Alaska Air Group, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2011, covering Alaska Airlines, Horizon Air, and parent-company activities. Effective January 1, 2011, Horizon sold all capacity to Alaska under a capacity purchase agreement; this changed segment presentation but did not affect consolidated results.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Operating revenue | $1,110.2M | $976.2M | $2,075.4M | $1,805.8M |
| Operating income | $57.8M | $109.7M | $191.6M | $135.4M |
| Net income | $28.8M | $58.6M | $103.0M | $63.9M |
| Diluted EPS | $0.78 | $1.60 | $2.80 | $1.74 |
| Operating margin | 5.2% | 11.2% | 9.2% | 7.5% |
- Q2 revenue rose 13.7%, driven by passenger revenue growth; operating expenses increased 21.5%, primarily from fuel and fleet-transition charges. Q2 operating margin compressed year over year.
- First-half operating cash flow was $368.7M versus $333.6M. Investing cash outflow was $241.9M and financing cash outflow was $149.3M. Cash and cash equivalents declined $22.5M to $67.0M; cash and marketable securities totaled $1,153.5M.
- At June 30, total long-term debt was $1,408.8M, including $253.9M current and $1,154.9M long-term. Shareholders’ equity was $1,206.5M. The company reported $200M of undrawn credit facilities and compliance with their $500M minimum unrestricted liquidity covenant.
- Q2 consolidated unit revenue (RASM) rose 6.0%; load factor increased 2.4 percentage points to 84.3%. Economic fuel cost rose 42.6% to $3.28 per gallon. Consolidated CASM excluding fuel and fleet-transition charges declined 3.7% to 8.41 cents.
Material changes versus prior periods
- Q2 reported net income fell by half, despite revenue growth, as fuel expense rose $142.5M and fleet-transition costs increased. First-half reported net income improved, aided in part by fuel-hedge mark-to-market timing.
- Management’s non-GAAP adjusted net income was $89.6M, or $2.44 diluted EPS, for Q2 versus $84.0M, or $2.29, a year earlier. First-half adjusted net income was $119.0M versus $97.1M. These measures exclude fuel-hedge mark-to-market adjustments and fleet-transition costs; the company cautions these excluded items are not necessarily nonrecurring or unusual.
- Q2 included $26.8M of fleet-transition costs; first-half costs were $36.9M, mainly from subleasing the final 13 CRJ-700 aircraft and revising estimated losses on 16 subleased Q200 aircraft.
- Debt declined from $1,534.2M at December 31, 2010, following scheduled payments and aircraft-debt prepayments. The company repurchased $33.3M of stock in the first half and authorized an additional $50M repurchase program.
Outlook, risks, and contingencies
- Management expected Q3 2011 capacity to increase 5% year over year, with advance booked load factors in line with the prior year; bookings were described as strong. Full-year capacity guidance was 29.6–29.8 billion ASMs, up 6.5%–7.5%.
- Forecast consolidated CASM excluding fuel and special items: 8.2–8.3 cents for Q3 and 8.45 cents for full-year 2011. Management expected Q3 economic fuel cost of approximately $3.38 per gallon, subject to market movements.
- Management cited concern about a softening economy and whether fare increases would offset higher fuel costs; it planned to monitor demand and adjust capacity. Key risks include fuel-price volatility, economic conditions, competition, significant indebtedness, labor and operational disruptions, concentrated markets, and regulatory or security events.
- 2011 capital expenditures were estimated at $365M; 2012 at $370M. Firm aircraft purchase commitments totaled $894M for 25 aircraft. Total disclosed debt, lease, aircraft-purchase, interest, and other obligations were $4,018.8M.
- The LAX Terminal 6 project was estimated at $250M, with the company expecting approximately $25M as its non-reimbursable share; $75.9M of reimbursable project costs had been recorded as an asset. Routine litigation was not expected by management to materially affect results.
- After quarter-end, the company borrowed approximately $106M to finance six Q400 aircraft and had prepaid $85.5M of existing debt through the filing date. It expected additional prepayments and approximately $6M in related costs.
Important facts for investors to verify
- Fuel prices, hedge settlements, and the distinction between reported and economic fuel costs, including the sensitivity of results to hedge-accounting timing.
- Whether demand, fares, and load factors meet management’s Q3 expectations amid planned capacity growth and economic uncertainty.
- Execution and cash requirements for aircraft orders, LAX Terminal 6 funding and reimbursements, and planned debt prepayments.
- Actual fleet-transition losses, ongoing obligations for subleased aircraft, and the effect of planned pension changes and contributions.
- Liquidity and covenant headroom after capital spending, debt repayment, and share repurchases; the filing reports $1,153.5M of cash and marketable securities at quarter-end.