Alaska Air Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The company operates Alaska Airlines and Horizon Air. Financial amounts are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,256 | $1,214 | $2,390 | $2,253 |
| Operating income | $174 | $116 | $239 | $189 |
| Net income | $104 | $68 | $141 | $109 |
| Diluted EPS | $1.47 | $0.93 | $1.98 | $1.50 |
| Operating margin | 13.9% | 9.6% | 10.0% | 8.4% |
Q2 passenger revenue was $1,088, up 4%. Traffic rose 7.5%, while yield fell 3.7%; capacity increased 7.6% and load factor was nearly flat at 86.4%. Consolidated revenue per available seat mile (RASM) declined 3.8% to 14.70 cents. Non-GAAP adjusted net income was $105 million in Q2 versus $111 million a year earlier; for the first half it was $149 million versus $139 million. These adjusted figures exclude fuel-hedge mark-to-market effects.
- Expenses and margins: Q2 operating expenses decreased 1% to $1,082, as fuel expense fell $61 million, partly offset by a $45 million increase in non-fuel expenses. Q2 CASM excluding fuel was 8.31 cents, down 0.8%. First-half operating expenses rose 4% to $2,151; non-fuel expenses rose 6%, while fuel expense was broadly unchanged. First-half CASM excluding fuel was 8.46 cents, down 1.6%.
- Cash flow: First-half operating cash flow was $592 million, compared with $455 million. Investing cash outflow was $512 million, including $258 million of property and equipment additions; financing cash outflow was $145 million. Cash and cash equivalents ended at $57 million, down from $122 million at year-end.
- Liquidity: Cash and marketable securities totaled $1.429 billion, up 14.1% from December 31, 2012, and equal to 30% of trailing-twelve-month revenue. Current assets were $1.986 billion and current liabilities $1.756 billion. The company reported no borrowings under its two $100 million credit facilities and was in compliance with their $500 million minimum unrestricted cash and marketable securities covenant.
- Debt: Total long-term debt, including current maturities, was $924 million, down from $1.032 billion at year-end; $109 million of debt was repaid during the first half. Long-term debt net of current maturities was $814 million. S&P upgraded the company’s corporate credit rating to BB with a stable outlook.
Material changes and notable items
- Q2 GAAP net income improved substantially year over year, mainly because the prior-year quarter included a $70 million mark-to-market fuel-hedge loss. Q2 2013 included a $1 million mark-to-market loss. First-half mark-to-market losses were $13 million in 2013 versus $50 million in 2012.
- Higher maintenance expense, SeaTac landing fees and rents, selling expense, and other non-fuel costs offset some of the benefit from lower Q2 fuel expense. SeaTac rate increases accounted for approximately $12 million of the Q2 increase in landing fees and rentals.
- After quarter-end, Alaska amended its Bank of America affinity-card agreement. Applying the relevant revenue-allocation accounting standard is expected to produce an approximately $150 million one-time, non-cash revenue increase in Q3 2013. The agreement is also expected to generate $55 million of additional cash flow in the remainder of 2013, assuming card and spending volumes remain consistent.
- The company repurchased $51 million of shares in the first half, including $32 million in Q2, under its $250 million program. The board declared a $0.20-per-share dividend payable August 22, 2013.
Outlook, commitments and risks
- Management expected Q3 load factors to decline year over year (half a point in August and one point in September) as capacity increases 7.0%; it expected unit revenue to decline again, citing competitive capacity and pressure in Alaska and West Coast markets.
- Q3 consolidated capacity guidance was 8.850–8.900 billion ASMs, up 7.0%; full-year 2013 capacity guidance was 33.650–33.750 billion ASMs, also up 7.0%. Forecast consolidated CASM excluding fuel and special items was 8.25–8.30 cents for Q3, up 3.0%, and approximately 8.45 cents for 2013, down 0.5%.
- Management expected wages and benefits to increase about $40 million in the second half due to new labor agreements; full-year aircraft maintenance expense was expected to be approximately 10% higher. It expected 2013 cash taxes of $100–$150 million and pension contributions of approximately $35 million.
- At June 30, firm aircraft purchase commitments totaled $2.884 billion, alongside significant lease and other contractual commitments. The company had firm orders for 70 aircraft and options for 69 additional Boeing 737s and seven Q400s. Planned 2013 capital expenditures were $490 million.
- Fuel prices and hedge valuations are volatile. The company had fuel hedges covering 419 million gallons through March 2016 and changed its hedging approach to begin approximately 18 months before consumption, rather than 36 months historically. Other disclosed risks include competition, economic conditions, operational disruptions, labor matters, and reliance on automated systems. Alaska flight attendants had sought mediation; other employee groups remained in negotiations.
- Routine litigation was not expected by management to materially affect results. The filing reported no material change to previously disclosed risk factors and no material change to market-risk disclosures.
Investor verification priorities
- Track passenger yields, RASM, load factors, and the revenue impact of planned capacity growth amid competitive pressure.
- Separate underlying operating performance from fuel-hedge mark-to-market effects; assess fuel prices, hedge settlements, and future hedge coverage.
- Verify realization and timing of the affinity-card agreement’s expected $150 million non-cash revenue adjustment and $55 million cash-flow benefit.
- Monitor non-fuel cost inflation, especially labor, maintenance, SeaTac charges, and the company’s CASM guidance.
- Assess liquidity against aircraft commitments, capital spending, debt repayment, dividends, repurchases, pension contributions, and credit-card reserve triggers if liquidity or credit ratings weaken.