Alaska Air Group (
) will announce its fourth quarter earnings Thursday, January 23.
The carrier will likely post strong growth in revenues and profits
on higher passenger traffic driven by capacity expansion.
Additionally, we figure Alaska's baggage and ticket change fee
hikes implemented from October 31, 2013, will bring incremental
revenues in the fourth quarter to add to its top line growth.
In the first three quarters of 2013, driven by gains from
capacity expansion, Alaska's revenues rose by 12% annually to $3.9
billion and profits rose by 58% annually to $430 million. This
performance is one of the strongest profit growths among US
airlines and, in our opinion, Alaska's smaller size compared to
) allowed it to add capacity at rates higher than the industry
average. In turn, this grew the carrier's passenger traffic at
higher rates. Coupled with Alaska's focus on cost control, higher
passenger traffic lifted the profits significantly.
We currently have a stock price estimate of $74.66 for Alaska
Air Group, around 5% below its current market price.
See our complete analysis of Alaska Air Group
Capacity Expansion Will Drive Growth In Alaska's Fourth
Quarter Top Line
In the fourth quarter, Alaska expanded its flying capacity by
around 5% annually, starting service to many trans-continental and
mid-continental destinations from its hubs on the west coast. In
turn, this higher capacity raised the carrier's passenger traffic
by around 4% annually in the fourth quarter. A stable demand
environment for flights during the quarter also enabled Alaska to
maintain unit revenues - the amount collected from passengers per
seat for a mile of flight. In all, higher passenger traffic and
stable unit revenues effectively mean that Alaska will post higher
passenger revenues in the fourth quarter.
Higher Baggage Fee Will Add To Top Line Growth
Additionally, beginning October 31, 2013, Alaska hiked its
baggage fee to $25 for each of the first two checked bags and $75
for each bag beyond two bags, compared to a fee of $20 per bag it
charged earlier for the first three checked bags and $50 for each
additional bag. The carrier also hiked its ticket change fee
to $125 for travel due within 59 days, compared to a flat fee of
$75 for a change made online and $100 for a change made through a
call center that it charged earlier. Through these two hikes in
baggage and ticket change fees, Alaska anticipates to generate
incremental revenues of $50 million annually. We figure in the
fourth quarter these hikes will add to gains from capacity
expansion to grow the carrier's top line.
Growth In Unit Costs Will Likely Remain Low
Separately, Alaska, in the first three quarters of 2013 posted
good cost performance with its unit operating costs, excluding
fuel, declining. We figure the carrier's gains from various cost
initiatives enabled it to post lower unit costs - operating costs
per seat for a mile of flight. For instance, the installation of
seats on all of Alaska's Next-Generation 737s provided it with
revenue opportunities without growing costs. This installation
allowed for addition of six more seats on the carrier's
737-800s and nine more seats on its -900s without compromising
on passenger seating space. Revenue from these additional seats
helped expand Alaska's margins as it came with no corresponding
operating costs. In the fourth quarter, we anticipate gains from
this seat retrofit and other measures to continue to maintain
Alaska's good cost performance.
In all, Alaska's profits in the fourth quarter will likely rise
on low growth in costs and strong growth in revenues driven by
capacity expansion and baggage fee hike.
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