Alaska Airlines paces the industry

Having restructured itself to compete head on with low-cost carriers, Alaska posted net income of USD28.8 million, down 50.9% in the second quarter on a 14.5% increase in passenger revenues which came in at USD1 billion million on high load factors and fares. In the second quarter 2010 it posted net income ex special items of USD58.6 million.

Outlook

Its guidance was down from its guidance posted after the first quarter although it still sees capacity growth in the 8-9% range in a fuel environment that might suggest otherwise. However, it reported continuing strong demand, up a point from last summer.

It projects a 5% increase in consolidated ASMs to 7.7 billion for the third quarter for a 6.5-7.5% increase in full-year capacity to between 29.6-29.8 billion. It is anticipating a 5% hike in fuel in the third quarter for a 43% increase in price per gallon to USD3.38.

Its advanced booked load factors were up a point in July, down a point in August but expected to be up 1.5 points in September.

What will be interesting will be Alaska's record compared to JetBlue and Southwest who report on July 26 and August 4, respectively. Alaska experienced a 13.7% revenue improvement to USD1.1 billion which covered 48.5% of its rising fuel costs. In the first quarter, mainline yield came in between JetBlue at 13.39 cents and Southwest's 15.31 cents, about the same as Delta and higher than United and American.

CASM ex fuel in the first quarter was the lowest amongst most low-cost and legacy carriers with the singular exception of JetBlue which was at 7.22 compared to Alaska's 7.83 for mainline operations. Southwest came in at 7.91 in the first quarter.

CASM ex fuel for Alaska's second quarter was 7.44 cents compared to American's 9.36, United/Continental's 8.17 cents and US Airways 9.14 cents.

Comparative statistics to date

2Q 2011 vs 2101	ALK	AMR	DAL	HA	JBLU	LUV	UAL/CO	LCC	ALGT
Profit USD	28.8 down 50.9%	(286M) v (11M)					538M down 11.9%	92M vs 279M
Op Revs USD	1.1B up 13.7%	6.114B up 7.8%					9.8B up 10.3%	3.5B up 10.5%
Op Exp USD	1B up 21.5%	6.192B up 13%					9.1B up 12.1%	3.3B up 18.8%
ASMs	7.4B up 7.2%	39.2B up 2.1%					56.4B up 1.1%	19.1B up 3.3%
LF	84.3 up 2.4 pts	83.6% down 0.3 pts					84% down 0.9 pts	83.8% up 0.9 pts
Yield Cents	14.39 up 3.9%	13.90 up 4.6%					14.46 up 10.3%	16.30 up 6.5%
Prasm Cents	13.58 up 6.8%	11.62 up 4.9%					12.15 up 9.1%	13.66 up 7.6%
CASM Cents	NA	14.52 up 9..8%					12.97 up 10.7%	14.59 up 15%
CASM ex fuel/ Cents	8.46 down 3.1%	9.36 up 1.4%					8.17 up 3%	9.14 up 0.9%
Anc/Other Revs USD	66.9 up 7.4%	659M up 5.5%					780M up 0.9%	345M up 3.9%

Source: Centre for Asia Pacific Aviation

Its pre-tax margin for the first six months was shy of its 10% goal at 9.3% but it was up significantly from the first half 2010 which came in at 8.7%. It also reported a USD395 million operating cash flow in the quarter compared with USD334 million in 2Q2010 resulting in USD121 million in free cash flow compared with 220 million in last year's second quarter. Horizon posted a 7.8% pre-tax margin illustrating its progress toward matching Alaska's results in the next few years.

Its productivity increases remain impressive. If it were operating at the same productivity it did in 2Q-2009, it would need an additional 1300 employees.

Compared with 2008, President Brad Tilden reported Alaska Air Group has exceeded the industry performance by 7 ppts. He attributed the results to growth in the Hawaii and Mexico markets which were up 47% and 21% year on year, respectively. He also pointed out that the vast majority of the airline's growth has been in markets where it is the only player or where it has an edge, very similar to US Airways's strategy.

