Alaska Air Group, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Airline holding company operating Alaska Airlines and Horizon Air. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Unless noted, amounts are in millions.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,557 | $1,272 | $3,946 | $3,525 |
| Operating income | $470 | $269 | $708 | $458 |
| Net income | $289 | $163 | $430 | $272 |
| Diluted EPS | $4.08 | $2.27 | $6.04 | $3.77 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $822 | $638 |
- Q3 revenue included a $192 million one-time, noncash Mileage Plan accounting benefit ($120 million after tax; $1.70 per diluted share). Excluding that item and fuel-hedge mark-to-market effects, adjusted net income was $157 million, or $2.21 per diluted share, versus $150 million, or $2.09, in Q3 2012.
- Nine-month adjusted net income, excluding the same categories, was $306 million ($4.30 diluted EPS), compared with $290 million ($4.02) in 2012.
- Q3 passenger revenue rose 6%; traffic increased 6.8%, while ticket yield declined 0.8%. Consolidated load factor was 86.5%, down 0.4 percentage points. Excluding the special revenue, Q3 revenue per available seat mile was 15.39 cents versus 15.38 cents.
- Q3 operating expenses rose 8% to $1,087 million; fuel expense was $363 million and non-fuel expense was $724 million. CASM excluding fuel rose 1.4% to 8.16 cents. For nine months, CASM excluding fuel declined 0.5% to 8.36 cents.
- At September 30, cash and marketable securities totaled $1,445 million, including $41 million of cash and cash equivalents. Total debt was $893 million ($111 million current and $782 million long-term), down from $1,032 million at December 31, 2012. Shareholders’ equity was $1,802 million.
- Cash used in investing activities was $680 million for nine months, including $395 million of property and equipment additions. Financing activities used $223 million, including $139 million in debt payments, $83 million in share repurchases, and $14 million in dividends.
Changes, outlook, and risks
- The July 2013 modified and extended Bank of America affinity-card agreement changed revenue allocation among loyalty-program deliverables. The related transition accounting generated the $192 million special revenue item. A revised estimate of miles expected to expire unused, from 12.0% to 17.4%, contributed $44 million of that special revenue.
- Management attributed improved results in part to passenger growth and stronger Mileage Plan economics. However, increased competitive capacity in Alaska and immature new routes pressured mainline yields and load factors. Fuel expense, labor, maintenance, and airport charges remain important cost variables.
- Management expected Q4 2013 capacity to increase about 4.5% year over year and CASM excluding fuel to rise about 2%; full-year capacity was forecast to increase about 7%, with full-year CASM excluding fuel approximately flat. Management cautioned that unit-revenue comparisons would remain difficult and said Q4 unit costs were expected to be higher year over year.
- Management forecast full-year 2013 incentive pay of approximately $96 million and maintenance expense about 10% higher for the year. It expected full-year economic fuel price per gallon to be lower than 2012, primarily due to lower refining margins.
- Liquidity included two undrawn $100 million credit facilities; the company reported compliance with their $500 million minimum unrestricted cash and marketable securities covenant. The filing also reports $2,960 million of aircraft purchase commitments and $749 million of operating lease commitments. Credit-card agreements could require reserves if specified credit-rating or liquidity triggers were met.
- Risk factors cited include fuel-price volatility, competition, economic conditions, operational disruptions, labor negotiations, dependence on key markets, and regulatory or technology changes. The company reported routine litigation not expected by management to materially affect results and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much of reported earnings growth is attributable to recurring operating performance versus the $192 million one-time loyalty-accounting benefit and fuel-hedge mark-to-market items.
- Whether traffic, yields, load factors, and capacity trends support management’s revenue expectations, particularly amid competitive pressure and difficult unit-revenue comparisons.
- Whether labor, maintenance, airport fees, and other non-fuel costs track management’s forecasts, and whether the revised mileage breakage estimate remains supportable.
- Liquidity headroom after aircraft deliveries, debt service, capital returns, and commitments; monitor the $500 million credit-card and credit-facility liquidity thresholds.
- Execution of aircraft commitments and the impact of fuel hedges, including the company’s shortened hedging horizon and exposure to changes in crude oil and refining margins.