Business context and reporting period
Alaska Air Group, Inc. (Alaska Airlines and Horizon Air) filed this unaudited Form 10-Q for the three months ended March 31, 2013, compared with the first quarter of 2012. Results are seasonal and are not necessarily indicative of full-year performance.
Key financial and operating metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $1.133 billion | $1.039 billion |
| Operating income | $64 million | $72 million |
| Operating margin | 5.6% | 6.9% |
| Net income | $37 million | $41 million |
| Diluted EPS | $0.51 | $0.56 |
| Operating cash flow | $212 million | $183 million |
- Passenger revenue was $978 million, up 9%; mainline revenue rose 10% and regional revenue 5%. Total operating expenses increased 11% to $1.069 billion.
- Fuel expense was $381 million, up $62 million (19%). Non-fuel expenses rose 6% to $688 million; non-fuel cost per available seat mile (CASM) fell 2.3% to 8.62 cents.
- Traffic increased 9.0% and capacity 8.7%; load factor was 85.1%, up 0.2 percentage points. Yield was flat, while passenger revenue per available seat mile rose 0.3%.
- Cash and marketable securities totaled $1.265 billion at March 31, versus $1.252 billion at year-end. Cash and cash equivalents were $95 million. Total debt was $946 million, including $106 million current and $840 million long-term.
- Investing cash outflow was $151 million, including $103 million of property and equipment additions. Financing cash outflow was $88 million, including $88 million of debt payments and $19 million of share repurchases.
Material changes versus the prior period
- Pretax income declined $7 million to $59 million. The $94 million revenue increase was more than offset by $62 million higher fuel expense and $40 million higher non-fuel operating expenses.
- Fuel expense included a $12 million unrealized mark-to-market hedge loss in Q1 2013, compared with a $20 million unrealized gain in Q1 2012. Excluding these mark-to-market items, adjusted net income was $44 million ($0.62 diluted EPS), versus $28 million ($0.39) a year earlier; this is a company-defined non-GAAP measure.
- Aircraft maintenance expense rose $16 million to $66 million, including a $6 million write-off of prepaid maintenance after engines were removed from a maintenance contract. The company also reported more Q400 engine events.
- Cash from operations increased $29 million. The company repurchased 373,185 shares for $19 million during the quarter.
Guidance, outlook, risks and contingencies
- Management forecast Q2 2013 consolidated capacity growth of 7.5% and CASM excluding fuel and special items of 8.35–8.40 cents, approximately flat year over year. Full-year capacity growth was forecast at 7.5%, with CASM excluding fuel and special items of 8.35 cents, down 1.5%. Mainline full-year capacity growth was forecast at 8.0% and CASM at 7.50 cents, down 1.0%.
- Management said April unit revenue would be pressured by competition, excess California–Hawaii capacity, developing new routes, government sequestration and Easter timing; it expected a negative year-over-year comparison likely exceeding 2.1%. Advance bookings indicated May and June load factors down one point each, with Q2 capacity up 7.5%. The filing cited competitive pressure affecting yields on more than 30% of ASMs.
- Management expected Q2 economic fuel price per gallon to be about 4% lower year over year, but said full-year fuel costs could not be forecast with certainty. Fuel prices and hedge valuations remain volatile.
- Expected 2013 property and equipment additions were $450 million. The company expected pension contributions of $35–$50 million despite no minimum required contribution. Firm aircraft purchase commitments totaled $2.966 billion; operating leases and other contractual obligations add further commitments.
- Two undrawn $100 million credit facilities require at least $500 million of unrestricted cash and marketable securities; the company reported compliance. It warned that certain credit-card agreements could require reserves if liquidity fell below $500 million or specified credit-rating conditions were met.
- Labor negotiations continued with several employee groups. Alaska flight attendants filed for National Mediation Board mediation on May 2, 2013. Other cited risks include fuel volatility, competition, operational disruption, labor matters, economic conditions and revenue concentration in key markets.
- The company announced a cabin investment program expected to run from late 2013 through most of 2014, adding seats to certain aircraft and targeting an approximately 2.4% fleet seat increase when complete.
Important facts for investors to verify
- Whether revenue and traffic growth can offset competitive fare pressure and planned capacity increases.
- Fuel prices, hedge settlements and mark-to-market effects, which materially influenced the year-over-year earnings comparison.
- Progress on maintenance cost recovery after the Q1 increase and prepaid maintenance write-off.
- Execution and funding of aircraft commitments, planned capital spending, pension contributions and share repurchases while maintaining liquidity covenant compliance.
- Labor negotiation developments and any resulting cost or operational effects.