Deutche Bank Analyst Mike Linenberg seems to focusing on distribution costs this earnings season and he has elicited comments from all the airline executives that they are much too high. Alaska has been successful in moving traffic to Alaska.com which is what its peers are doing. It is also in negotiation with two of the big three distribution systems and is seeking rate reductions. It said it has been successful in moving traffic to its website because it has more leisure than business traffic. More than 50% of bookings are on Alaska.com, resulting from its focus on on-line search and advertising and off-line advertising that plugs the value of the site.

Vice President Marketing Joe Sprague said the company is watching the trends on direct connect noting that technology already exists and places direct connect along side GDS results on travel agent computers. However, he sees the best application in the managed travel arena where Alaska is not as strong as its legacy peers. "We may look at direct connect but our bigger opportunity will come from pulling passengers from other sources to Alaska.com," he said.

Second quarter

Regional operations show a 10.1% decline in ASMs although it experienced a 3.4-point jump in load factor to 77.7%. CEO Bill Ayers was quick to point out that Horizon is not a drag on Air Group profitability which has been suggested by analysts over the years. He said Horizon is expected to perform at Alaska levels once its transition to pure capacity purchase is complete.

Horizon posted 17% drop in ASMs owing to the removal of its CRJ 700s and branded flying which was 50% of its network. CASM ex fuel for the regional subsidiary came in at 12.13 cents compared to 14.84 cents for the second quarter 2010.

Alaska Air Group is now in the midst of a restructuring campaign on Horizon mirroring its impressive actions at the mainline over the past few years when it set a goal of 10-15% return on invested capital over the course of the entire business cycle.

Horizon posted an adjusted, pre-tax net of USD7.4 million, down, not surprisingly, from the USD8.2 million in the year-ago period. Horizon operating revenues nearly halved in the quarter dropping from USD171.1 million in 2Q-2010 to USD95.4 million in 2Q-2011 on the loss of its branded flying. Adjusted operating costs, as expected also dropped, however, from USD158.1 million in last year's second quarter to USD83.8 million in 2Q-2011.

Alaska Air Group spent USD93.5 million on its capacity purchase on Horizon's capacity and USD48.3 million on SkyWest capacity but took in a 5.9% increase on regional revenues at USD194.3 million. Other revenues jumped 7.4% to USD66.9 million. Total operating costs rose 21.5%, mostly on fuel, to USD1.052 billion.

The consolidated operation flew 7.4 billion ASMs, up 7.2% with a 2.4-point increase in load factor to 74.3%. PRASM was up 6.8% to 13.58. While it did not report CASM, it did report a 3.1% drop in CASM ex fuel to 8.46 cents continuing its efforts to lower overhead.

The company finished the second quarter with USD1.15 billion in cash, a declined from USD1.21 billion in 2Q-2010 on debt repayments and its share repurchase program. Debt is at USD1.15 billion compared to USD1.31 billion at the end of 2010.

AA Order

Alaska echoed US Airways and United in its comments about the re-engined 737 order by American, reflecting general industry attitudes that since so little is known, they will take a wait-and-see approach.

As did US Airways, Alaska said it saving fuel is important and the sooner Boeing did it the better. Alaska is an all-Boeing operator so for fleet commonality purposes it likely have to wait for the Boeing product and, indeed, indicated it was too early to tell any fleet impact.

However, Alaska also echoed its mainline peers in saying it would likely not change its fleet plans at the moment. Analysts have suggested the promised cost savings for the Airbus neo and a re-engined Boeing product would be less than the 12-15% marketed by manufacturers. That is probably why US Airways CEO Doug Parker said that, so far, manufacturers have not come close to making a compelling case for US Airways to spend money on them.

Alaska Airlines fleet

Source: Centre for Asia Pacific Aviation and Ascend Worldwide

Alaska is set to take a total of 12 737-800s between 2012 and 2015 with another 737-800ERs in 2013 and 2014. It also has options for antoher 42 737s and 10 Q400s. By the end of 2011 it will have 168 aircraft including its regional fleet of Q400s.