,018.6 million. Pension contributions are excluded from that total; management cited a possible annual range of $45 million–$75 million based on historical funding practice.
- Routine litigation was not expected by management to materially affect results. The SEC was conducting an inquiry into trading in Puget Energy securities by an investment firm; CEO William Ayer, a PSE director, and the company were cooperating voluntarily. Management stated that no material changes had occurred to the previously disclosed risk factors. Key risks include fuel-price volatility, indebtedness, competition, labor matters, operational disruption, and concentrated markets.
Important facts for investors to verify
- Whether revenue and load-factor growth persist as capacity expands, particularly given the softer December booking comparison.
- Fuel prices, hedge settlements and mark-to-market effects, and their impact on cash fuel costs and reported earnings.
- Progress and costs of Horizon’s CRJ-700 transition, Q400 delivery acceleration, and all-CPA change beginning January 2011.
- Execution of the planned debt prepayments, liquidity-reduction strategy, share repurchases, aircraft spending, and pension funding.
- Potential costs from the Horizon pilot agreement and any further charges related to remaining CRJ-700 or Q200 lease arrangements.
- The status and any developments in the SEC inquiry and other legal matters; management’s stated assessment is not a guarantee of outcome.
Management’s adjusted earnings and unit-cost measures are non-GAAP measures; the filing cautions that excluded items should not necessarily be considered nonrecurring, infrequent, or unusual.