Alaska Air Group Reports First Quarter 2019 Results

Alaska Air Group Inc., yesterday reported first quarter 2019 GAAP net income of $4 million, or $0.03 per diluted share, compared to $4 million, or $0.03 per diluted share in the first quarter of 2018. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $21 million, or $0.17 per diluted share, compared to $18 million, or $0.14 per diluted share, in 2018.

Financial Highlights:

  • Reported net income under Generally Accepted Accounting Principles (GAAP) of $4 million, or $0.03 per diluted share for the first quarter of 2019 and 2018.
  • Reported net income for the first quarter of 2019, excluding special items such as merger-related costs and mark-to-market fuel hedge accounting adjustments, of $21 million, or $0.17 per diluted share, compared to $18 million or $0.14 per diluted share, in the first quarter of 2018. This quarter’s adjusted results compare to the First Call analyst consensus estimate of $0.12 per share.
  • Paid a $0.35 per-share quarterly cash dividend in the first quarter, a 9% increase over the dividend paid in the first quarter of 2018.
  • Repurchased a total of 214,891 shares of common stock for approximately $13 million in the first three months of 2019.
  • Generated approximately $470 million of operating cash flow in the first three months of 2019, including merger-related costs.
  • Held $1.4 billion in unrestricted cash and marketable securities as of March 31, 2019.
  • Maintained debt-to-capitalization ratio of 47% as of March 31, 2019, similar to the 47% as of Dec. 31, 2018.

Operational Highlights:

  • Launched commercial service from Paine Field in Everett, Washington, to eight West Coast destinations and began service from Seattle to Columbus, Ohio, and El Paso, Texas.
  • Completed painting 25 Airbus aircraft in Alaska livery, and expect to complete the remainder of the fleet in the second quarter.
  • Announced plans to build a new Alaska Lounge in Terminal 2 at San Francisco International Airport.
  • Introduced a new Alaska Airlines Visa Signature Card sign-up promotion offering up to 40,000 miles to new cardholders.
  • Added four Boeing 737-900ER aircraft to the mainline operating fleet in the first quarter of 2019.

Recognition and Awards:

  • Ranked the best U.S. Airline by Money Magazine for the second year in a row.
  • Named “Best Mid-Size Airline” by TripAdvisor in their 2019 Travelers Choice awards.
  • Ranked as the No. 2 Airline in America by The Points Guy.

Alaska Air Group Inc., yesterday reported first quarter 2019 GAAP net income of $4 million, or $0.03 per diluted share, compared to $4 million, or $0.03 per diluted share in the first quarter of 2018. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $21 million, or $0.17 per diluted share, compared to $18 million, or $0.14 per diluted share, in 2018.

“We performed well in the first quarter despite severe winter storms in the Pacific Northwest,” said Alaska CEO Brad Tilden. “The leadership team and I want to thank our employees for running the operation safely, and as smoothly as possible, and for taking great care of our guests throughout the quarter. Our margin improvement initiatives gained traction despite the storms, and we are optimistic about the rest of 2019.”

The following table reconciles the company’s reported GAAP net income and earnings per diluted share (diluted EPS) for the three months ended March 31, 2019 and 2018 to adjusted amounts.

Three Months Ended March 31,

2019

2018

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

4

$

0.03

$

4

$

0.03

Mark-to-market fuel hedge adjustments

(4)

(0.03)

(13)

(0.11)

Special items – merger-related costs

26

0.21

6

0.05

Special items – other

25

0.20

Income tax effect of reconciling items above

(5)

(0.04)

(4)

(0.03)

Non-GAAP adjusted net income and diluted EPS

$

21

$

0.17

$

18

$

0.14

 

Alaska Airlines and its regional partners fly 44 million guests a year to more than 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers in North America” in the J.D. Power North America Airline Satisfaction Study for 11 consecutive years from 2008 to 2018. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

Three Months Ended March 31,

(in millions, except per-share amounts)

2019

2018

Change

Operating Revenues:

Passenger revenue

$

1,716

$

1,684

2

%

Mileage Plan other revenue

110

107

3

%

Cargo and other

50

41

22

%

Total Operating Revenues

1,876

1,832

2

%

Operating Expenses:

Wages and benefits

557

536

4

%

Variable incentive pay

35

39

(10)

%

Aircraft fuel, including hedging gains and losses

420

409

3

%

Aircraft maintenance

120

107

12

%

Aircraft rent

83

74

12

%

Landing fees and other rentals

132

126

5

%

Contracted services

72

81

(11)

