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Alaska Air Stock Rose after Q3 Earnings Beat Estimates

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Alaska Air (ALK) stock rose nearly 1% during extended trade on Thursday. The company reported better-than-expected third-quarter earnings results. The airline’s third-quarter adjusted EPS of $2.63 beat analysts’ expectations of $2.52 and improved 38% YoY (year-over-year).

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Alaska Air’s third-quarter earnings drivers

Increased revenues, efficient cost management, and lower fuel costs mainly drove Alaska Air’s third-quarter earnings higher. The company’s third-quarter total operating revenues grew 8% YoY to $2.4 billion. The quarterly revenues were almost in-line with analysts’ consensus estimates.

The strong revenue growth was mainly driven by healthy travel demand and increased capacity. During the third quarter, Alaska Air’s total passenger traffic grew 4.4%, while its capacity increased 3.4%. The load factor improved by 90 basis points to 85.8% in the third quarter. Passenger traffic growth outpaced the company’s increased seat capacity. The load factor is one of the key operating metrics for passenger airlines. Notably, the load factor measures the percentage of seats occupied by passengers.

The RASM (revenue per available seat mile), a key unit revenue measure, increased 4.5% YoY to 13.64 cents. The improved load factor and passenger yield drove Alaska Air’s third-quarter RASM higher. The passenger yield is the average fare paid per mile per passenger. The metric grew 3.6% YoY to 14.71 cents in the third quarter.

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Third-quarter costs and margins

The CASM (cost per available seat mile), excluding fuel, rose 3.4% YoY to 8.34 cents. Alaska Air stated that the third-quarter ex-fuel CASM’s increase was 150 basis points lower than its expectations. The third-quarter ex-fuel CASM includes a $24 million signing bonus related to new employee contracts. Excluding this charge, the ex-fuel CASM would have increased 2% in the quarter.

Alaska Air’s third-quarter earnings also benefited from lower fuel costs. The average fuel cost per gallon in the third quarter was $2.13—8.6% lower than the same quarter the previous year. Notably, oil prices have remained significantly lower in the third quarter compared to rates in the third quarter of 2018. In the third quarter, the average WTI crude price was $56—down 19% from $69 in the third quarter of 2018. Since fuel accounts for one-fourth of an airline’s total operating expenses, a decline in crude prices reduces its operating expenses.

Higher revenues, efficient cost management, and lower fuel costs boosted Alaska Air’s third-quarter pre-tax margin. The company reported a YoY improvement of 360 basis points in its third-quarter adjusted pre-tax margin and reached 17.6%.

Balance sheet and shareholders’ return

Alaska Air ended the third quarter with cash and marketable securities of $16 billion. During the first nine months of fiscal 2019, the company has generated $1.4 billion in operating cash flow. Alaska Air is utilizing its cash to reduce debt and enhance shareholders’ return.

During the earnings conference call, Alaska Air said it’s on the verge of repaying $1.5 billion or 75% of $2 billion borrowings it took to complete Virgin America. At the end of the third quarter, the company’s debt-to-capitalization ratio fell to 42% compared to 47% as of December 31, 2018. The company thinks that it will achieve the long-term debt-to-capitalization ratio target of 40% very quickly.

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Alaska Air continued with wealth enhancement initiatives for shareholders. During the quarter, the company bought back approximately $28 million worth of its common stock. Alaska Air paid a quarterly dividend of $0.35 per share during the quarter, which was 9% higher than the third quarter of 2018. The company expects to return $248 million to its shareholders this year through dividend payments and share repurchases.

Alaska Air’s outlook

Alaska Air issued its fourth-quarter guidance and reaffirmed its outlook for fiscal 2019. For the fourth quarter, the company expects its RASM to grow 1%–4% to 12.97–13.36 cents, while the capacity will likely increase nearly 3.8% YoY.

The company expects the ex-fuel CASM to be 8.97–9.02 cents—an increase of approximately 0.5% YoY. Due to lower crude oil prices, the fuel cost per gallon is projected to decline 8.1% YoY to $2.16.

For fiscal 2019, Alaska Air reaffirmed its capacity and ex-fuel CASM guidance ranges. The company expects the seating capacity to increase 2.1% YoY. Alaska Air still projects the ex-fuel CASM to be between 8.68 cents and 8.70 cents—an increase of approximately 2.2% YoY.

Peers’ performance

Most of the major US carriers have reported their third-quarter results. Overall, airlines experienced remarkable earnings growth. Delta Air Lines (DAL) and United Airlines (UAL) both registered 33% growth YoY in their respective third-quarter earnings.

Southwest Airlines (LUV) and American Airlines (AAL) reported third-quarter EPS growth of 14% and 20%, respectively, despite massive flight cancelations due to grounded Boeing (BA) 737 MAX jets. Notably, Boeing MAX planes have faced a global flying ban since mid-March following two deadly accidents within five months. Together, Southwest Airlines and American Airlines own 58 MAX aircraft. During the quarter, they have faced over 25,000 flight cancelations due to the MAX grounding.

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