Business Context and Reporting Period
Company: Alaska Air Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Filing Date: November 5, 2009
Alaska Air Group operates two primary airline subsidiaries: Alaska Airlines, Inc. (mainline jet operations) and Horizon Air Industries, Inc. (regional operations). The reporting period covers the third quarter and the first nine months of fiscal year 2009. The company is classified as a large accelerated filer.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Total Operating Revenues | $967.4 | $1,065.2 | $2,553.7 | $2,835.5 |
| Operating Income (Loss) | $159.8 | $(120.0) | $214.6 | $(65.5) |
| Net Income (Loss) | $87.6 | $(86.5) | $97.5 | $(60.7) |
| Diluted EPS | $2.46 | $(2.40) | $2.69 | $(1.67) |
| Operating Cash Flow (9 Months) | $305.6 (2009) vs $141.0 (2008) | |||
| Cash & Marketable Securities | $1,229.6 (as of Sept 30, 2009) | |||
| Total Debt (Long-term + Current) | $1,806.0 (as of Sept 30, 2009) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $87.6 million in Q3 2009, a significant improvement from a net loss of $86.5 million in Q3 2008. This $174.1 million swing was driven primarily by a $376.1 million decline in aircraft fuel costs and the absence of fleet transition charges present in the prior year.
- Fuel Cost Reduction: Aircraft fuel expense dropped 65.2% in Q3 2009 compared to Q3 2008. This was due to a 49% reduction in raw fuel costs per gallon and a $165.6 million reduction in net losses associated with the fuel-hedging portfolio.
- Revenue Decline: Total operating revenues decreased 9.2% in Q3 2009. Passenger revenue fell 7.1% due to continued demand weakness and a 6.7% drop in ticket yield, partially offset by a 2.8-point increase in load factor.
- One-Time Items:
- 2009: Included $35.8 million in "New pilot contract transition costs" (bonuses and sick-leave program setup) in the first nine months.
- 2008: Included $42.3 million in revenue benefit from a change in Mileage Plan terms and $22.2 million in fleet transition charges (MD-80 and CRJ-700 retirements).
- Liquidity: Cash and marketable securities increased by $152.2 million to $1.23 billion during the nine-month period, bolstered by strong operating cash flows and sale-leaseback transactions.
Guidance, Outlook, and Risks
- Outlook: Management expects year-over-year declines in unit revenue to continue through the fourth quarter of 2009 due to low fares and sale activity. However, advance booked load factors for November and December are projected to be higher than the prior year.
- Cost Forecast: Mainline costs per available seat mile (CASM) excluding fuel and special items are forecast to be up 6% in Q4 and 10% for the full year 2009 compared to 2008.
- Revenue Initiatives: The new $15 first bag fee, implemented in July 2009, generated $23.5 million in incremental revenue in Q3. Management expects this fee to generate at least $70 million annually.
- Fleet Strategy: Horizon Air has delayed its transition to an all-Q400 fleet due to market conditions hindering the remarketing of CRJ-700 aircraft. Deliveries of Q400s for 2010 and 2011 have been deferred.
- Risks:
- Flooding: A compromised dam near Seattle-Tacoma International Airport poses a risk of flooding that could disrupt critical operations (fuel, power, call centers).
- Labor: Ongoing contract negotiations with the International Association of Machinists (IAM) regarding ramp service subcontracting.
- Fuel Volatility: Continued exposure to crude oil price fluctuations, though mitigated by hedging strategies.
Investor Verification Checklist
- Fuel Hedging Impact: Verify the sensitivity of future earnings to crude oil price changes, noting the company's exposure to refining margin swaps and call options.
- Debt Covenants: Review compliance with financial covenants, specifically the requirement to maintain a minimum $500 million unrestricted cash and marketable securities balance under credit card processing agreements.
- Capital Expenditures: Confirm the timeline and funding sources for the $686 million in firm aircraft purchase commitments, noting the shift toward cash payments for 2010 deliveries.
- Legal Contingencies: Monitor the status of the IAM grievance regarding ramp service subcontracting, as a final remedy could impact operations or costs.
- Stock Repurchases: Track the remaining $26.2 million available under the $50 million stock repurchase plan authorized in June 2009.