Alaska Airlines $$$

Old School 737

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AAG earns adjusted profit
of $40 million in 3rd quarter

Company still in the red for year,
schedule reductions boost unit revenue
October 23, 2008

By Don Conrard

Alaska Air Group today reported an adjusted net profit of $39.9 million for the third quarter, compared with an adjusted net profit of $78.8 million for the same period last year.
It was the company’s first profitable quarter in 2008, reducing Air Group’s loss for the first nine months to $12 million. This compares with a $109.5 million net profit for the first nine months of 2007.

“We are pleased to be one of only a few airlines to report an adjusted profit for the third quarter,” CEO Bill Ayer said. “While our net profit is only half of what we posted last year, earning a profit at all in this difficult environment indicates that our efforts to respond to high fuel costs and softer demand are paying off.”

Under Generally Accepted Accounting Principles (GAAP), Air Group reported a net loss of $86.5 million in the third quarter, compared with a net profit of $81.8 million during the same period a year ago.

The wide difference between GAAP and adjusted results is due to several special charges, including $22.2 million of fleet transition costs and $3.7 million in severance payments from employee layoffs. On the plus side, the company recorded a gain of $42 million for unused frequent flier miles after shortening the expiration period for inactive Mileage Plan accounts from three years to two.

But the biggest factor was a $218.2 million decline in the market value of Air Group’s hedge contracts for fuel the company plans to buy in the future. The paper value of these contracts rise or fall with changes in the price of crude oil, but do not result in a cash loss for the company. Driven by oil prices that dropped by almost 30 percent during the quarter, the paper value of the portfolio fell from $305.2 million on June 30 to $98.7 million on Sept. 30.

“It’s important to keep in mind that, even though our hedges are worth less on paper than they were at the end of last quarter, they still saved us $44 million in the third quarter,” said Brad Tilden, executive vice president of finance and planning and CFO.
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Even so, the company’s economic fuel expense shot up $110 million last quarter — or 44 percent more than the same period in 2007.

“Oil has now dropped below $70 per barrel — about half of where it was in July — and that’s good news,” Ayer said. “However, oil is being driven lower as a result of a slowing economy, which results in less demand for air travel and makes it more difficult to sustain the meaningful unit revenue increases that we’ve experienced.”

Uncertainty concerning passenger demand and the future direction of oil prices is the biggest issue facing the airline industry today, according to Ayer.

“The key is to control what we can and continue to adapt our business to changing conditions,” he said. “Our fleet, our balance sheet and our strong customer following put us in a great position to do just that.”

Weathering the storm

In order to cope with a sharp downturn in the economy and a falloff in passenger demand, Ayer said the company’s focus continues to be on executing the five-point plan it put in place at the end of the second quarter. That plan includes:

Preserving and enhancing cash reserves

Tilden views Air Group’s strong balance sheet and substantial cash reserves as “a source of competitive advantage and flexibility in these uncertain times.”

He notes that AAG ended the third quarter with more than $1 billion in cash and marketable securities, up from $823 million at the end of 2007.

The company generated $141 million of operating cash flow during the first nine months of 2008, compared with $373 million one year ago. Tilden attributed the cash flow decline to a $267 million increase in the company’s economic fuel costs since the first of the year.

Reducing capacity and redeploying aircraft to more profitable routes

Plans call for Alaska Airlines to reduce capacity 7 percent to 8 percent in the fourth quarter of 2008 on a 14 percent decrease in departures. Moving into 2009, capacity at Alaska will drop 10 percent to 12 percent during the first quarter on an 18 percent decline in departures, with full-year capacity expected to be down 8 percent.

“Those capacity plans are dependent on what happens with the Boeing strike and the economy,” Tilden said. “If the economy slips into a severe recession, we could further trim our schedule without significantly damaging our network or competitive position. The cuts we’ve made to date worked really well. We saw a 12 percent increase in unit revenues in September — with even more substantial increases in markets where either Alaska or the industry reduced capacity. No one likes to scale back, but it’s helpful to know the changes are working.”

Boosting unit revenue

“As we finalized our 2009 strategic plan, we agreed as a leadership team that our number one initiative is to maximize unit revenues,” Tilden said. “Our goal is to capitalize on the 8 percent capacity reduction and drive other improvements.”

Those other improvements include:

Investment in new tools and practices for schedule planning, revenue management and Mileage Plan.
Higher planned advertising to improve market share.
New revenue streams such as inflight Wi-Fi, trip insurance and previously announced changes to Mileage Plan award redemption levels and fees for partner award travel.
Conserving fuel

Alaska Airlines’ fuel consumption dropped 7.7 percent during the third quarter, compared with the same period a year ago, partly because of a 0.8 percent dip in available seat miles (ASMs) from a reduced schedule that began in September.

