Lower employee costs also reduce non-fuel costs

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Decline in unit cost excluding fuel

Lower fuel costs were not the only factor in the decline in Alaska Airlines’ unit cost. Cost per available seat mile, excluding fuel cost (or CASM-ex), also decreased to 7.87 cents in 3Q14 from 8.16 cents in 3Q13, a year-over-year decline of 3.6%. Only Alaska (ALK) and United (UAL) reported a year-over-year decline in unit cost excluding fuel in 3Q14 of 3.6% and 4.4%, respectively.

Most of the other airlines’ costs increased on higher employee costs. Growth in Delta’s unit cost excluding fuel was 15.2%, Southwest’s (LUV) was 2.5%, and JetBlue’s (JBLU) was 2.8%. However, part of the decline was also due to higher pilot wages and high lease costs at the Port of Seattle incurred in the previous year. Alaska Airlines estimates its unit cost excluding fuel to decrease by 2.5% year-over-year in 4Q14 and by 1% in FY14.

Part7_3Q14_CASM ex-fuel growth

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Employee cost and productivity

The decrease in non-fuel cost was primarily driven by expenses related to employee wages, benefits, and variable incentive pay, all of which comprise ~40% of the total non-fuel expenses. Wages and benefits per ASM decreased by 0.6% to $309 million, although wages increased due to the higher wage rates according to the new labor contract.

However, an increase in variable incentive pay offset the 9.3% decrease in wages and benefits per ASM. Variable incentive pay per ASM increased by 6.9% to 0.31 cents in 3Q14. Although wages increased during the quarter due to the new labor contract, other expenses such as pensions and medical expenses declined.

Other non-fuel expenses

Some of the other expenses that caused the decline in non-fuel costs were related to aircraft rent and landing fees. Expenses related to contracted service, depreciation and amortization (or D&A), and selling expenses increased during 3Q14.

Investors can add transportation stocks to their portfolios through ETFs that invest in all major US airline stocks. These ETFs include the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

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