%

Selling expenses

72

78

(8)

%

Depreciation and amortization

106

94

13

%

Food and beverage service

49

50

(2)

%

Third-party regional carrier expense

41

37

11

%

Other

138

141

(2)

%

Special items – merger-related costs

26

6

NM

Special items – other

25

NM

Total Operating Expenses

1,851

1,803

3

%

Operating Income

25

29

(14)

%

Nonoperating Income (Expense):

Interest income

9

8

13

%

Interest expense

(22)

(24)

(8)

%

Interest capitalized

4

5

(20)

%

Other—net

(10)

(12)

(17)

%

Total Nonoperating Income (Expense)

(19)

(23)

(17)

%

Income Before Income Tax

6

6

Income tax expense

2

2

Net Income

$

4

$

4

Basic Earnings Per Share:

$

0.03

$

0.03

Diluted Earnings Per Share:

$

0.03

$

0.03

Shares Used for Computation:

Basic

123.291

123.155

Diluted

123.915

123.630

Cash dividend declared per share:

$

0.35

$

0.32

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.

(in millions)

March 31, 2019

December 31, 2018

Cash and marketable securities

$

1,436

$

1,236

Other current assets

565

551

Current assets

2,001

1,787

Property and equipment – net

6,629

6,781

Operating lease assets

1,715

Goodwill

1,943

1,943

Intangible assets – net

127

127

Other assets

225

274

Total assets

12,640

10,912

Air traffic liability

1,116

788

Current portion of long-term debt

300

486

Current portion of operating lease liabilities

275

Other current liabilities

1,695

1,668

Current liabilities

3,386

2,942

Long-term debt

1,664

1,617

Long-term operating lease liabilities

1,443

Other liabilities and credits

2,401

2,602

Shareholders’ equity

3,746

3,751

Total liabilities and shareholders’ equity

$

12,640

$

10,912

Debt-to-capitalization ratio, adjusted for certain operating leases(a)

47

%

47

%

Number of common shares outstanding

123.504

123.194

(a)

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

Three Months Ended March 31,

2019

2018

Change

Consolidated Operating Statistics:(a)

Revenue passengers (000)

10,417

10,489

(0.7)%

RPMs (000,000) “traffic”

12,449

12,403

0.4%

ASMs (000,000) “capacity”

15,508

15,480

0.2%

Load factor

80.3%

80.1%

0.2 pts

Yield

13.78¢

13.58¢

1.5%

RASM

12.10¢

11.84¢

2.2%

CASMex(b)

9.06¢

8.81¢

2.8%

Economic fuel cost per gallon(b)

$2.13

$2.14

(0.5)%

Fuel gallons (000,000)

199

197

1.0%

ASM’s per gallon

77.9

78.6

(0.9)%

Average number of full-time equivalent employees (FTE)

21,832

21,266

2.7%

Mainline Operating Statistics:

Revenue passengers (000)

7,864

8,211

(4.2)%

RPMs (000,000) “traffic”

11,172

11,360

(1.7)%

ASMs (000,000) “capacity”

13,874

14,098

(1.6)%

Load factor

80.5%

80.6%

(0.1) pts

Yield

12.73¢

12.69¢

0.3%

RASM

11.31¢

11.20¢

1.0%

CASMex(b)

8.30¢

8.02¢

3.5%

Economic fuel cost per gallon(b)

$2.12

$2.13

(0.5)%

Fuel gallons (000,000)

169

172

(1.7)%

ASM’s per gallon

82.1

82.0

0.1%

Average number of FTE’s

16,457

16,013

2.8%

Aircraft utilization

10.4

11.2

(7.1)%

Average aircraft stage length

1,304

1,285

1.5%

Operating fleet

237

224

13 a/c

Regional Operating Statistics:(c)

Revenue passengers (000)

2,553

2,278

12.1%

RPMs (000,000) “traffic”

1,277

1,043

22.4%

ASMs (000,000) “capacity”

1,634

1,382

18.2%

Load factor

78.2%

75.5%

2.7 pts

Yield

23.03¢

23.70¢

(2.8)%

RASM

18.68¢

18.26¢

2.3%

Operating fleet

93

83

10 a/c

(a)

Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.

(b) 

See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages.

(c) 

Data presented includes information related to flights operated by Horizon and third-party carriers, excluding Pen Air.

