Alaska Air Group, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing reports unaudited results for the three and nine months ended September 30, 2011, compared with the same periods in 2010. Air Group operates Alaska Airlines and Horizon Air. Beginning January 1, 2011, Horizon sold all capacity to Alaska under a capacity purchase agreement; this changed segment revenue and expense presentation but did not affect consolidated results.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $1,198.1 million, up 12.2% from $1,068.0 million | $3,273.5 million, up 13.9% from $2,873.8 million |
| Operating income | $143.2 million, versus $216.9 million | $334.8 million, versus $352.3 million |
| Net income | $77.5 million, versus $122.4 million | $180.5 million, versus $186.3 million |
| Diluted EPS | $2.12, versus $3.32 | $4.91, versus $5.08 |
| Operating margin | 11.9%, versus 20.3% | 10.2%, versus 12.3% |
| Net margin | 6.5%, versus 11.5% | 5.5%, versus 6.5% |
Q3 passenger revenue was $1,100.8 million, up 12.6%. Consolidated load factor increased 1.9 points to 86.5%; revenue per available seat mile rose 7.1%. For the first nine months, consolidated load factor rose 2.2 points to 84.4% and revenue per available seat mile increased 5.6%.
Cash flow and liquidity. Operating cash flow for the first nine months was $608.8 million, versus $506.4 million. Investing activities used $438.6 million and financing activities used $192.2 million. Cash and cash equivalents were $67.5 million; cash and marketable securities totaled $1,265.8 million at September 30, up 4.8% from December 31, 2010. Current assets were $1,726.3 million and current liabilities $1,518.3 million. Management said available liquidity and expected operating cash flows should fund operations for the foreseeable future.
Debt and capital commitments. Long-term debt, including current maturities, was $1,392.4 million, down from $1,534.2 million at year-end 2010. The company repaid $248.3 million and issued $106.5 million of debt during the nine-month period. Two undrawn credit facilities total $200 million; the company was in compliance with their $500 million minimum unrestricted cash and marketable securities covenant. Firm aircraft purchase commitments totaled $839.7 million for 25 aircraft. Reported contractual obligations totaled $3,875.6 million, including operating leases and interest.
Material changes versus prior periods
- Fuel was the principal pressure on reported earnings. Q3 fuel expense increased 90.2% to $420.1 million, while economic fuel cost per gallon rose 36.7% to $3.24. For the nine months, fuel expense rose 48.1% to $1,012.1 million.
- Q3 pretax income fell to $125.3 million from $198.2 million, chiefly due to a $199.2 million increase in fuel expense, partly offset by $130.1 million higher revenue. Management cited higher economic fuel costs and Q3 fuel-hedge mark-to-market losses of $84.3 million, compared with gains of $16.7 million a year earlier.
- Non-fuel cost performance improved on a unit basis: consolidated CASM excluding fuel and fleet transition costs declined 2.6% in Q3 and 4.1% for the nine months. Non-fuel expenses nevertheless rose 0.7% in Q3 and 4.8% year to date.
- Nine-month reported net income declined modestly, while management’s adjusted net income excluding fuel-hedge mark-to-market adjustments and fleet transition costs increased to $250.2 million from $215.2 million. For Q3, the corresponding adjusted amount was $131.1 million versus $118.1 million. These are non-GAAP measures; the company cautions that excluded items are not necessarily non-recurring or unusual.
Outlook, commentary and risks
- Management reported strong fourth-quarter advance bookings, projecting load factors about 2.5 points higher in November and 0.5 point higher in December year over year, with Q4 capacity expected to grow 3%. It also noted concerns about a softening economy and whether fares could offset higher fuel costs.
- Q4 2011 economic fuel cost was estimated at $3.30 per gallon, subject to frequent change. Q4 consolidated capacity was forecast to increase 3%; CASM excluding fuel and special items was forecast at 8.75–8.85 cents. Full-year capacity was forecast to grow 7%, with that CASM measure down 3%.
- Management expected Q4 nonoperating expense of approximately $10–12 million, incentive pay of approximately $70 million for 2011, and capital expenditures of $370 million in 2011 and $385 million in 2012. It expected to prepay a further $12.5 million of debt in Q4.
- Fuel-price volatility, economic conditions, competition, significant indebtedness, labor matters, operational disruptions, concentration in key markets, safety events, system reliance, and regulatory changes are identified risks. The company hedges fuel exposure; as of November 3, 2011, hedge positions covered approximately 50% of expected Q4 2011 fuel requirements.
- Fleet transition charges were $38.9 million for the first nine months, including CRJ-700 removals and Q200 lease termination and sale costs. The company completed the transition to an all-Q400 Horizon fleet and completed disposition of 13 of 16 Q200 aircraft after quarter-end; remaining sales were expected in Q4.
- The LAX Terminal 6 project was estimated at $250 million, with completion expected in spring 2012. The company anticipated an approximately $25 million non-reimbursable share; most construction costs were expected to be reimbursed under its agreement with the City of Los Angeles and Los Angeles World Airports.
- Management said routine litigation was not expected to materially affect financial position or results. No material risk-factor changes were reported, and disclosure controls were deemed effective.
Important facts for investors to verify
- Whether fuel prices and hedge accounting continue to materially affect reported earnings, and how reported results compare with management’s non-GAAP adjusted measures.
- Whether advance bookings, load-factor assumptions, capacity plans, and fare yields support the stated Q4 and full-year outlook amid economic uncertainty.
- Liquidity and covenant headroom, debt repayment plans, and the funding of aircraft orders and other contractual obligations.
- Actual costs, reimbursement timing, and final non-reimbursable share of the LAX Terminal 6 project.
- Completion of the remaining Q200 aircraft dispositions and any further fleet transition charges.