Alaska continues to impress, return on invested capital hits 11.3%


Not only did Alaska manage a profit in its historically weakest quarter, something its legacy counterparts so far have failed to do, but it did so at record levels. GAAP net income was also impressive at USD74.2 million compared with USD5.3 million in the 2010 first quarter which speaks to the work the airline has put in over the last decade to make itself more bullet proof throughout the year and the business cycle.

Ex mark-to-market fuel hedge gains of USD82.0 million  and USD10.1 million in CRJ-700 fleet transition costs, the company posting first quarter net income of USD29.5 million, more than double the USD13.1 million posted in the first quarter of 2010.

"We are pleased to report a record first quarter profit,” Chair and CEO Bill Ayer said. “This quarter's results are due to strong passenger demand leading to a 16%, or USD136 million, improvement in revenue. This profit is especially gratifying given the significant increase in fuel costs. As we look ahead, fuel prices will be an even bigger challenge, but we are well positioned with our efficient fleet, diversified network and the fundamental changes we've made to our business over the past several years. Our people are operating a great airline and their hard work is paying off."

Alaska Air Group has two important advantages for dealing with rising fuel,” said CFO Brandon Pedersen. “The first is a simple, easy to understand, insurance hedge program that provides protection from oil price spikes but allows us to take advantage of declines in price without triggering payments to counter parties... [that results in] caps in the money at USD97 per-barrel oil. Second, we have a young, fuel efficient fleet of 737 and Q400s which we view as the best protection against rising fuel.”

Air Group trailing 12-month return on invested capital is 11.3%, more than double that posted in the year-ago quarter when it was 5.3%. It must be remembered that Alaska Air Group launched the US industry’s new focus on ROIC a full year before the rest of the industry began using that as a significant metric. Part of its plan was to be profitable throughout the year, even during historically weak times, and throughout the business cycle. To that end it has successfully restructured its network to reduce or eliminate seasonality and is now only vulnerable when an outside force, such as SARS, makes an appearance.

President Brad Tilden said the company’s load factor merits discussion since it represents the changes wrought in the last several years to improve company results. “If you look at load factor in the first quarter for airlines with more than USD2 billion in revenues, since 2001, Alaska was always ranked in the bottom three between 2001 and 2009,” he said. “Our figure was usually in the mid-60s to low 70s. We moved to fifth place in 2010 and first in 2011 with a record 83% load factor which was achieved on a 15% capacity increase and an improvement in our pre-tax margin. The pre-tax margin was 4.9%, strong for us by historical standards but illustrates our work to reduce seasonality and optimize our network throughout the year.”

Mr Tilden also cited efforts to stimulate winter demand to Hawaii, Mexico and California coupled with careful capacity allocation and maximizing revenues while maintaining the company’s low-fare value proposition.

The first quarter was the company’s second consecutive profitable first quarter, noted Mr Tilden. Mainline passenger revenue jumped USD115 million or nearly 20%, he reported, adding the improvement was driven by 14.7% increase in capacity and a 4.4% increase in passenger unit revenue. Mr Tilden reported traffic continued to outpace capacity resulting in a 2.4-point increase in load factor and a 1.4% yield improvement.

He said the company is now focusing on yields to offset fuel and had several initiatives underway to push fares up in the coming months.

Mr Tilden reported unit revenue increases in all regions including Hawaii, significant given the 75% increase in capacity in the Hawaii market since last year. Hawaii now represents 15% of capacity and approximately USD400 million in annual revenue. He also said that the void left by the failure of Aloha and ATA has now largely been filled. 

He sees growth subsiding and projected full-year ASMs to rise 8-9% with quarterly increases of 9%, 6% and 7% in the second, third and fourth quarter, respectively.

“Profits have resulted from improvement in top line growth and our focus on lowering non-fuel unit costs,” he told analysis. “For the first quarter, mainline unit costs improved by nearly 7% (6.3%) dropping from 8.4 cents to 7.83 cents. For the rest of the year, we are still forecasting 7.6-cent mainline CASM, down 3% from 2010 and reflecting the fact that a key part of our strategy is to reduce the gap between us and the lowest cost carriers.”

Employee productivity rose 8% on top of the 8% increase in productivity in 1Q-2010. It also managed to save USD12.5 million during the quarter with its fuel hedging program while paying down USD52 million of long-term debt during the quarter. Adjusted debt-to-total capitalization ratio now stands at 65 percent—the lowest since 1999. Its debt to cap ratio is now 65%, 15 points better points than what it at the end of 1Q2010.

Despite the fact the company completed its current USD50 million share repurchase program in early April, analysts still seemed to want more as indicated by the questioning executives fielded. Since 2007, Air Group has repurchased approximately 7.6 million shares at an average price of USD28 per share.

Mr Ayer reported record load factor for the quarter at 80%, noting that demand is remaining strong despite the impact of fuel cost increases on the economy.

Mr Pederson reported the Horizon restructuring is moving ahead as planned with nine more CRJs coming out in the second quarter which will drive a USD18 million charge.

He stressed the impact of accounting changes resulting from the Horizon restructuring made comparables more challenging. The company issued more abbreviated subsidiary results and large year on year Alaska regional revenue and costs and Horizon’s total revenues and expenses.

“With Horizon’s transition to all-CPA carrier, substantially all of its revenues relate to capacity purchased by Alaska and its passenger revenues are captured on Alaska’s books as are such expenses as selling and distribution, landing fees and fuel costs,” he explained. “As a result, Horizon’s expenses look more like other CPA providers and reflect its singular mission of providing capacity for Alaska and predominantly include aircraft ownership, maintenance and crew costs. So, the bottom line is we have moved things around to achieve an industry standard but that is also creating some challenges when comparing year-over-year results at the operating subsidiary level.”

He reported Horizon posted a USD2.9 million adjusted pre=tax profit, adding it was on track with the pace of its planned restructuring progress. Revenues were up 13% on 6% more capacity.

In mid-May, SkyWest’s begins its Alaska flying using five CRJ 700s in the Santa Barbara, Long Beach, Fresno, Burbank and Ontario markets.

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