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Three Months Ended March 31, 2019

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues

Passenger revenues

$

1,422

$

294

$

$

$

1,716

$

$

1,716

CPA revenues

116

(116)

Mileage Plan other revenue

100

10

110

110

Cargo and other

48

1

1

50

50

Total operating revenues

1,570

305

117

(116)

1,876

1,876

Operating expenses

Operating expenses, excluding fuel

1,152

274

97

(118)

1,405

26

1,431

Economic fuel

358

66

424

(4)

420

Total operating expenses

1,510

340

97

(118)

1,829

22

1,851

Nonoperating income (expense)

Interest income

16

(7)

9

9

Interest expense

(21)

(8)

7

(22)

(22)

Interest capitalized

4

4

4

Other – net

(10)

(10)

(10)

Total Nonoperating income (expense)

(11)

(8)

(19)

(19)

Income (loss) before income tax

$

49

$

(35)

$

12

$

2

$

28

$

(22)

$

6

Three Months Ended March 31, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues

Passenger revenues

$

1,441

$

243

$

$

$

1,684

$

$

1,684

CPA revenues

110

(110)

Mileage Plan other revenue

98

9

107

107

Cargo and other

40

1

41

41

Total operating revenues

1,579

252

111

(110)

1,832

1,832

Operating expenses

Operating expenses, excluding fuel

1,131

239

104

(111)

1,363

31

1,394

Economic fuel

367

55

422

(13)

409

Total operating expenses

1,498

294

104

(111)

1,785

18

1,803

Nonoperating income (expense)

Interest income

11

(3)

8

8

Interest expense

(22)

(5)

3

(24)

(24)

Interest capitalized

4

1

5

5

Other – net

(5)

(7)

(12)

(12)

Total Nonoperating income (expense)

(12)

(7)

(4)

(23)

(23)

Income (loss) before income tax

$

69

$

(49)

$

3

$

1

$

24

$

(18)

$

6

(a)

The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.

(b) 

Includes merger-related costs, an employee bonus awarded in January 2018 in connection with the Tax Cuts and Jobs Act, and mark-to-market fuel hedge accounting adjustments.

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

Alaska Air Group, Inc.

CASM Excluding Fuel and Special Items Reconciliation

Three Months Ended March 31,

2019

2018

Consolidated:

CASM

11.94

¢

11.65

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.71

2.64

Special items – merger-related costs

0.17

0.04

Special items – other(a)

0.16

CASM excluding fuel and special items

9.06

¢

8.81

¢

Mainline:

CASM

11.04

¢

10.72

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.55

2.51

Special items – merger-related costs

0.19

0.04

Special items – other(a)

0.15

CASM excluding fuel and special items

8.30

¢

8.02

¢

(a)

Special items – other includes special charges associated with the employee tax reform bonus awarded in January 2018.

Fuel Reconciliation

Three Months Ended March 31,

2019

2018

(in millions, except for per-gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or “into-plane” fuel cost

$

421

$

2.11

$

423

$

2.15

(Gains) losses on settled hedges

3

0.02

(1)

(0.01)

Consolidated economic fuel expense

424

2.13

422

2.14

Mark-to-market fuel hedge adjustment

(4)

(0.02)

(13)

(0.07)

GAAP fuel expense

$

420

$

2.11

$

409

$

2.07

Fuel gallons

199

197

Debt-to-capitalization, adjusted for certain operating leases

(in millions)

March 31, 2019

December 31, 2018

Long-term debt

$

1,664

$

1,617

Capitalization of certain operating leases(a)

1,718

1,768

Adjusted debt

3,382

3,385

Shareholders’ equity

3,746

3,751

Total Invested Capital

$

7,128

$

7,136

Debt-to-capitalization ratio, adjusted for certain operating leases

47

%

47

%

(a)

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

  • By eliminating fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.
  • Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
  • Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.
  • CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.
  • Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
  • Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

GLOSSARY OF TERMS

Aircraft Utilization – block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length – represents the average miles flown per aircraft departure

ASMs – available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM – operating costs per ASM, or “unit cost”; represents all operating expenses including fuel and special items

CASMex – operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio – represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share – represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares – represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel – best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Free Cash Flow – total operating cash flow generated less cash paid for capital expenditures

Load Factor – RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline – represents flying Boeing 737, Airbus 320 and Airbus 321neo family jets and all associated revenues and costs

Productivity – number of revenue passengers per full-time equivalent employee

RASM – operating revenue per ASMs, or “unit revenue”; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional – represents capacity purchased by Alaska from Horizon, SkyWest and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs – revenue passenger miles, or “traffic”; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield – passenger revenue per RPM; represents the average revenue for flying one passenger one mile

SOURCE Alaska Air Group Inc.