The bigger factor, however, involved the retirement of Alaska’s remaining MD-80s in late August. The carrier flew an average of 73 ASMs per gallon in the third quarter. That measurement, comparable to car miles per gallon, is up from 64 ASMs during the same period three years ago. By comparison, Southwest averages 69 ASMs per gallon while United and American average 61 and 62, respectively.

Controlling non-fuel costs

Alaska Airlines drove unit costs down 0.7 percent during the third quarter, meaning the company spent $6.8 million less than the same period last year.

“It’s hard to overcome inflation and we did that,” Tilden said. He attributed much of the decline in unit costs to more fuel-efficient aircraft and improved operational performance, which is “translating into nice reductions in expenses, such as those related to passenger inconvenience.”
The airline is forecasting full-year unit costs of 7.55 cents, up about 1 percent from last year.

“This remains the most difficult period in commercial aviation history,” Ayer said. “Through all the upheaval, our basic strategy — to build a great airline for employees, customers and investors, and to do it for the long term — has not changed. The tactics required have varied, but our commitment has not wavered. In spite of the current economic uncertainty and the magnitude of change, our employees have kept their focus on delivering a safe and enjoyable travel experience. I couldn’t be more grateful to them.”

Alaska Airlines

Excluding special items, Alaska’s adjusted pretax income amounted to $56.6 million, compared with pretax income of $123.4 million in the third quarter of 2007.

The airline’s mainline passenger traffic in the third quarter declined 1.1 percent on a capacity decline of 0.8 percent. Load factor declined 0.2 points to 79.5 percent.

Alaska’s mainline passenger revenue per available seat mile (ASM) increased 4.4 percent and its operating cost per ASM, excluding fuel and special items, declined 0.7 percent.

Horizon Air

Excluding special items, Horizon’s adjusted pretax income amounted to $12.7 million compared with pretax income of $7.5 million in the third quarter of 2007.

“The terrific work our teams have done to trim capacity, reduce costs and shore up revenue is evident in our Q3 results, yet opportunity remains,” President and CEO Jeff Pinneo said. “To date, we’ve adjusted flight frequencies to compensate for Q400s replacing the smaller Q200s, exited unprofitable markets, and redeployed aircraft from underperforming flights into new markets such as Flagstaff and Prescott, Arizona, and Mammoth Lakes, California. Looking ahead to the fall and winter, the schedule changes we’ve implemented and announced have reduced capacity significantly below the same period last year.”

Horizon Air’s passenger traffic in the third quarter declined 13.9 percent on a 12.8 percent capacity decrease. Load factor decreased by nearly one point to 76.3 percent. Horizon’s passenger revenue per ASM increased 18.8 percent and its operating cost per ASM, excluding fuel and special items, increased 0.7 percent.

Horizon is forecasting a 21 percent decrease in capacity for the fourth quarter of 2008 and a 9 percent reduction in 2009.
 

Mookie

luckiest man alive
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OMG...we're doing so horribly! we MUST cut costs to become more competative, become leaner, scarifices must be made...

wait a goddamn minute...we MADE money???

and, my favorite part: "He notes that AAG ended the third quarter with more than $1 billion in cash and marketable securities, up from $823 million at the end of 2007." One Beeelion dollars, there Dr. Evil.

ok Gregg...spin this so we can all panic that the sky is falling.

Mookie
 
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Chief Pilot

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Management has been able to make money on the backs of a generally very loyal employee group. The loyalty is almost exclusively to the Airline and not to the group of slick and sleazy folks in executive positions here. Unfortunately, this loyalty is waining fast--it already has by the pilot group. The vast majority don't believe a single thing that is said by this management group. Management, though generally smart with finances, thinks that pilots are generally pretty stupid and will believe the rhetoric that is spouted on a daily basis by those in charge. They think we aren't able to research how their messages to the employees are 180 degrees different than the ones given to Wall Street.

Don't believe for a second that they can't give us the contract we deserve!
 
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Fubijaakr

Seniority is Forever
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I love it when one of the only profitable airlines spins that profit as "doom and gloom."
 

Baze

Kama'aina
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AAG is in financial dire straits.

We must start furloughing tomorrow so we can shrink to profitability. Oh, but we're going to keep the fleet size the same.

Oil going up is bad.

Oil going down is bad.

Keeping the MDs is bad.

Retiring the MDs early is bad.

The building at Angle Lake is nothing more than a factory for smoke & mirrors.
 
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