Alaska Air Group Gaining Altitude, Profits Climb

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You won't findAlaska Air Group stuck in a holding pattern.

The parent of Alaska Airlines and Horizon Air has been gaining altitude on the profit front amid efforts to reduce costs, improve service and expand its routes.

Alaska Air Group ( ALK ) has seen profits climb by at least 17% the past four quarters. In the most recent first quarter, earnings rose 59% to 62 cents a share, ahead of forecasts by Thomson Reuters for 56 cents a share. It was Alaska's fastest profit gain in two years. Revenue rose 9% to $1.13 billion on 8.7% capacity growth.

Why the big climb in profits?

"This quarter's record profit resulted from steady demand that kept pace with our 9% capacity growth as well as from the many changes we've made to improve our business over the last several years to lower our costs, better match capacity with demand, expand our network, while at the same time continuing to deliver award-winning service to our customers," said Chief Financial Officer Brandon Pedersen in an email.

The company has done a good job managing capacity as it relates to passenger traffic, says McAdams Wright Ragen analyst Mike Roarke. As a result, he says, it's been able to maintain a pretty good load factor, which is the amount of seats occupied on each flight.

In addition, he adds, the company has been very focused on cost controls.

Reducing Costs

"Those two pieces have continued to add up to pretty good results for the company," he said.

The Seattle-based company has taken a number of steps over the past few years to reduce costs and operate more efficiently. Alaska Airlines was one of the first airlines to put kiosks at airports to more efficiently check in passengers, says CRT Capital Group analyst Michael Derchin. It also went to one fleet type, the Boeing 737, he adds, to reduce pilot training costs, reduce inventory of spare parts and other efficiencies related to a common aircraft type.

Bringing in newer, more efficient planes also has helped the company lower its unit cost annually in recent years, Derchin says.

Alaska and Horizon Air with partner regional airlines serve 95 cities through an expansive network in Alaska, the lower 48, Hawaii, Canada and Mexico.

The first quarter is its seasonally weakest period. In many years, it's posted sizable losses during the quarter, said CEO Brad Tilden on the April 25 first-quarter conference call.

This year, it earned a profit in each month during the quarter, and for the first time in Tilden's 22 years at the company, it saw a profit in the month of January.

The company is hitting its "aggressive cost management objectives," and the decline in oil prices will help significantly, Tilden said on the call.

"So overall, these excellent first-quarter results put us in a good position for the rest of the year," he said.

For the quarter, pretax margin was 6.3%, a 1.9 percentage point improvement from a year earlier.

The company's unit cost, excluding fuel, was down 2.3% vs. a year earlier, a bit lower than its initial guidance at the start of the quarter, Pedersen said on the call.

The company's average load factor in the first quarter was 85.1%, which was an all-time high for the first quarter, Derchin says. He expects the load factor to be even higher in the second and third quarters.

Over the past few years, Alaska has expanded to more cities to create a more balanced network in terms of geography, says Derchin. Most recently, in the first quarter, it began new service between San Diego and Boston and between Seattle and Salt Lake City. It will begin new service between San Diego and Lihue, Hawaii, and seasonal service between Portland and Fairbanks in June.

Capacity growth during the first quarter was driven by new midcontinental routes, transcontinental routes out of the Pacific Northwest and by California to Hawaii routes added last year.

Among the company's strengths, says Roarke, is its ability to be "nimble."

Because it's smaller, it's able to deploy more capacity into markets when it sees an opportunity, he says. It's much tougher, he adds, for its larger competitors to do that.

Analysts polled by Thomson Reuters expect the company to continue operating at a higher altitude. They see full-year earnings rising 19% to $5.65 a share. They expect a 15% gain in 2014.

On the cost side, Derchin estimates the company's average cost of jet fuel will fall to $3.27 per gallon in the second quarter from $3.48 in the first quarter. That should be a "nice tail wind," he said.

In terms of the outlook for travel, leisure travel has held up pretty well and looks good, he says.

But business travel is tied to the economy, which is growing slowly. There are some negative factors coming out of sequestration. People traveling for government are cutting back, he says, and consultants who work for the government are also cutting back.

"All in all, demand is OK, but not robust," he said.

The company faces some competitive head winds.

"We're seeing more competitive capacity in certain markets and some pricing actions by competitors that are negatively affecting fares," Tilden said on the conference call. He sees advanced book load factors flat in both May and June.

Traffic Growth

On a combined basis, Alaska Air Group saw an 8.5% increase in traffic on an 8.9% increase in capacity for April vs. a year ago, it reported May 3.

This resulted in a 0.3% decrease in load factor to 86.1%.

Tilden says the company is taking steps to improve yields, which represent the average revenue for flying one passenger one mile. And it's evaluating whether more changes to fall capacity are needed.

"We have a history of reacting appropriately to changes in demand and adjusting capacity," he adds. "Our size allows us to be flexible and adapt quickly."

Roarke questions if the company can keep growing at the pace it has been: "They have had such a phenomenal recent history, I wonder how do they continue to keep that intact. How do they continue to raise prices and continue to expand profitably without attracting competitors to their route? They're making so much money, why aren't other airlines jumping in and trying to replicate the results they're achieving in some of their key markets?"



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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