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A ‘solid’ second quarter
Fuel, fares and competition temper profits
July 26, 2007
By Don Conrard
Alaska Air Group (AAG) earned a net profit of $46.1 million during the second quarter, based on generally accepted accounting principles (GAAP), compared with $55.5 million during the same period a year ago.
Excluding a mark-to-market loss on settled fuel hedge contracts and other special items, AAG’s adjusted net income for the quarter was $47.2 million, down from $60.3 million for the second quarter of 2006.
In addition to higher fuel prices, Ayer attributed the decline in AAG’s profitability to passenger traffic that didn’t keep pace with capacity growth and lower unit revenues.
“Overall, we carried more customers, but at lower fares,” he said.
Growth plans
Much of Alaska Airlines’ capacity growth for the rest of 2007 will come from introducing new 737-800s, which have 17 more seats each than the MD-80s they’re replacing. Flying to Hawaii, which generates more ASMs than short-haul flights, will also be a factor.
“The challenge for us is to determine whether we use the additional seats to reduce frequency in existing markets while sending freed-up aircraft to new markets — or attempt to stimulate demand to fill those seats,” said Brad Tilden, executive vice president of finance and planning.
While Alaska Airlines plans to follow through on its fleet plan to replace all of its MD-80s by the end of 2008, its rate of growth in subsequent years is less certain.
“Our preference is clearly to grow,” Tilden said. “But growth makes sense only if we can do so profitably. And we need to stay focused on that part of the equation.”
Fleet investment
AAG ended the quarter with cash and short-term investments of $988 million, down $26 million from Dec. 31, 2006.
“Almost all our capital spending during the first half of the year was related to the phase-out of our MD-80 fleet, advance deposits on new aircraft and the simplification of Horizon’s fleet,” said Tilden. “Going forward, we have arranged financing for 13 of the 28 aircraft we have on firm order for deliveries through 2009.”
Tilden estimates the transition to an all-Boeing 737 fleet will save the airline about $130 million annually through greater fuel efficiency and lower maintenance and pilot training costs.
AAG outlook
AAG has set aside $14.3 million so far this year for employee variable incentive pay, which is 25 percent less than at this time last year because the company expects its profits to be lower in 2007. AAG has also contributed $35 million to its defined-benefit pension plans so far this year.
Characterizing AAG’s overall performance, Ayer said: “We’re committed to maintaining our pre-eminent market position, and our people have a proven track record of successfully competing against both low-cost and legacy carriers. The growth of other carriers in our markets underscores the need to continue to improve costs and take really good care of our customers in the process.”
Fuel, fares and competition temper profits
July 26, 2007
By Don Conrard
Alaska Air Group (AAG) earned a net profit of $46.1 million during the second quarter, based on generally accepted accounting principles (GAAP), compared with $55.5 million during the same period a year ago.
Excluding a mark-to-market loss on settled fuel hedge contracts and other special items, AAG’s adjusted net income for the quarter was $47.2 million, down from $60.3 million for the second quarter of 2006.
Alaska Airlines results
- Excluding special charges, Alaska Airlines reported adjusted pretax income of $82.4 million for the quarter compared with $79.6 million last year.
- “We’re pleased with this quarter’s record adjusted pretax earnings,” CEO Bill Ayer said, “especially given a significant decline in our fuel hedging benefit this year, which led to much higher economic fuel costs. It’s a tribute to the hard work our employees put forth everyday. I appreciate their efforts — particularly during the very busy and challenging summer travel season.”
Full story on Alaska and Horizon
Word Bank
Definitions of commonly used financial terms
“Although our second quarter profit fell short of last year’s, the results represent a solid performance in view of significantly higher fuel costs and a softer revenue environment,” CEO Bill Ayer said.Definitions of commonly used financial terms
In addition to higher fuel prices, Ayer attributed the decline in AAG’s profitability to passenger traffic that didn’t keep pace with capacity growth and lower unit revenues.
“Overall, we carried more customers, but at lower fares,” he said.
Growth plans
Much of Alaska Airlines’ capacity growth for the rest of 2007 will come from introducing new 737-800s, which have 17 more seats each than the MD-80s they’re replacing. Flying to Hawaii, which generates more ASMs than short-haul flights, will also be a factor.
“The challenge for us is to determine whether we use the additional seats to reduce frequency in existing markets while sending freed-up aircraft to new markets — or attempt to stimulate demand to fill those seats,” said Brad Tilden, executive vice president of finance and planning.
While Alaska Airlines plans to follow through on its fleet plan to replace all of its MD-80s by the end of 2008, its rate of growth in subsequent years is less certain.
“Our preference is clearly to grow,” Tilden said. “But growth makes sense only if we can do so profitably. And we need to stay focused on that part of the equation.”
Fleet investment
AAG ended the quarter with cash and short-term investments of $988 million, down $26 million from Dec. 31, 2006.
“Almost all our capital spending during the first half of the year was related to the phase-out of our MD-80 fleet, advance deposits on new aircraft and the simplification of Horizon’s fleet,” said Tilden. “Going forward, we have arranged financing for 13 of the 28 aircraft we have on firm order for deliveries through 2009.”
Tilden estimates the transition to an all-Boeing 737 fleet will save the airline about $130 million annually through greater fuel efficiency and lower maintenance and pilot training costs.
AAG outlook
AAG has set aside $14.3 million so far this year for employee variable incentive pay, which is 25 percent less than at this time last year because the company expects its profits to be lower in 2007. AAG has also contributed $35 million to its defined-benefit pension plans so far this year.
Characterizing AAG’s overall performance, Ayer said: “We’re committed to maintaining our pre-eminent market position, and our people have a proven track record of successfully competing against both low-cost and legacy carriers. The growth of other carriers in our markets underscores the need to continue to improve costs and take really good care of our customers in the process.”
