Alaska Air Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Amounts are in millions except per-share and operating-statistic data. Interim results are unaudited and may not indicate full-year performance, in part because air travel is seasonal.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Operating revenue | $1,269 | $1,222 | Up 4%; passenger revenue rose 5% to $1,087 |
| Operating income | $238 | $141 | Operating margin approximately 18.8%, versus 11.5% |
| Net income | $149 | $94 | Net margin approximately 11.7%, versus 7.7% |
| Diluted EPS | $1.12 | $0.68 | Adjusted EPS was $1.12 versus $0.64, excluding prior-year fuel-hedge mark-to-market adjustments |
| Operating cash flow | $514 | $242 | Increase attributed mainly to lower fuel prices, a $65 tax refund/collection, and higher passenger revenue |
| Capital additions | $279 | $93 | Primarily aircraft and purchase deposits |
| Cash and marketable securities | $1,312 | $1,217 at Dec. 31, 2014 | Cash and cash equivalents alone were $51 at quarter-end |
| Total debt | $768 | $803 at Dec. 31, 2014 | Long-term debt, excluding current portion, was $650 |
Operating expenses declined 5% to $1,031: fuel expense fell $123, or 34%, while non-fuel expense rose 10% to $796. Economic fuel cost was $1.98 per gallon, down from $3.32. Consolidated CASM excluding fuel decreased 0.6% to 8.61 cents. The filing reports $235 of operating cash flow less $279 of property additions? No: reported operating cash flow was $514 and property additions were $279, equivalent to approximately $235 before other investing and financing activity.
Business and operating trends
- Capacity (ASMs) increased 10.8% and traffic (RPMs) increased 9.1%; load factor declined 1.3 points to 83.4%.
- Passenger yield fell 4.2%, PRASM fell 5.7%, and RASM fell 6.4%. Management attributed yield and load-factor pressure primarily to increased competition and some routes that had not matured.
- Mainline passenger revenue rose 6% to $901, while regional passenger revenue was flat at $186. Other revenue was $159.
- Wages and benefits rose $34, or 13%, reflecting higher staffing and the new flight-attendant contract, among other factors. Maintenance expense rose 24% to $63.
- Management cited strong on-time performance: 85.0% of Alaska flights and 86.2% of Horizon flights arrived on time in the quarter.
Liquidity, debt, and commitments
- Current assets were $1,776 versus current liabilities of $1,880; the resulting current ratio was approximately 0.94. Liquidity also included $1,312 of cash and marketable securities and $200 of unused credit facilities.
- The company had no borrowings under its two $100 credit facilities and was in compliance with their $500 minimum unrestricted cash and marketable-securities covenant. It said it had no immediate plans to draw on them.
- Q1 financing included $35 of debt payments, $102 of share repurchases, and $26 of dividends. The quarterly dividend declared and paid was $0.20 per share.
- Contractual obligations totaled $5,333, including $2,950 of aircraft purchase commitments and $1,002 of operating lease commitments. The company had firm commitments for 81 aircraft and options for additional aircraft.
- The company reported investment-grade ratings of BBB- from Fitch and Standard & Poor’s. It also noted that certain credit-card agreements could require reserves if specified credit-rating or liquidity thresholds were breached.
Outlook, risks, and unusual items
- Management forecast Q2 2015 capacity growth of approximately 10.5% and CASM excluding fuel roughly flat year over year. For full-year 2015, it forecast capacity growth of approximately 10.0% and CASM excluding fuel down approximately 0.5%.
- Management expected competitive capacity in its markets to rise approximately 15% in Q2, potentially pressuring yields and load factors. It expected full-year aircraft maintenance expense to be 10%–15% above 2014.
- Management expected at least $550 of 2015 shareholder returns through dividends and repurchases. It estimated 2015 property and equipment additions of $735.
- Management described summer demand as strong and cited low fuel costs, its cost structure, and service investments. These are forward-looking statements, not guarantees.
- Fuel remains a significant exposure. Outstanding crude-oil call options covered 256 million gallons for settlement from April 2015 through September 2016; management noted that fuel prices and hedge accounting can make reported fuel expense volatile.
- Principal disclosed risks include competition, fuel-price volatility, economic conditions, operational disruptions, labor matters, reliance on key markets and automated systems, and regulatory changes. Management reported routine litigation and did not expect its outcome to materially affect results; no material changes to previously disclosed risk factors were reported.
- Q1 2014 included an $11 gain from sales of equity securities and an $8 pretax unrealized fuel-hedge gain; the latter was excluded from management’s adjusted comparison. The filing states that non-GAAP adjusted measures are used by management but should not be assumed to be nonrecurring.
Important facts for investors to verify
- Whether capacity growth and competitive expansion translate into sustained pressure on yield, PRASM, and load factor.
- Whether lower fuel prices persist and how hedge settlements and premiums affect cash fuel costs and reported results.
- Whether non-fuel cost targets are met, given higher labor, maintenance, and fleet-growth costs.
- How aircraft purchases, leases, and planned shareholder returns affect liquidity and debt while maintaining the $500 minimum-liquidity covenant.
- Whether future cash taxes rise as accelerated tax depreciation reverses, and the eventual effect of adopting the new revenue-recognition standard.